FASB provides that companies report accounting changes in three different ways. One way is reporting the change currently by reporting the change's overall impact in the continuing year’s income statement. The second way is by reporting the changes retrospectively, whereby the company reveals the change's overall effect as a modification to the initially retained earnings of the preliminary year handed out. The third way is by reporting the changes prospectively where the company does not adjust opening balances, and the previously reported results do not change. However, FASB recommends using a retrospective approach as it gives more detailed and useful information to financial statement users compared to other methods. FASB further provides that the divulgence of accounting change in accounting principles is vital and should entail the type of change, the cause of the change, and the method used to apply it. The method should entail account for the previous period that has been modified, the effect of the change on current operations' income, and the collective impact of the change on company earnings that have been retained.
FASB articulates that companies should report these changes prospectively in dealing with changes in accounting estimates such as uncollectable receivables. Companies should thereby not modify formerly presented results but should instead describe the effects of all changes in estimates of both current and future periods. However, companies are not required to disclose accounting estimates of normal operations but should do so if the changes affect several continuing periods.
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According to FASB, dealing with changes in reporting entities such as presenting integrated statements rather than statements of individual companies, companies should report the change by changing all previously reported periods' financial statements. Companies should reveal the type and cause of the change in their financial statements and its impact on income from ongoing operations for all periods presented.
Reference
FASB. (n.d.). Summary of statement No. 154 . FASB: Financial Accounting Standards Board. https://www.fasb.org/summary/stsum154.shtml
