UAL2-U2-L08 · University Accounting Level 2
Accounting changes, errors, and restatements
Learning goals
- Distinguish policy changes, estimate changes, and prior-period errors.
- Apply retrospective or prospective treatment to supplied facts.
- Build a retained-earnings and comparative-statement correction.
Prerequisite check
New information about an asset's remaining life is usually an estimate change. A mathematical mistake using information already available is an error. The same dollar effect can have different accounting depending on why the old amount changed.
Vocabulary
- Accounting policy: principle, basis, convention, rule, or practice used in reporting.
- Estimate change: revision arising from new information or developments.
- Prior-period error: omission or misstatement from failure to use reliable information available when statements were authorized.
- Retrospective application: applying a policy as if it had always been used, when practicable.
- Prospective application: recognizing effects in current and future periods.
Core idea
Policy changes are generally retrospective when required or more reliable/relevant and practicable; estimate changes are prospective; material prior-period errors are corrected retrospectively. IAS 8 and Canadian ASPE Section 1506 share this broad structure but detailed wording and exceptions depend on the stated framework.
Why this treatment makes sense
Retrospective presentation preserves comparability when past accounting was wrong or a policy changes. Prospective treatment respects that a reasonable estimate made from old information was not an error merely because outcomes changed.
A repeatable method
- Write what changed and why, using evidence dates.
- Classify as policy, estimate, error, or combined change.
- Identify transition instructions for a new standard first.
- Determine retrospective or prospective treatment and practicability.
- Calculate tax effects using case data.
- Adjust opening equity and comparative amounts when retrospective.
- Disclose nature, amount by line/period, and future effect if required.
Worked example
In 2027, Harbour Textiles discovers that a December 2025 inventory purchase of $40,000 was omitted from both inventory and accounts payable, and the goods remained unsold at December 31, 2025. They were sold in 2026. Ignore tax.
Correct 2025: inventory and payable both increase $40,000; 2025 profit is unchanged. Correct 2026 opening inventory is $40,000 higher, so 2026 COGS rises $40,000 and 2026 profit/closing retained earnings fall $40,000. If 2027 comparative statements include 2026, restate them and adjust the relevant opening retained earnings rather than charging a 2027 “inventory error expense.”
By contrast, if 2027 evidence changes a machine's remaining life from six years to three, recompute depreciation prospectively from current carrying amount and residual value.
Journal, ledger, and statement connection
The correction worksheet maps each period, account, tax effect, and opening equity. Ledger entries depend on which periods remain open, but published comparative columns and notes must reflect the retrospective correction consistently.
Common mistakes
- Calling every revision an estimate change to avoid restatement.
- Restating a reasonable estimate using hindsight.
- Correcting only retained earnings while leaving comparative balance sheets wrong.
- Ignoring tax effects or transition provisions supplied in the question.
Guided practice
A machine carrying amount is $90,000, residual $6,000, and revised remaining life three years based on new usage data. Prospective annual depreciation is ($90,000 − $6,000)/3 = $28,000; prior depreciation is not restated.
Independent practice
Level 1 — classify: New customer data raises the loss allowance estimate. Policy, estimate, or error?
Level 2 — prospective: Asset carrying amount $150,000; revised residual $10,000; remaining life four years. Calculate depreciation.
Level 3 — error: A material $25,000 2025 expense was never accrued or paid and is found in 2027. Ignore tax; explain the comparative/opening-equity logic.
Self-check and solutions
Level 1: Estimate change, provided the original estimate reasonably used then-available information.
Level 2: ($150,000 − $10,000)/4 = $35,000 annually prospectively.
Level 3: Restate the affected 2025 comparative if presented and reduce the earliest presented opening retained earnings as needed; recognize the liability until settled. Do not bury the old expense in 2027 operating results.
Retrieval practice
- Which changes are normally prospective?
- What evidence distinguishes error from estimate change?
- What should be checked before general change rules?
Answers: estimates; information available when the old statements were authorized; specific transition provisions.
Exam-style application
Classify four changes, compute one prospective depreciation revision, map a two-year error through inventory/COGS/equity, and draft the core disclosure in plain language.
Lesson summary
Classification drives treatment: policies and errors generally look backward, estimates look forward, and every correction must reconcile across periods and statements.