Accounting Principle Changes: What Every CPA Needs to Know (1 hr)

Course No. CAM023
Format: Online pdf (23 pages). Printed book available.
Instructional Delivery Method: QAS Self-Study
Prerequisites: None
Advance Preparation: None
Level: Overview
CPE Credit: 1 hr.
Field of Study: Accounting
Course Author: Kelen F. Camehl, CPA, MBA
Course expiration:  You have one year from date of purchase to complete the course.
Course Revision Date: January 2025

Course Topics:
* Changes in Accounting Principle
* Accounting for the Change in Accounting Principle
* Justifying a Change in Accounting Principle
* Change in Accounting Principle – Illustrative Example
* Disclosures Required for Changes in Accounting Principles
* Change in Accounting Estimate
* Change in Reporting Entity

Learning Objectives:

Upon completion of this course, you will be able to:

• List the different types of accounting changes and how they affect an entity’s financial statements
• Differentiate between the requirements for the different types of accounting changes
• Identify disclosure requirements related to changes in accounting principles

Introduction

The accounting principles related to accounting changes and error corrections are included within ASC Topic No. 250.  Similar to many other ASC topics, this topic includes a discussion of the objectives/background of the guidance, scope exceptions, a glossary, as well as presentation and disclosure matters.

Accounting changes, this can take the shape of any of the following:

• Changes in accounting principle;
• Changes in accounting estimates;
• Changes in reporting entity;

It’s important to note that an error correction is not an accounting change and is separate and apart from the situations discussed above.  Instead, an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively.

Changes in Accounting Principle

The first topic we address in this course is the accounting and reporting requirements with respect to changes in accounting principle.  Before that, let’s first identify what is meant by a change in accounting principle.  Simply put, a change in accounting principle is a situation where an entity changes from reporting from one generally acceptable accounting principle (GAAP) to another.  In other words, one permitted principle to another permitted principle.  For example, this could be a situation where an entity changes its inventory method from First-In First-Out (FIFO) to Last-In First-Out (LIFO).  Given that both of these types of inventory methods are accepted accounting principles, this change is considered a change in accounting principle.  However, if the entity switched to the FIFO method (a GAAP method) from a previous method that was not in compliance with GAAP, this would not be considered a change in accounting principle, but would instead be a correction of an error.  This distinction is important to keep in mind as we progress through the course.  Other examples include, but are not limited to, the following:

• Change from completed contract method to percentage-of-completion method for revenue recognition
• Change from straight-line depreciation to accelerated depreciation
• Change from cost method to equity method for investment accounting
• Change from full cost method to successful efforts method in oil and gas accounting
• Change from recognition of lease expenses on a cash basis to an accrual basis
• Change from cash to accrual basis of accounting

ASC 250 is important for CPAs because it explains how to handle changes in accounting principles, estimates, and errors in financial statements. The standard helps ensure that financial reports are accurate and consistent by providing clear rules for making changes and correcting mistakes.