Types of Accounting Changes

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.

  In other words, all changes are made retrospectively, except changes in estimate.

👉 Answer:

👨‍🎓 Here are the steps to figure it out:

• Remember: This is a change in reporting entity, so we need to go back and make sure that comparing current and previous financial records is an apples-to-apples comparison.