O'Reilly logo

Crash Course in Accounting and Financial Statement Analysis, Second Edition by Arkady Libman, Matan Feldman

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

Accounting Changes

Accounting changes represent changes in a company’s accounting methodology governing the reporting of its financial statements, and are reported net of taxes on a separate line item following extraordinary items (Exhibit 5.10).

Exhibit 5.10. Accounting Changes Represent Changes in a Company’s Accounting Methods
Source: Used with permission of McDonald’s Corporation. 2005 Annual Report, © McDonald’s Corporation, 2005.

Types of accounting changes include:

  • Changes Applied to New Transactions

    • New transactions occur only after the accounting change takes place.

    • No adjustments to current financial statements are required.

    • Example: Applying a different depreciation method to new assets.

  • Changes in Estimates

    • Can be associated with useful lives and salvage value of depreciable assets as well as value of uncollectible revenue (e.g., Bad Debt Expense is an estimate).

    • Changes are made only in the affected (present and/or future) period(s); past results remain as originally reported.

  • Retroactive Changes in Accounting Principles

    • If the company chooses to apply newly adopted accounting principles retroactively (to the past results), the impact of this change on prior periods is shown as a separate item on the income statement called “Cumulative Effect of the Accounting Change on Prior Periods.”

Certain events are not expected to recur, and their placement on ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required