Question

When a company makes changes that result in different reporting entities, how should the company report the change?

1) By changing the financial statements of all prior periods presented and showing the financial information for the new reporting entity for all periods
2) By only changing the financial statements of the current period and not revising the prior period statements
3) By creating separate financial statements for each reporting entity without revising the prior period statements
4) By not reporting the change in the financial statements

Answer 1

To report changes in reporting entities, a company should revise financial statements for all prior periods presented to maintain consistency, making Option 1 the correct approach. This ensures comparability across periods and requires disclosures in the financial statement notes.

Step-by-step explanation:

When a company undergoes changes that affect its reporting entities, the correct way to report this change according to accounting principles is by changing the financial statements of all prior periods presented. The concept behind this method is to maintain consistency and comparability between periods. This makes it easier for users of financial statements to analyze trends and make decisions based on the company's financial data over time.

The company should retrospectively apply the change to its reporting structure for all periods presented as if the new reporting entity had always existed. This often involves restating previous financial statements to reflect the new structure.

Therefore, the correct option from the list provided by the student would be Option 1: changing the financial statements of all prior periods presented to show the financial information for the new reporting entity for all those periods.

Such a change is significant and must be disclosed in the notes to the financial statements to provide context to the change and its effects on the company's financial position and results of operations.