Ifrs And Fasb Comparison On Accounting Errors

1207 words - 5 pages

Jenna Brooks Summary on Research for Accounting Changes and Error Analysis

Companies have always faced issues of how to reflect changes in accounting methods and error corrections in financial statements. A change in accounting principle results when an entity adopts a generally accepted accounting principle different from the one it used previously (Hall 2007). A presumption exists that an accounting principle once adopted shall not be changed in accounting for events and transactions of a similar type (Financial Accounting Standards Board). It is preferred that consistent use of the same accounting principle from one accounting period to another is used because it enhances ...view middle of the document...

They both indicate that companies should retrospectively apply the direct effects of a change in accounting policy. Retrospective application is applying a new accounting policy to transactions, other events and conditions as if that policy had always been applied (International Accounting Standard 8). For example, if there is a change in inventory accounting method, such as LIFO to FIFO there is an adjusting entry to change inventory according to the new method. A company should change the inventory amounts in prior periods to indicate the new change to the FIFO method. The company should adjust the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied (Hall 2007).
The Accounting Principles Board use to require most changes in accounting principle to be accounted for by what is referred to as the cumulative effect method. This method requires the cumulative effect of the change to be included in the determination of net income of the period of the change (Williams and Carcello, FASB Statement No. 154, Accounting Changes and Error Correction. 2005). It showed the cumulative effect of the difference between the two accounting principles in the current income statement (Bloom and Fuglister 2006). Now, companies no longer report a cumulative effect on the current year's income statement, instead, they report any necessary adjustment as an adjustment to the opening balance of retained earnings for the earliest period shown. Before requiring the retrospective approach the APB was concerned that the retrospective application and restatement of previously issued financial statements might erode investor confidence in financial reporting (Hall 2007). They worried that investors would put less confidence in the financial statements because they were going around and being changed, causing multiple changes instead of keeping things consistent. In addition, they argues that the cost of changing prior period financial statements may be excessive. However, FASB rejected these notions and instead seemed more concerned about the consistency between accounting periods and the comparability of financial statements among different companies. FASB said the improved consistency and comparability would enhance the usefulness of financial information by facilitating the analysis and understanding of more comparative accounting data (Hall 2007). FASB argues that this approach provides financial statement users with more useful information. The retrospective approach eliminates all cumulative effect adjustments to current income and should greatly enhance the consistency and comparability of financial information over time and between companies (Hall 2007).
While there are similarities between IFRS and GAAP in accounting for accounting changes and errors, there are some...

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