Types of Accounting Changes

Lesson Exercise Solution

Sometimes companies need to change their accounting. It can do this in two ways:

Retrospectively - Accountants go back and change previous financial statements.
Prospectively - Accountants only make changes to the current financial statements.

Here's why a change might have to be made:

Change in accounting principle - Switching between GAAP-approved methods (voluntary or mandatory) is done retrospectively.
Change in reporting entity - If the nature of the firm is fundamentally changed, the financials are updated retrospectively.
Change in estimate - If an estimate turns out to be incorrect, changes are made prospectively.
Errors - If there was a mistake in the application of accounting rules or a calculation, changes are made retrospectively.

You're the head accountant for Harvey Co. and are going to make an accounting change.

This is what you've been told:

The firm's accountants omitted any records involving its acquisition of many capital assets.

How should the change be handled with respect to timing?

The change should be made retrospectively (accountants need to revise prior financials).

Remember: This is a change due to error, so we need to go back and fix it.