Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 22: Q3CE (page 1325)

What reporting requirements does retrospective application require?

Short Answer

Expert verified

The retrospective application requires three major things.

Step by step solution

01

Definition of retrospective application

When the accounting principle is applied to two or more previously issued financial statements as if the principle had always been used is known as the retrospective application.

02

Requirements of retrospective application

According to FASB ASC 250-10-45-5

The business should report the change in accounting principles through retrospective application of the new accounting principle to all prior periods unless it is impracticable to do so.

It requires the following:

1. The total effect of the change should be presented in the carrying amount of assets and liabilities at the beginning of the first period presented.

2. An adjustment to the opening retained earnings balance

3. Financial statements for each individual prior period presented should be adjusted to reflect the period-specific effects of applying the new account principle.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Define a change in estimate and provide an illustration. When is a change in accounting estimate effected by a change in accounting principle?

(Change in Estimate) Mike Crane is an audit senior of a large public accounting firm who has just been assigned to the Frost Corporation’s annual audit engagement. Frost has been a client of Crane’s firm for many years. Frost is a fastgrowing business in the commercial construction industry. In reviewing the fixed asset ledger, Crane discovered a series of unusual accounting changes, in which the useful lives of assets, depreciated using the straight-line method, were substantially lowered near the midpoint of the original estimate. For example, the useful life of one dump truck was changed from 10 to 6 years during its fifth year of service. Upon further investigation, Mike was told by Kevin James, Frost’s accounting manager, “I don’t really see your problem. After all, it’s perfectly legal to change an accounting estimate. Besides, our CEO likes to see big earnings!”

Instructions Answer the following questions.

(a) What are the ethical issues concerning Frost’s practice of changing the useful lives of fixed assets?

(b) Who could be harmed by Frost’s unusual accounting changes?

(c) What should Crane do in this situation?

As part of the year-end accounting process and review of operating policies, Cullen Co. is considering a change in the accounting for its equipment from the straight-line method to an accelerated method. Your supervisor wonders how the company will report this change in principle. He read in a newspaper article that the FASB has issued a standard in this area and has changed GAAP for a “change in estimate that is effected by a change in accounting principle.” (Thus, the accounting may be different from what he learned in intermediate accounting.) Your supervisor wants you to research the authoritative guidance on a change in accounting principle related to depreciation methods.

Instructions

(a) What are the accounting and reporting guidelines for a change in accounting principle related to depreciation methods?

(b) What are the conditions that justify a change in depreciation method, as contemplated by Cullen Co.?

(c) What guidance does the SEC provide concerning the impact that recently issued accounting standards will have on the financial statements in a future period?

(Change in Estimate—Depreciation) Peter M. Dell Co. purchased equipment for \(510,000 which was estimated to have a useful life of 10 years with a salvage value of \)10,000 at the end of that time. Depreciation has been entered for 7 years on a straight-line basis. In 2018, it is determined that the total estimated life should be 15 years with a salvage value of $5,000 at the end of that time.

Instructions (a) Prepare the entry (if any) to correct the prior years’ depreciation.

(b) Prepare the entry to record depreciation for 2018

IFRS requires companies to use which method for reporting changes in accounting policies?

(a) Cumulative effect approach.

(b) Retrospective approach.

(c) Prospective approach.

(d) Averaging approach.
See all solutions

Recommended explanations on Business Studies Textbooks

Introduction to Business

Read Explanation

Nature of Business

Read Explanation

Intermediate Accounting

Read Explanation

Operational Management

Read Explanation

Business Development

Read Explanation

Organizational Communication

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free