Question

How do you determine if a change in principle should be reported retroactively, currently, or prospectively?

Answer 1

A cumulative-effect type change (current) in accounting principle can be reported by using current method. The prior period financial statements that are included for comparison cannot be restated. Considering the extraordinary items and net income on the income statement, the increasing effect of accounting change have to be reported.If there are Pro forma amounts in any period must be published as supplemental information.

Retroactive method is used to report any retroactive-effect type change in accounting principle. The company evaluates the cumulative effect of implementing any new method on financial statement in the beginning of the year. This new accounting principle is used to restate the pior period financial statements. If the cumulative effect is significant than the periods shown in the financial statements, the beginning retained earnings of the prior year being presented would be adjusted.

LIFO (last-in, first-out) method of inventory is reported using the prospective method.The starting inventory amount for a particular year the change is adopted is identified as the base-year inventory for the future. Restating the prior periods’ income is not practical in prospective method. Any change to the Last In First Out method of inventory valuation need to be disclosed by the company.