Changes are inevitable in companies. Sometimes, these changes may relate to accounting standards, policies, and estimates. However, it may not be as straightforward due to various reasons. One of the most common of these includes the comparability of financial statements. Companies must refer to the relevant accounting standards to ensure the proper treatment.
Sometimes, companies may only need to apply changes prospectively. However, some changes may also require a retrospective application. Before discussing the difference between the two types of accounting, it is crucial to understand what they are.
What is Retrospective Accounting?
Retrospective accounting requires restating previously issued financial statements to reflect new information. This information may include various items, such as changes in accounting standards or policies. Sometimes, an error in accounting may also require retrospective accounting. Retrospective accounting involves restating the figures already reported in the financial statements in a previous period.
Retrospective accounting is typically applicable when there has been a significant change in accounting. The goal of retrospective accounting is to provide stakeholders with financial information that is consistent over time. Therefore, it makes comparing financial performance from one period to the next easier. Retrospective accounting focuses on the comparability aspect of financial statements.
What is Prospective Accounting?
Prospective accounting is a method of accounting that involves projecting future financial information. Companies use these projections to create financial statements. Unlike retrospective accounting, prospective accounting looks forward. It uses estimates and assumptions about future events and conditions. Prospective accounting is not a requirement under accounting standards or practices.
A benefit of prospective accounting is that it can provide stakeholders with valuable information about a company’s future financial performance. It can help investors and other stakeholders make better-informed decisions about the company. Similarly, it can help management make strategic decisions about allocating resources and planning for the future.
Retrospective Vs. Prospective Accounting: What are the differences?
The differences between retrospective and prospective accounting come from the following points.
Timeframe
The primary difference between retrospective and prospective accounting is the timeframe. The former involves restating previously issued financial statements. However, prospective accounting takes a future view and involves projecting financial information.
Basis
Retrospective accounting uses actual information which comes from financial statements and accounting records. However, prospective accounting projects financial information using estimates and assumptions based on future events and conditions.
Comparability
Retrospective accounting focuses on and enhances the comparability of financial information. It allows stakeholders to compare performance and position over time. However, prospective accounting does not focus on the same.
Use
Retrospective accounting allows stakeholders to understand the changes in accounting policies and how it impacts financial statements. Therefore, it helps analyze performance and analyze trends. However, prospective accounting only helps with predictions and projections. It can be helpful in budgeting and setting goals.
Impact
Sometimes, retrospective accounting is highly complex. It may require restating several years of financial statements while describing those changes. Therefore, it can result in a high impact on various areas. Prospective accounting can also be complex. However, it is not as impactful on decisions and reporting.
Conclusion
Retrospective and prospective accounting can often be confusing. However, both are nothing alike due to significant differences. Retrospective accounting involves restating financial statements to enhance comparability. On the other hand, prospective accounting focuses on the future and includes estimates and projections.
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