Definition
ASC 250-10-45-5 requires a change in accounting principle to be applied retrospectively to all prior periods presented, unless doing so is impracticable. The carrying amounts of assets and liabilities at the start of the earliest period presented are adjusted, with an offset to opening retained earnings, and each prior period shown is adjusted for the effects specific to it. A voluntary change is permitted only when the new principle is preferable. Changes in estimates are not applied retrospectively.
Why it matters in an audit or review
The auditor tests that the new principle is justified, that the cumulative effect is computed correctly, and that all comparative periods and disclosures are adjusted. Required disclosures cover the nature and reason for the change and the effect on affected line items. Retrospective application is different from correcting an error, which is a restatement and has its own disclosure requirements.
Example
Illustrative: a company changes from average cost to FIFO. Inventory at the start of the earliest period presented is $80,000 higher under FIFO. At a 25% tax rate the deferred tax liability rises by $20,000, so opening retained earnings increases by $60,000. The prior-year income statement is recast for the cost difference.
Common mistakes
- Applying a change from the current year forward when retrospective application is required.
- Omitting the as-previously-reported and as-adjusted columns for comparatives.
Sources
- FASB ASC 250-10-45 and 250-10-50, Accounting Changes and Error Corrections
- AICPA, AU-C Section 710, Comparative Information, Corresponding Figures and Comparative Financial Statements
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error