Why is changing from the cash basis to the accrual basis a correction of error?
The cash basis of accounting is considered non-GAAP, whereas, the accrual basis is GAAP and is required for financials statements for public companies. Therefore, if the company prepared their financial statements under the cash-basis, that would be considered an error. Since the company is going from non-GAAP to GAAP, the company must correct the error and restate their financial statements using the accrual basis method.
When a company corrects and error, they must record a prior period adjustment and restate the financial statements. This means that any prior period financial statements must be restated to be presented under the accrual basis.
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How a Account for Changes in Accounting Principle
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How to Account for a Change in Accounting Estimate:
Changes in estimates, such as the estimated useful like for a tangible asset or the bad debt allowance percentage, are accounted for on a prospective basis. This means that the current and future financial statements must reflect the change, but the company does not need to change historical periods. Instead, the change will be made...
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If a company identifies an error in prior period financial statements, what should they do?
If errors are identified and they are material or cause the financial statements to be misleading, then the company should restate the financial statements and reissue them.
How a Account for Changes in Accounting Principle
Assuming the change in accounting principle is justified (i.e. makes sense), then the change should be reflected on a retrospective basis. Unlike the prospective treatment for changes in accounting estimate, 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....
How to Account for a Change in Accounting Estimate:
Changes in estimates, such as the estimated useful like for a tangible asset or the bad debt allowance percentage, are accounted for on a prospective basis. This means that the current and future financial statements must reflect the change, but the company does not need to change historical periods. Instead, the change will be made...
If a company identifies an error in prior period financial statements, what should they do?
If errors are identified and they are material or cause the financial statements to be misleading, then the company should restate the financial statements and reissue them.
