Prospective application definition
/What is Prospective Application?
Prospective application is the application of a new accounting policy to transactions after the date of the policy change, with recognition of the effect of changes in accounting estimates in the current and future periods. The change is not applied to prior periods.
Example of Prospective Application
Hard Shell Manufacturing has been using the straight-line depreciation method for its factory equipment. On January 1, 2025, the company decides to switch to the double-declining balance (DDB) method to better reflect asset usage. Under the prospective application concept, the company does not adjust depreciation from previous years. Instead, it only applies the new DDB method starting January 1, 2025, for the remaining useful life of the asset.
Prospective Application vs. Retrospective Application
Prospective application involves applying a new accounting policy only on a go-forward basis, while retrospective application mandates that the policy also be applied to transactions that were recorded in prior periods. It is quite common for retrospective application situations to result in the restatement of financial statements from prior periods. Whether an accounting change is to be dealt with on a prospective or retrospective basis is up to the guidelines included in the applicable accounting standard.