Under United States generally accepted accounting principles (U.S. GAAP), the reason for a revision determines its accounting treatment. Identical dollar differences can represent a new estimate, a different acceptable principle, or an error correction.
The controlling facts distinguish six categories:
Retrospective application rebuilds comparative amounts using the new principle or reporting entity throughout the periods presented. Prospective application recognizes an estimate revision in the period of change and, when relevant, later periods.
An error correction repairs accounting that was incorrect when prepared, rather than replacing a previously reasonable estimate with hindsight. Restatement revises previously issued statements to correct their errors.
HIGH-FREQUENCY: Classification identifies what changed: the accounting rule, the available information, the reporting group, or the correctness of the original accounting. The preparer calculates the adjustment after selecting that branch.
A change in accounting estimate requires evidence that the earlier estimate was reasonable when made and that later information supports revision. A spreadsheet mistake or ignored contemporaneous engineering report instead supports error correction.
Common mistakes
- Mixing opening dates. Merrow's comparative opening adjustment is $15,000; the current-ledger retained earnings adjustment is $27,000.
- Taxing the cumulative balance. Merrow's Year 3 incremental tax expense is $1,000, rather than the $9,000 deferred liability established at current-year opening.
- Restarting from historical cost. Arlen's prospective expense is $24,000; incorrectly depreciates previously consumed cost again.
Bottom line
- Classification follows the accounting rule, information available, reporting group and correctness of the original accounting.
- A voluntary principle change requires an acceptable, preferable alternative and generally receives retrospective application unless specific transition provisions or supported impracticability govern.
- Retrospective adjustments separate the after-tax cumulative effect before the earliest comparative period from income effects within each presented period.
- Estimate revisions and depreciation-method changes reflecting revised consumption patterns apply prospectively to the remaining carrying amount.
Exam shortcut
The preparer marks three dates before calculating: the original measurement date, the earliest comparative opening and the current ledger's opening. Each answers a different part of the question. A balance-difference column establishes cumulative effects. Subtracting consecutive balances isolates each year's expense or income effect before applying the supported tax treatment. For depreciation, the preparer identifies carrying amount at revision and remaining life.
The full lesson (about 7,723 words, 51 min read) adds 4 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- III.A1
Browse all free CPA FAR lessons or jump into free CPA FAR practice questions.