Effect of accounting changes

Financial Times  Sep 13  Comment 
Supermarket chain’s profits hit by one-off restructuring and accounting charges
Insurance Journal  Jun 11  Comment 
Many insurers and reinsurers are facing some earnings volatility in 2018 due to a change in accounting requirements for equity securities, Fitch Ratings said in new market commentary. According to Fitch, companies with significant equity...
MarketWatch  Apr 16  Comment 
Shares of General Electric Co. slumped 1.6% in morning trade Monday, to pace the Dow Jones Industrial Average's decliners, after the industrial conglomerate revealed retrospective financials for additional disclosures regarding new accounting...
Financial Times  Apr 14  Comment 
Fresh tax charge of $1.2bn disclosed along with restatement of earnings for 2017
MarketWatch  Mar 7  Comment 
The tax bill signed into law in December introduced a new layer of confusion to the usual muddle of GAAP and non-GAAP numbers, or those prepared under Generally Accepted Accounting Principles and those that adjust for one-time items.


Effect of accounting changes appear on a company's financial statements whenever accounting principles change and impact net income from previous reporting periods.

Effect of accounting changes is relevant only to a company's financial statements and the reporting of its net income or net loss. When a company changes or updates the accounting principles it uses to calculate its income, this can affect the company's reported income in previous reporting periods.

In order to allow meaningful evaluation of a company's current and prior revenues, companies must disclose the effect of changes in accounting principles on their balance sheet. The cumulative effect of accounting changes is most often disclosed in a footnote that explains its financial effect, allowing readers to evaluate the current accounting period's net income against prior periods.

A cumulative effect of accounting change is seen after a change in:

  1. Accounting principles, such as a new method of calculating Amortization or Depreciation
  2. Accounting estimates - for example, a revised projection of Accounts Receivable
  3. Reporting entity - for example, in a merger or acquisition, the new company now includes an entirely new group of assets

==Example== 8====D In 1970, Chrysler changed from LIFO "Last In, First Out" accounting to FIFO "First In, First Out" accounting principles. This change created a cumulative effect of $53.5 million in the company's net income, and if it had been disclosed as part of net income on the company's financial statement the company would have reported a net income of $45.9 million. But instead, it reported previous income statements using the new principle, which led to a more accurate reported net loss of $7.6 million.[1]


  1. The CPA Journal, "Cumulative Effect of a Change in Accounting Principle: Remove It from the Income Statement," January 2003
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