Term
| change in accounting estimate |
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Definition
| A changes that occurs as the result of new events, more experience, or additional information. Companies should not adjust previously reported results for changes in estimates but should report them prospectively—in the period of change if the change affects that period only, or in the period of change and future periods if the change affects both. (pp. 1368, 1381). |
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Term
| change in accounting estimate effected by a change in accounting principle |
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Definition
| Rule applied when it is impossible to determine whether a change in principle or a change in estimate has occurred. In such cases, a company considers the change as a change in estimate. (p. 1382). |
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Term
| change in accounting principle |
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Definition
| A change from one generally accepted accounting principle to another. A company reports a change in accounting principle using retrospective application (p. 1368). |
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Term
| change in reporting entity |
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Definition
| A change from reporting as one type of entity to another type of entity. For example, a company might change the subsidiaries for which it prepares consolidated financial statements. (p. 1368). |
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Term
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Definition
| Change to the financial statements due to an error of any sort (e.g., mathematical mistakes, bad faith changes in estimates, incorrect application of a generally accepted accounting principles, or incorrect classification). Companies must correct errors as soon as they discover them; they record corrections of errors from prior periods as adjustments to the beginning balance of retained earnings in the current period (called prior period adjustments). (p. 1384). |
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Term
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Definition
| Errors that affect both the balance sheet and the income statement but that will be offset or corrected over two periods. (p. 1391). |
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Term
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Definition
| The difference in prior yearsÂ’ income between the newly adopted and prior accounting method. (p. 1369). |
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Term
| direct effects of change in accounting principle |
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Definition
| Changes in assets and liabilities that result directly from making a change in accounting principle. An example is the change in the inventory balance when a company changes from one inventory method to another. Companies report direct effects retrospectively. (p. 1379). |
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Term
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Definition
| Arguments that focus on the supposed impact of the accounting method on the behavior of investors, creditors, competitors, governments, or managers of the reporting companies themselves. (p. 1390). |
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Term
| errors in financial statements |
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Definition
| Errors resulting from mathematical mistakes, mistakes in applying accounting principles, or oversight or misuse of facts that existed when preparing the financial statements. (p. 1368). |
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Term
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Definition
| Retrospective application that is not possible because a company cannot determine the prior period effects using every reasonable effort to do so. If it is deemed impracticable to apply the retrospective approach, the company prospectively applies the new accounting principle (p. 1379). |
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Term
| indirect effects of change in accounting principle |
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Definition
| Any change to current or future cash flows of a company that results from making a change in accounting principle that is applied retrospectively. An example is the change in payments in a profit-sharing plan arising from a change in accounting principle. Indirect effects do not change prior period amounts. A company includes in the financial statements a description of the indirect effects and discloses the amounts recognized in the current period and related per share information. (p. 1379). |
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Term
| noncounterbalancing errors |
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Definition
| Errors that affect both the balance sheet and the income statement and will not be offset in the next accounting period. (p. 1391). |
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Term
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Definition
| Corrections of errors from prior periods, made in the accounting records as adjustments to the beginning balance of retained earnings in the current period. (p. 1384). |
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Term
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Definition
| The application of a different accounting principle only in future financial statements. As a result, companies do not adjust opening balances to reflect the change in principle. (p. 1369). |
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Term
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Definition
| The process of revising previously issued financial statements to reflect the correction of an error. This term restatement distinguishes an error correction from a change in accounting principle (recasting statements within retrospective application). (p. 1385)(n). |
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Term
| retrospective application |
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Definition
| The application of a different accounting principle to recast previously issued financial statements as if the new principle had always been in use. Companies treat any part of the effect attributable to years prior to those presented as an adjustment of the earliest retained earnings balance presented. (p. 1369). |
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