ASC 250 âAccounting Changes and Error Correctionsâ
This case clarified the treatment of accounting changes afteracquisitions. As we have seen, FASBâs guidance comes through ASC805 âBusiness Combinations.â However, the guidance for other typesof accounting changes is in ASC 250 âAccounting Changes and ErrorCorrections.â This section will integrate accounting changes afteran acquisition with the accounting changes listed in ASC 250.
ASC 250 lists four types of accounting changes.
Change in Accounting Principle â for example, a newrevenue-recognition standard
Change in Accounting Estimate â for example, change inestimated useful life of a depreciable asset
Change in Reporting Entity
Correction of an Error in previously issued financialstatements â for example, last periodâs inventory and thereforeretained earnings were overstated
One particularly confusing element of ASC 250 is the categorycalled âchange in reporting entity.â To the unwary observer thissounds a lot like an acquisition, but that is actually not thecase. The reason that the distinction is critical is that ASC 250prescribes a retroactive accounting to âchange in reportingentity,â but as we just saw the accounting treatment foracquisitions is prospective, with only limited pro-formalretroactive disclosures.
The key accounting question for these four types of changes anderrors is whether the change is accounted forretrospectively orprospectively. In the former case, weadjust previous financial statements to reflect the newinformation. In the latter case, we make no adjustments to previousfinancial statements.
To help you become more familiar with these terms and therequirements of the codification, Work Schedule 6 lists the fourscenarios covered by ASC 250. As the schedule shows, three of thefour scenarios are treated retrospectively, including a âchange inreporting entity.â To gain a better understanding of whatretrospective and prospective means, please identify the paragraphnumber that prescribes the appropriate accounting treatment(retrospective or prospective) to the four scenarios. Although youare only asked to identify the paragraph number, it is suggestedthat you also identify the specific word(s) in the paragraph thatindicate retrospective or prospective treatment for each of thefour types of changes.
As the schedule indicates, changes and corrections are accountedfor retrospectively, with the exception of a change in estimatewhich is accounted for prospectively. Our focus here is to clarifythat changes in accounting entity does not coveracquisitions. According the ASC 250-10-34-21, âChanges inAccounting entityâ consists of an accounting change that results ina âdifferent reporting entityâ. To the casual observer,acquisitions would seem to fit this category, with the requirementof retroactive restatement of all prior periods as if the acquiredcompany had always been a part of the acquirer. However, this isnot the case, as ASC 250-10-20 indicates (emphasis added):
Presenting consolidated or combined financial statements inplace of financial statements of individual entities
Changing specific subsidiaries that make up the group ofentities for which consolidated financial statements arepresented
Changing the entities included in combined financialstatements.
Item (b) at first view seems to include acquisitions, however thecodification adds the following exclusionarystatement:
Neither a business combinationaccounted for by the acquisition method nor the consolidation of aVIE pursuant to topic 810 is a change in reporting entity.
To summarize, âchange in reporting entityâ, which are accounted forretroactively, relates to the decision to consolidate existingsubsidiaries (a topic that is sometimes covered in a senior-levelaccounting course). It does not relate to newly-acquiredsubsidiaries, which are accounted for prospectively with limitedretrospective disclosures. The main takeaway is that acquisitionsare not covered by âchange in reporting entityâ and receiveprospective accounting treatment with only limited retrospectivedisclosures.
