What is a change in accounting principle? How do you determine if a change in principle should be reported retroactively, currently, or prospectively? How do these changes affect the financial statements?Changes in principlewhen companies switch from one acceptable accounting method to another. Accounting changes can be accounted for: Retroactively (prior years restated), Currently (cumulative effect reported currently), Prospectively (only current and future years affected). In general, changes in accounting principles are recorded and reported by the “current approach.” The cumulative income effect (net of the tax effect) is reported as a separate item of income between extraordinary items and net income. The effect of the change on certain key income numbers should be reported for the current period and on a “pro forma” (“as if”) basis for the financial statements of all prior periods included in the report.
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