Types of changes and accounting approaches

Question 1

What are the 4 types of accounting changes GAAP addresses?

Answer 1

1. ) Accounting principles changes (FIFO to weighted average)
2. ) Accounting estimate changes (Change in useful life)
3. ) Changes in reporting entity (change in consolidated group)
4. ) Corrections of errors in prior financial statements

Question 2

Is a correction of an error in prior financial statements treated as an accounting change?

Answer 2

No, but the procedures for recording are the same as for accounting principle changes

Question 3

What is a retrospective change?

Answer 3

Application of a principle to prior periods as if that principle had always been used. This records the effect of the change on prior years as an adjustment to the beginning balance of RE for the year of change rather than income.

Question 4

What quality from the Conceptual framework does a retrospective change enhance?

Answer 4

Comparability.

Question 5

Does a retrospective change have to be disclosed?

Answer 5

Yes, an entity must disclose the effects on income and income taxes.

Question 6

What is a prospective change?

Answer 6

Apply the change to current and future periods only; prior year statements are unaffected.

Question 7

What is a restatement?

Answer 7

Term reserved specifically for error changes. Requires correcting the comparative financials along with correcting the opening RE balance. Entity must also disclose the nature of the error and the effect on current and prior periods

Question 8

Explain the accounting approaches for each type of accounting change?

Answer 8

1. ) Accounting principle change - Retrospective
2. ) Accounting estimate change - Prospective
3. ) Change in reporting entity - Retrospective
4. ) Correction of error - Restatement

Question 9

What is an accounting principle change?

Answer 9

Change from one Generally accepted accounting principle to another when there is at least two acceptable principles, or when the current principle is no longer accepted. A change in the method of applying a principle is also considered a change.

Question 10

What are some examples of an accounting principle change?

Answer 10

1. ) Changing from LIFO to FIFO
2. ) Changing the accounting for long term contracts (Completed contract to percentage completion)
3. ) Change in method of applying LCM to inventory

Question 11

What are examples of accounting estimate changes?

Answer 11

Depreciation or amortization method

Question 12

How is a change in method that is indistinguishable from a change in estimate accounted for?

Answer 12

Change in estimate

Question 13

What type of changes and events are comparative financial statements of prior periods changed for?

Answer 13

Accounting principle changes and error corrections

Question 14

What concept is displayed when there is restatement of prior year financial statements?

Answer 14

Comparability

Question 15

What is the date of application used by firms for accounting changes?

Answer 15

First day of the year of change

Question 16

When can an accounting principle change be justified?

Answer 16

If the change is required by a new pronouncement, or if the entity can justify the use of an allowable new principle on the basis that it is preferable in terms of financial reporting. Common justifications include changing business conditions, and better matching of revenues and expenses.

Question 17

How would a change from cash to accrual basis of accounting be reported in the financials?

Answer 17

Cumulative effect adjustment to retained earnings, with separate disclosure