9C Accounting Changes

Question 1

Correction of errors

Answer 1

1) Correction of errors are not accounting changes. They are done as prior period adjustments to the beginning balance of retained earnings, net of tax effect.

Question 2

Restatement

Answer 2

Correction of errors to the financial statements

Question 3

Public Company FS

Answer 3

3 years IS and CF, 2 years BS

Question 4

What are changes in accounting principle?

Answer 4

Any change from one GAAP to another GAAP.

1) change in inventory method (FIFO, LIFO, Weighted average)
2) change in construction accounting method (% completion, completed contract)

Question 5

When is a change in accounting principle allowed?

Answer 5

Only if the change is required by a newly issued accounting pronouncement or if the entity can justify the use because it is preferable

Question 6

How is a change in principle accounted?

Answer 6

Retrospectively

Question 7

What is retrospective treatment?

Answer 7

New accounting principle is applied to the prior periods’ financial statemetns as if the new accounting principle had been used in those periods.

Question 8

How to deal with changes in accounting principle?

Answer 8

1) Just use the new accounting principle in the current accounting period
2) Take the cumulative effect (difference between old and new since company started until the beginning of the first period presented) and adjust the carrying values of assets and liabilities as of the beginning of the first period presented
i) The offsetting debit or credit made to the beginning balance of retained earnings (net of tax effect) for the first period presented
ii) Only direct effects are part of the cumulative effect
iii) Indirect effects are reported in the period the change is made
3) Presentation of prior periods in comparative financial statements

Question 9

What if prior period effects cannot be determined?

Answer 9

1) If cumulative effect can be calculated, but if period-specific effects can only be determined for some of the prior accounting periods presented, then present the changes to the earliest prior period possible and adjust that prior perod’s beginning balances for assets, liabilities, and RE. An offsetting adjustment is made to the opening balance of retained earnings for the period.

Question 10

What if cumulative effect cannot be calculated?

Answer 10

Apply prospectively but only if one of the conditions are met:

1) After making every reasonable effort to apply the new principle to a previous period (retrospective application), you are unable to do so (you tried and tried, but couldn’t do it); or
2) there are assumptions about management’s intentions that cannot be independently substantiated (you can’t read management’s mind)
3) significant estiamtes are required and you cannot obtain objectivei nformation to make estimates (you are really bad at guessing)

Example of impractibility: converting from FIFO to liFo because of those pesky LIFO layers

Question 11

How are changes in depreciation, amortization, and depletion methods treated?

Answer 11

As changes in accounting estimates

Question 12

Distinction between special vs. non-special changes

Answer 12

No distinction is made. All changes in accounting principle are treated in the same manner.

Question 13

What are direct effects?

Answer 13

Effects to the assets, liabilities, DITA, DITL, and impairment losses as a result of the new accounting principle. Eg: effect on deferred taxes or impairment adjustment, adjustment to inventory from change in inventory valuation method

Question 14

What are indirect effects?

Answer 14

Effects to current and future cash flows as a result of the new accounting principle. Eg: royalties and profit sharing.

Question 15

What should the notes to the FS say to describe a change in accounting principle?

Answer 15

1) The nature and reason for the change, and why the new method is better
2) The method of applying the change
3) Description of prior period info that is retrospectively adjusted
4) Effect of the change on income from continuing operations, net income, and any other affected financial statement line item, and any affected per share amoutns for the current period and all periods adjusted retrospectively
5) cumulative effect of the change on retained earnings or toher components of equity or net assets as of the earliest period presented
6) if retrospective application is impracticable, the reason and a description of how the change was reported
7) description of the indirect effects of the change, including amounts recognized in the current period and related per share amounts
8) unless impracticable, the amounts of the indirect effects of teh change and the per share amounts for each prior period presented.

Question 16

Accounting principle change in interim period

Answer 16

In the year of the change, interim fs should disclose the effect of the change on income from continuing operaitons, net income, and related per share amounts for the post change interim periods

Question 17

Do subsequent periods need to mention the change?

Answer 17

No, once the change in method is disclosed, no disclosures are necessary

Question 18

What are changes in accounting estimates?

Answer 18

Besides changes in depreciation, amortization, and depletion, other examples include

a) changes in % for BDX or warranty expense
b) changes in salvage value or estimated useful life for depreciable assets

Question 19

How is a change in accounting estimated accounted?

Answer 19

Prospectively. The FS are not restated or retrospectively adjusted.

Question 20

How to deal with changes in accounting estimate?

Answer 20

1) Use new estimate in the current period
2) Do not adjust the financial statements of prior periods presented. This is called prospective treatment (affects current period and future accounting periods, if applicable)

Question 21

If a change in estimate is due to a change in principle

Answer 21

it is treated as a change in estimate

Question 22

if the entity effects the estimate by changing the acocunting principle?

Answer 22

the footnote disclosures required by a change in accounting principle apply and must be included in the notes to the financial statements

Question 23

Change in estimate

Answer 23

Changed of estimated FS amount based on new information or experience

Question 24

What are changes in reporting entity?

Answer 24

1) Change that results in financial statements representing a different entity.
2) occurs when there is a change in org structure
3) Leaving out a subsidiary when it’s being controlled by the bankruptcy court, but including it once it emerges from bankruptcy
4) Leaving out a foreign subsidiary when it’s being controlled by a foreign government but including it when there’s a change in the government policy.

Question 25

How to deal with change in reporting entity?

Answer 25

1) Just use the new reporting entity in the current accounting period
2) Apply the new reporting entity retrospectively to the financial statemetns of all prior periods presented.

Question 26

How to disclose change in reporting entity in financial statement?

Answer 26

Disclose the type of change and the reasons for the change, the related effects on income before extraordinary items, net income, other comprehensive income, and related per share effects on EPS for all periods presented.

Question 27

When is change in accounting principle allowed in IFRS?

Answer 27

If change is required by an IFRS or there is a voluntary change in accounting methods.

1) If new IFRS, the transition rules in the new statement should be followed

2) If change is voluntary, only can be used if it provides reliable and more relevant information about the transactions, entity’s financial position, performance, or cash flows
3) voluntary change is given retrospective application as if it was always applied. It requires that the opening balance of equity be adjusted for the earliest period presented and that other amounts are disclosed for each prior period as if the new policy had always been applied
4) if it is impracticable to determine the effects of the change, then the change may be applied on a prospective basis.

Question 28

What is the disclosure that should be made under IFRS when changing accounting principle?

Answer 28

1) Title of the IFRS requiring the change
2) Nature of the change
3) amount of adjustments to each financial statement line item
4) effects on earnings per share

Question 29

What is the change in accounting estimate per IFRS?

Answer 29

1) Occurs due to uncertainties in measuring items on the FS
2) Changes include change in bad debt estimate, inventory obsolescence, FV of financial assets or liabilities, the useful life of a depreciable asset, or warranty obligations.
3) Change is accounted prospectively

Question 30

What are the types of accounting changes?

Answer 30

1) Changes in accounting principle
2) Changes in accounting estimate
3) Changes in reporting entity”