When a change in accounting policy occurs,
A) nothing should be done.
B) the new policy should be used in reporting the results of operations of the current year, and the cumulative income effect net of tax should be reflected on the statement of retained earnings as an adjustment to the opening balance.
C) the cumulative effect of the change in policy should be reflected on the income statement as of the beginning of the next year.
D) the cumulative effect of the change in accounting policy should be classified as an extraordinary item on the income statement.

Question

Quizplus · Accepted Answer

The correct approach when a change in accounting policy occurs is to apply the new policy retrospectively unless it is impracticable to determine the period-specific effects or the cumulative effect of the change. This involves adjusting the opening balance of retained earnings for the earliest period presented and the comparative amounts for each prior period presented as if the new accounting policy had always been in place. This is in line with the principle of consistency and comparability in financial reporting.

When a Change in Accounting Policy Occurs