Intermediate Accounting II / ACNT 2304
Types of Accounting Changes
1. Change in accounting principle-Change from one generally accepted accounting
principle to another.
2. Change in accounting estimate-Revision of an estimate because of new
information or new experience.
3. Change in reporting entity-Change from reporting as one type of entity to
another type of entity.
Correction of Errors
Error correction-Correction of an error caused by a transaction being recorded
incorrectly or not at all.
CHANGE IN ACCOUNTING PRINCIPLE
Changing from one acceptable accounting principle to another acceptable accounting
principle is accounted for as a change in accounting principle. This does not include the
adoption of a new accounting principle because the entity has entered into transactions
for the first time that require specific accounting treatment. It also does not include the
change from an inappropriate accounting principle to an acceptable accounting principle.
The later would be classified as the correction of an error.
A. Current Approach: Cumulative-Effect Type of Accounting Change
(1) The catch-up or current approach requires that the cumulative effect of the change
in accounting principle be reported net of tax, in the income statement between
extraordinary items and net income.
(2) If the entity prepares comparative financial statement, the statements for prior
years are not restated.
(3) Pro-forma amounts should be reported on the face of the income statement for all
periods as if the new accounting principle had been used in prior periods.
Example: At the beginning of 2002 Spencer Company decided to change from
accelerated depreciation to straight-line for financial reporting purposes. The company
will continue to use the accelerated method in computing federal income taxes. The
company is in the 35% tax bracket. The following schedule shows depreciation under the
accelerated method and the straight-line method for 2000 and 200