Basic Accounting Change
The Per-Share Impact of Cumulative Accounting Principle Changes on Basic EPS
Basic Accounting Change represents the component of basic earnings per share (EPS) resulting from the cumulative effect of a change in accounting principle. When a company adopts a new accounting standard or voluntarily changes an acceptable method, the cumulative adjustment for prior periods was historically recognized in the income statement. This line item isolated the per-share impact of that one-time adjustment using basic shares only. Under current US GAAP (since 2005), such changes are applied retrospectively to retained earnings with no income statement effect, making this metric largely obsolete in modern reporting.
What is Basic Accounting Change?
Basic Accounting Change captures the per-share effect on basic EPS from the cumulative catch-up adjustment when a company changes an accounting policy. It used the basic weighted average shares outstanding (no dilution) to show the impact on reported earnings for existing shareholders.
Prior to 2005, under APB Opinion 20, voluntary accounting changes resulted in a cumulative effect reported net of tax in the current period's income statement. This directly affected basic EPS and was disclosed separately in EPS reconciliations.
Since SFAS 154 (now ASC 250) in 2005, most changes require retrospective application—restating prior periods and adjusting beginning retained earnings—with no current-period income statement or EPS impact.
Evolution of Accounting Treatment
The rules have changed significantly:
Key Developments
- Pre-2005 (APB 20): Cumulative effect of voluntary changes included in current net income.
- 2005 onward (SFAS 154/ASC 250): Retrospective restatement of prior financials; cumulative effect to beginning retained earnings.
- Exceptions: Some adoptions (e.g., new standards with specific transition) may use prospective or modified approaches.
- IFRS (IAS 8): Also requires retrospective application with rare exceptions.
As a result, Basic Accounting Change is typically zero in financial statements after 2005.
This change improved comparability and reduced earnings volatility from accounting adjustments.
Historical Calculation
The cumulative effect was the difference in retained earnings if the new principle had always been applied, adjusted for taxes.
Historical Examples
Example 1: Inventory Method Switch
Example 2: Revenue Recognition Change
Today, these would be handled via restatement of prior years with no current EPS impact.
Relevance in Analysis
In modern analysis (post-2005), this line has little relevance as accounting changes do not affect current EPS. Focus instead on restated historical figures for comparability.
For historical data analysis: - Explains unusual EPS swings in transition years - Should be excluded when computing normalized or recurring basic EPS - Aids in understanding pre- and post-change trends
Warning: Large historical accounting change impacts can distort year-over-year EPS comparisons if not properly adjusted.
Key Takeaways
Basic Accounting Change showed the per-share effect of cumulative accounting principle changes on basic EPS.
Historically (pre-2005), it flowed through current net income; now applied retrospectively to retained earnings.
Virtually obsolete in post-2005 financial statements due to changed GAAP rules.
No direct impact on current basic EPS under modern standards.
Primarily useful for interpreting long-term historical EPS trends and comparability.
Basic Accounting Change
The Per-Share Impact of Cumulative Accounting Principle Changes on Basic EPS
Basic Accounting Change represents the component of basic earnings per share (EPS) resulting from the cumulative effect of a change in accounting principle. When a company adopts a new accounting standard or voluntarily changes an acceptable method, the cumulative adjustment for prior periods was historically recognized in the income statement. This line item isolated the per-share impact of that one-time adjustment using basic shares only. Under current US GAAP (since 2005), such changes are applied retrospectively to retained earnings with no income statement effect, making this metric largely obsolete in modern reporting.
Table of Contents
What is Basic Accounting Change?
Basic Accounting Change captures the per-share effect on basic EPS from the cumulative catch-up adjustment when a company changes an accounting policy. It used the basic weighted average shares outstanding (no dilution) to show the impact on reported earnings for existing shareholders.
Prior to 2005, under APB Opinion 20, voluntary accounting changes resulted in a cumulative effect reported net of tax in the current period's income statement. This directly affected basic EPS and was disclosed separately in EPS reconciliations.
Since SFAS 154 (now ASC 250) in 2005, most changes require retrospective application—restating prior periods and adjusting beginning retained earnings—with no current-period income statement or EPS impact.
Evolution of Accounting Treatment
The rules have changed significantly:
Key Developments
- Pre-2005 (APB 20): Cumulative effect of voluntary changes included in current net income.
- 2005 onward (SFAS 154/ASC 250): Retrospective restatement of prior financials; cumulative effect to beginning retained earnings.
- Exceptions: Some adoptions (e.g., new standards with specific transition) may use prospective or modified approaches.
- IFRS (IAS 8): Also requires retrospective application with rare exceptions.
As a result, Basic Accounting Change is typically zero in financial statements after 2005.
This change improved comparability and reduced earnings volatility from accounting adjustments.
Historical Calculation
The cumulative effect was the difference in retained earnings if the new principle had always been applied, adjusted for taxes.
Historical Examples
Example 1: Inventory Method Switch
Example 2: Revenue Recognition Change
Today, these would be handled via restatement of prior years with no current EPS impact.
Relevance in Analysis
In modern analysis (post-2005), this line has little relevance as accounting changes do not affect current EPS. Focus instead on restated historical figures for comparability.
For historical data analysis: - Explains unusual EPS swings in transition years - Should be excluded when computing normalized or recurring basic EPS - Aids in understanding pre- and post-change trends
Warning: Large historical accounting change impacts can distort year-over-year EPS comparisons if not properly adjusted.
Key Takeaways
Basic Accounting Change showed the per-share effect of cumulative accounting principle changes on basic EPS.
Historically (pre-2005), it flowed through current net income; now applied retrospectively to retained earnings.
Virtually obsolete in post-2005 financial statements due to changed GAAP rules.
No direct impact on current basic EPS under modern standards.
Primarily useful for interpreting long-term historical EPS trends and comparability.
Related Terms
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