Accounting for Changes 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.
Other examples of situations that would result in a change in reporting entity would consist of a change in the reporting consolidated financial statements in one subsidiary being reported. Universal CPA Review’s visual learning approach breaks this down by using the example of Shark Corp. acquiring an additional 50% of Minnow Corp. (initially owning 25%). This would indicate that Shark Corp. would now have significant influence, meaning they would change the reporting of this subsidiary from the equity method to the acquisition method.
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