What is a change in reporting entity?
A change in reporting entity requires retrospective treatment, which means that any prior periods that will be presented in the current year financial statements need to be restated. A change in reporting entity specifically addresses the fact that the comparable financial periods need to include the financial results for the same legal entities or reporting units.
For example, let’s say that the Year 1 results for Tahoe Ventures did not include the financial results for Truckee Mountain (an unconsolidated subsidiary). However, in Year 2, the results for Truckee Mountain will be included in the consolidated financials for Tahoe Ventures. Tahoe Ventures would need to restate the Year 1 financials to include Truckee Mountain so that the two periods are comparable. The reason this is important is because financial results that are not comparable can mislead investors.
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What does a retrospective change to the financial statements mean?
When there are accounting changes, a company can either approach those changes on a prospective or retrospective basis. The approach ultimately depends on the type of change. When a company prepares it financial statements, there are often historical periods presented next to the current period. If the accounting change requires retrospective treatment, then those historical […]
What is the a prospective change vs a retrospective change?
A prospective change means that the change needs to be accounted for on a go-forward basis (only looking forward). For example, if the company changes an estimate, then only the current year financials need to reflect the change and not the prior period financials. A retrospective change means that the change needs to be accounted […]
How a change in accounting principle is reflected in the financial statements?
Assuming the change in accounting principle is justified (i.e. makes sense), then the change should be reflected on a retrospective basis. This means that any prior periods that are included in the current year financial statements need to be restated to reflect the new accounting principle. For example, let’s say that the company used LIFO […]