Accounting for Error Corrections
Errors are not considered to be accounting changes. These corrections could be made due to mathematical or mechanical errors when preparing the financial statements, or mistakes that have been made when determining and applying U.S. GAAP. Furthermore, if a company makes a change that is considered to be going from GAAP to Non-GAAP, it will be considered an error, not a change in accounting principle.
There are two scenarios that you should be aware of on the CPA Exam:
If comparative financial statements are presented, the company should simply correct the prior period financial statement error (e.g. if the company realizes an error from Year 1 in Year 2, they should simply correct the Year 1 financial statements).
If comparative financial statements are not presented with the existing error due to the error occurring too far in the past to present, the company should then adjust the beginning retained earnings account for the earliest period that is being presented.
Universal CPA Review breaks this down further in its video lecture. This can be seen in the YouTube video below.
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