FAR 2 Module 2

Question 1

how is an accounting change in estimate reported?

Answer 1

prospectively
-changes in ordinary accounting estimates do not have to be disclosed in notes unless material

Question 2

how is a change in accounting estimate reported?

Answer 2

1) cumulative effect of change is included in the retained earnings statement as an adjustment of the beginning RE balance of the earliest period presented
2) prior period financial statements are restated, if presented

Question 3

what are the special exceptions to the general rule for reporting of changes in an accounting principle?

How are these exceptions reported?

Answer 3

1) changes where it is impracticable to estimate the cumulative effect adjustment, ex. change in LIFO or depreciation

2) accounted for prospectively like a change in accounting estimate

3) no restatement of prior years as a result of impracticability

Question 4

name the three types of accounting changes

Answer 4

1) change in accounting principle
2) change in accounting estimate
3) change in accounting entity

Question 5

Under U.S. GAAP, how is a change in the accounting entity reported?

Answer 5

all current and prior period financial statements presented are restated

Question 6

how are error corrections reported?

Answer 6

reported as prior period adjustments to RE and all comparative financial statements presented are restated and net of tax
-not accounting changes

Question 7

how is a change in depreciation method treated?

Answer 7

it is treated as a change in accounting principle that is not independent from a change in accounting estimate and is such accounted for as a change in accounting estimate
-new depreciation method should be used at beg. of period in which change occurs and start with current book value of asset
-no adjustment to RE or retroactive application

Question 8

installment method

Answer 8

-type of revenue recognition principle acceptable under GAAP
-revenue and expense accounted for at time of cash collection rather than at sale (occurs after sale)
-allows for partial deferral of gain from sale to future tax years
-buyer makes payments in installments over time
-helps spread out income for seller

Question 9

triggers for changes in accounting estimates

Answer 9

1) material, nonrecurring IRS adjustments
2) changes in FA lives
3) adjustments to YE officer salaries/bonuses
4) write-downs of obsolete inventory
5) settlement of litigation
6) changes in accounting principle that are correlated to change in accounting estimate (ex. installment method to immediate revenue recog.)
7) revisions of estimates related to discontinued operations

Question 10

if change in accounting estimate impacts future periods

Answer 10

-disclose in the notes to F/S the impact of estimate on income from continuing operations, net income and per share

Question 11

change in accounting principle

Answer 11

a change from one acceptable principle to another under GAAP

Question 12

rule of preferability

Answer 12

-can change to another accounting principle if required by GAAP or if the change better presents the information

Question 13

direct effects vs. indirect effects

Answer 13

-adjustments necessary to restate F/S of prior periods
-differences in nondiscretionary items based on earnings that would occur had principle been used in prior periods

Question 14

cumulative effect when noncomparative financial statements presented

Answer 14

cumulative effect = beg. RE in period of change - RE with application of new principle
-includes direct and indirect effects in accounting records
-presented net of tax as adjustment to beg. RE in stockholder’s equity statement

Question 15

cumulative effect when comparative financial statements presented

Answer 15

cumulative effect = beg. RE in first period presented - RE if it had been applied in prior periods
-presented net of tax as adjustment to beg. RE in stockholder’s equity statement

Question 16

general rule for changes in accounting principle

Answer 16

-changes in principle are recognized by adjusting beg. RE in earliest period presented for cumulative effect of change
-if comparative (prior period) F/S presented, use retrospective application to restate beg. RE

Question 17

why would an adjustment to LIFO inventory costing be considered impracticable?

Answer 17

it requires recalculating old inventory layers and can therefore be more time consuming to rebuild those cost layers
-therefore you handle prospectively and additional LIFO layers calculated moving forward

Question 18

nonrecurring transaction treatments

Answer 18

-no accounting change should be made for these as these are in the past and do not occur often

Question 19

change in accounting entity disclosure

Answer 19

-disclose cause and nature of change should be made, including changes in income from continuing operations, net income, and RE

Question 20

examples of error corrections

Answer 20

1) recognition, measurement, presentation, disclosure in F/S from mathematical mistakes
2) mistakes in GAAP application
3) oversight or misuse of facts at time F/S prepared
4) changes from non-GAAP to GAAP method of accounting

Question 21

error correction for comparative and noncomparative F/S

Answer 21

-correct error in prior F/S if error presented, if error not presented, adjust net of tax opening RE of earliest period
-error correction reported as an adjustment to opening balance of RE net of tax