Which types of accounting changes must be disclosed in financial statements?

• A. II and III only
• B. I and II only
• C. I and III only
• D. I, II, and III

Answer: (D)

The key idea is that when anything alters how financial statements are prepared, it must be disclosed to users. There are three kinds of accounting changes that require disclosure: changes in accounting principle, changes in accounting estimates, and changes in the reporting entity.

For a change in accounting principle, you generally restate prior-period financial statements to reflect the new principle, and you disclose the nature of the change and its effects on previously issued financial statements as well as on the current period. For a change in accounting estimate, you do not redo past statements; the effect is recognized prospectively in the period of the change and, if material, disclosed in the notes with the rationale and expected impact on future periods. For a change in the reporting entity, you restate the corresponding prior-period statements to reflect the new entity presentation and disclose the change and its effects.

Because each category involves information that readers need to understand how the financial statements have been altered, all three types must be disclosed. That’s why the best choice includes I, II, and III.