Changes and events
Change or Error
Principle is retrospective, estimate is prospective, and an error is a restatement through beginning retained earnings.
How the exam words it
- -The stem switches inventory methods (LIFO to FIFO) and asks 'how should this change be reported?'.
- -A useful life or salvage value is revised, or the depreciation method changes.
- -A prior-year expense was never recorded and it asks how the correction is reported, usually with a tax rate.
- -It asks which event 'does NOT require retrospective restatement'.
The playbook
- 1Name the bucket: change in principle, change in estimate, change in entity, or error correction.
- 2Principle changes apply retrospectively, with the cumulative effect in opening retained earnings; estimate changes apply prospectively over current and future periods.
- 3A depreciation method change is a change in estimate effected by a change in principle: prospective.
- 4Errors are prior period adjustments: restate prior periods and adjust beginning retained earnings net of tax.
The trap
Treating a change in depreciation method as retrospective. It is a change in estimate effected by a change in principle and is handled prospectively.
How the exam varies it
The same pattern, re-skinned along these axes:
Principle versus estimate versus errorName the treatment versus compute the adjustment or the new expenseGross versus net-of-tax adjustment
Drill this pattern
8 questions of Change or Error from across the AUD topics. Clear it by getting 5 right with a streak of 3.