accounting for changes in accounting principles

An accounting change for the purposes of income statement is a change from one GAAP accepted method to another GAAP accepted method. Therefore, a change in accounting policy only occurs in area where there is more than one acceptable method. The most common examples are: inventory, fixed assets depreciation and long-term contract.
A change from a non-GAAP method to a GAAP method (for example, from not depreciating fixed assets to the straight-line method) is not a change in accounting policy. Rather, it is the correction of an error.
An entity shall report a change in accounting principle trough retrospective application of the new accounting principle to all prior periods, unless it is impracticable to do so. Retrospective application requires the following:
- the cumulative effect of the change to new accounting principle on periods prior to those presented shall be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented.
- An offsetting adjustment, if any, shall be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period.
- Financial statements for each individual prior period presented shall be adjusted to reflect the period-specific effects of applying the new accounting principle.