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Implementing a change in accounting

Hello, Can you provide direction with the below questions:

Lesson 7 has to do with pending changes. The effects of implementing a change are usually dealt with retrospectively or prospectively.

1) Explain briefly the difference between those two methods of applying an accounting change.

First give a definition of the two types of applications and then answering this question: If I were going to switch depreciation methods from straight line to double declining balance, explain, in general terms, how I would handle this (apply the effect of the change) if I did it retrospectively versus prospectively.

2) After you have given the definitions and then described how a change from SL to DDB would be handled retrospectively and then how such a change would be handled prospectively, then for this particular change (SL to DDB depreciation) what does GAAP require, i.e., what is the proper way to handle a change from SL to DDB - retrospectively or prospectively?

Solution Preview

1. In a retrospective change, we post a prior-period adjustment to the retained earnings account for any income statement accounts that needed to be adjusted in the past and adjust any balance sheet accounts to their correct values as of the date of the change. We also restate any prior balance sheets and income statements with the adjusted amounts, and include a note in all adjusted financial statements issued with the type of change, the reason or cause for the change (i.e., why the change is required or preferred to conform to GAAP requirements) and the effect of the change (on an after-tax basis) to the affected accounts.

In a prospective change, we do not ...

Solution Summary

This solution distinguishes the two methods of applying an accounting change and discusses how a change in a depreciation method would be handled under U.S. generally accepted accounting principles (GAAP).