Accounting for Changes in Accounting Principles
- Graziano Stefanelli
- Jul 1
- 3 min read
Changes in accounting principles are an important aspect of financial reporting, as they reflect an organization’s adoption of new or different accounting policies in response to updated standards, new regulations, or a change in business circumstances. Because consistency and comparability are key objectives of financial reporting, the rules for recognizing, measuring, and disclosing these changes are designed to ensure users of financial statements understand their nature, effects, and rationale.
What Is a Change in Accounting Principle?
A change in accounting principle occurs when a company adopts a generally accepted accounting principle different from the one previously used for a particular type of transaction, event, or circumstance. This can arise due to:
Implementation of a new accounting standard (e.g., revenue recognition, lease accounting)
Voluntary election to change from one acceptable policy to another (e.g., from LIFO to FIFO for inventory)
Adoption of a more relevant or reliable policy based on changing business needs
Not included are changes in accounting estimates or corrections of errors, which have their own separate treatment.
Examples of Common Changes in Principles
Moving from the cost method to the equity method for investments when significant influence is gained
Adopting a new revenue recognition model as required by an updated standard (ASC 606 or IFRS 15)
Changing depreciation methods (e.g., straight-line to double-declining balance)
Retrospective Application
Both US GAAP and IFRS generally require changes in accounting principles to be applied retrospectively. This means prior period financial statements are restated as if the new principle had always been applied. The goal is to maintain consistency and comparability across periods.
Adjust the beginning balance of affected accounts for the earliest period presented
Restate comparative financial statements for all periods shown
Disclose the nature of and reason for the change, including a description of the prior period adjustments
Exceptions to Retrospective Application
Retrospective application may not be required if it is impracticable to determine the period-specific effects or the cumulative effect of applying the new principle to prior periods. In such cases, the new principle is applied prospectively from the earliest practicable date, and extensive disclosure is required to explain the approach and impact.
Disclosure Requirements
Clear disclosure of changes in accounting principles is critical. Both US GAAP (ASC 250) and IFRS (IAS 8) require:
Description of the change and why it was made
Method of applying the change
Impact on income, earnings per share, and other key financial metrics for all periods presented
The cumulative effect of the change on retained earnings or other equity as of the earliest period presented
Comparison: US GAAP vs. IFRS
US GAAP (ASC 250): Requires retrospective application unless impracticable; SEC registrants must file restated filings as needed.
IFRS (IAS 8): Retrospective restatement is also the default, with disclosure of both quantitative and qualitative effects.
Both frameworks emphasize transparency and comparability for users of financial statements.
Practical Example
If a company adopts a new revenue recognition standard, it would recalculate prior year revenues under the new standard and restate all comparative periods. The cumulative effect adjustment would be made to opening retained earnings of the earliest period presented.
Example Journal Entry (Cumulative Effect):
Dr. Retained Earnings
Cr. Revenue (or other affected account)
Correction of Errors vs. Changes in Principle
It is important to distinguish between changes in accounting principles and correction of errors. Errors are mistakes or omissions in prior period financial statements and must also be corrected retrospectively, with clear disclosure of the nature and impact of the correction.
Summary Table: Accounting for Changes in Principles
Aspect | Treatment | Disclosure? |
Principle Change | Retrospective (unless impracticable) | Yes |
Cumulative Effect | Adjust opening equity | Yes |
Prior Periods | Restate comparative data | Yes |
Correction of Error | Retrospective restatement | Yes |
Relevant Standards
US GAAP: ASC 250 – Accounting Changes and Error Corrections
IFRS: IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors
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