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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.

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Most popular questions from this chapter

Discuss how a change to the LIFO method of inventory valuation is handled when it is impracticable to determine previous LIFO inventory amounts.

At January 1, 2017, Beidler Company reported retained earnings of \(2,000,000. In 2017, Beidler discovered that 2016 depreciation expense was understated by \)400,000. In 2017, net income was \(900,000 and dividends declared were \)250,000. The tax rate is 40%. Prepare a 2017 retained earnings statement for Beidler Company

(Error Analysis) When the records of Debra Hanson Corporation were reviewed at the close of 2018, the following errors were discovered. For each item, indicate by a check mark in the appropriate column whether the error resulted in an overstatement, an understatement, or had no effect on net income for the years 2017 and 2018.

2017 2018 Over- Under- No Over- Under- No Item statement statement Effect statement statement Effect

1. Failure to record amortization of patent in 2018.

2. Failure to record the correct amount of ending 2017 inventory. The amount was understated because of an error in calculation.

3. Failure to record merchandise purchased in 2017. Merchandise was also omitted from ending inventory in 2017 but was not yet sold.

4. Failure to record accrued interest on notes payable in 2017; that amount was recorded when paid in 2018.

5. Failure to reflect supplies on hand on the balance sheet at end of 2017.

Under IFRS, the retrospective approach should not be used if:

(a) retrospective application requires assumptions about management’s intent in a prior period.

(b) the company does not have trained staff to perform the analysis.

(c) the effects of the change have counterbalanced.

(d) the effects of the change have not counterbalanced.

Briefly describe some of the similarities and differences between GAAP and IFRS with respect to reporting accounting changes.
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