Final answer:
The modified retrospective approach is a method used when implementing a change in accounting principle, where the entity adjusts its current and future financial statements without restating prior periods.
Step-by-step explanation:
When a company decides to change an accounting principle, it must determine how to implement the change in its financial statements. The modified retrospective approach is one such method of implementation. Under this approach, the entity applies the new accounting principle to all periods presented in the financial statements as if the new principle had always been used. The cumulative effect of the change is recorded as an adjustment to the opening balance of equity in the year of change. Unlike the retrospective approach, which requires restating prior periods as if the new principle had always been applied, the modified retrospective approach only applies to the current and future financial statements. The key difference is that under the modified option, prior period financial statements are not restated.