The effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate should be reported
A) in the period of change and future periods.
B) by restating the financial statements of all prior periods presented.
C) by showing the pro forma effects of retroactive application.
D) as a correction of an error.

Question

Quizplus · Accepted Answer

When the effect of a change in accounting principle cannot be separated from the effect of a change in accounting estimate, it should be reported in the period of change and future periods. This is because the change affects ongoing financial reporting and reflects a new path forward in accounting treatment. Therefore, A is the correct answer. B is incorrect because restating financial statements of all prior periods presented is only done when there is an error or where an entity restates its financial statements due to a material error or fraud. C is incorrect because showing the pro forma effects of retroactive application applies when a company wishes to show how its financial statements would have looked if it applied a new accounting principle or prior period adjustment retrospectively. D is incorrect because when the effect of the change in accounting principle is inseparable from the effect of the change in accounting estimate, it does not qualify as a correction of an error.

The Effect of a Change in Accounting Principle That Is