Question

ASC 250 “Accounting Changes and Error Corrections”

This case clarified the treatment of accounting changes afteracquisitions. As we have seen, FASB’s guidance comes through ASC805 “Business Combinations.” However, the guidance for other typesof accounting changes is in ASC 250 “Accounting Changes and ErrorCorrections.” This section will integrate accounting changes afteran acquisition with the accounting changes listed in ASC 250.

ASC 250 lists four types of accounting changes.

Change in Accounting Principle – for example, a newrevenue-recognition standard

Change in Accounting Estimate – for example, change inestimated useful life of a depreciable asset

Change in Reporting Entity

Correction of an Error in previously issued financialstatements – for example, last period’s inventory and thereforeretained earnings were overstated

One particularly confusing element of ASC 250 is the categorycalled “change in reporting entity.” To the unwary observer thissounds a lot like an acquisition, but that is actually not thecase. The reason that the distinction is critical is that ASC 250prescribes a retroactive accounting to “change in reportingentity,” but as we just saw the accounting treatment foracquisitions is prospective, with only limited pro-formalretroactive disclosures.

The key accounting question for these four types of changes anderrors is whether the change is accounted forretrospectively orprospectively. In the former case, weadjust previous financial statements to reflect the newinformation. In the latter case, we make no adjustments to previousfinancial statements.

To help you become more familiar with these terms and therequirements of the codification, Work Schedule 6 lists the fourscenarios covered by ASC 250. As the schedule shows, three of thefour scenarios are treated retrospectively, including a “change inreporting entity.” To gain a better understanding of whatretrospective and prospective means, please identify the paragraphnumber that prescribes the appropriate accounting treatment(retrospective or prospective) to the four scenarios. Although youare only asked to identify the paragraph number, it is suggestedthat you also identify the specific word(s) in the paragraph thatindicate retrospective or prospective treatment for each of thefour types of changes.

Work Schedule 6. ASC 250 “Accounting Changesand Error Corrections”.
For:	Accounting Treatment	Paragraph Number
Change in Accounting Principle	Retrospective
Indicate the paragraph number in the box above and copy andpaste the paragraph and highlight/underline the words indicatingretrospective application.
Change in Accounting Estimate	Prospective
Indicate the paragraph number in the box above and copy andpaste the paragraph and highlight/underline the words indicatingprospective application.
Change in Reporting Entity	Retrospective
Indicate the paragraph number in the box above and copy andpaste the paragraph and highlight/underline the words indicatingretrospective application.
Correction of an Error	Retrospective
Indicate the paragraph number in the box above and copy andpaste the paragraph and highlight/underline the words indicatingretrospective application.

As the schedule indicates, changes and corrections are accountedfor retrospectively, with the exception of a change in estimatewhich is accounted for prospectively. Our focus here is to clarifythat changes in accounting entity does not coveracquisitions. According the ASC 250-10-34-21, “Changes inAccounting entity” consists of an accounting change that results ina “different reporting entity”. To the casual observer,acquisitions would seem to fit this category, with the requirementof retroactive restatement of all prior periods as if the acquiredcompany had always been a part of the acquirer. However, this isnot the case, as ASC 250-10-20 indicates (emphasis added):

A change in reportingentity is limited mainly to the following:

Presenting consolidated or combined financial statements inplace of financial statements of individual entities

Changing specific subsidiaries that make up the group ofentities for which consolidated financial statements arepresented

Changing the entities included in combined financialstatements.

Item (b) at first view seems to include acquisitions, however thecodification adds the following exclusionarystatement:

Neither a business combinationaccounted for by the acquisition method nor the consolidation of aVIE pursuant to topic 810 is a change in reporting entity.

To summarize, “change in reporting entity”, which are accounted forretroactively, relates to the decision to consolidate existingsubsidiaries (a topic that is sometimes covered in a senior-levelaccounting course). It does not relate to newly-acquiredsubsidiaries, which are accounted for prospectively with limitedretrospective disclosures. The main takeaway is that acquisitionsare not covered by “change in reporting entity” and receiveprospective accounting treatment with only limited retrospectivedisclosures.