Accounting Changes & Errors Flashcards
Know this for retrospective application
When there’s retrospective application the entity MUST disclose the effects on income and income taxes.
What are four types of accounting changes and errors?
1- Accounting principle changes
2- Accounting estimate changes
3- Changes in reporting entity
4- Error corrections in F/S
Accounting changes & their treatment
Principle change — Retrospective
Principle change — Prospective (when determining prior year effects impracticable)
Estimate change — Prospective
Reporting entity — Retrospective
Error correction — Retrospective
What is the accounting treatment when a firm changes an accounting principle which was not GAAP to a new principle which is GAAP?
As an error correction not as an accounting principle change. Even though both use retrospective application but be weary of terminology.
Does introduction of a new accounting principle warrant retrospective application?
It may not be required. Just follow the transition guidelines.
How a change which is indistinguishable as an estimate or principle treated?
It’s treated as current and prospectively.
Is change in method of depreciation an estimate or principle change?
It’s a change in estimate.
What’s the treatment when a change in principle cannot be distinguished from a change in estimate?
The change is treated as a change in estimate (prospectively).
Know this
Changes in an estimate that was based on negligence or in bad faith are also error corrections
Why we use “Restatement” for error correction and “Retrospective Application” for principle change?
The term “Restatement” is used rather than “Retrospective Application” to distinguish voluntary principle changes from restatements due to errors and to reduce potential confusion between the two.
Is prior period adjustment account closed at the end of accounting period and if yes to what account?
Yes it is closed at the end of accounting period and it is closed to Retained Earnings.
Counter balance errors and their appropriate corrective treatment
If a counter balancing error was discovered in a year before which, the the error had corrected itself, then there are no required retained earnings adjustments in the year when error was caught, neither are there any prior period adjustments required. However, if the error was caught before it had chance to correct itself then the error-correcting entry is needed. See study text in “Accounting Errors - Restatement” bullet in CPA Excel for further info. The contents are found in the big blue “EXAMPLE” box.
