Flashcards in Accounting Changes in Principle, Reporting Entity, Estimate and Error correction Deck (12):
Changes in Accounting Principle
(a) Change in accounting principle occurs by:
IFRS new pronouncement or Company's voluntary change from one Accounting principle to another Accounting principle
If change via new IFRS pronouncement follow the transition rules in the IFRS pronouncement on how to properly adjust the financial statement.
(b) Voluntary change: only do this if the change to another accounting principle provides RELIABLE and MORE RELEVANT information on transaction, Financial position, performance, or cash flow
(1) Voluntary change on accounting principle requires:
(a) Retro application on prior period financial statements in using the new accounting principle
(b) Adjust earliest period shown's opening balance equity (beginning balance retained earnings)
2) Can't determine the effects on Change in accounting principle, then change is applied on PROSPECTIVE basis.
Change in accounting estiate
Accounted for on a prospective basis in period of change (current period) and then future periods.
It includes changes in estimates for:
(a) Bad estimates
(b) Inventory obsolesce (obsolete inventory)
(c) Fair value s of assets or liabilities
(d) Useful life of a appreciable asset
(e) Warranty obligations
IFRS disclosure requirement on Accounting principle change.
(a) Title of the IRS requiring the change
(b) Nature of change
(c) Amount of adjustments to each financial statement line item
(d) Effects on earnings per share (EPS)
Correction of error
Requires Prior period adjustment (prior period restatement) on prior period's financial statement that has the error.
Then, have an offsetting Adjustment to the Opening balance (beginning balance) Retained earnings in the period that has the error.
Example: Year 1 has an error. Then prior period adjustment (restatement) on Year 1 and then make an adjustment to Year 1's beginning retained earnings.
Then: Each period's financial statement are then adjusted to reflect the correction of the period-specific effects of the year. Correct error in Year 1 (that has error then), then correct Year 2 and then Year 3 (to eliminate the effects of error).
Correction error - Disclosure
Footnote disclosure disclose that Previous issued financial statements were restated along with Description on error.
Footnote disclose also on: Cumulative effect of change on retained earnings or other components of equity or net assets at beginning of earliest period presented.
(a) Line item effects on error and Per share amount in each period presented.
(b) Gross effects and net effects from applicable income taxes on the net income of Prior Period along with effects on Retained earnings and Net income
Correction error - Disclosure: once disclose error was corrected in current financial statement, do you need to disclose it again in later financial statements?
No. no need to repeat the disclosure.
Change in accounting estimate
Change in accounting estimate is: change in method that is inseparable from a change in estimate. It's treated as an accounting estimate.
Treat change on prospective basis. Apply the change in present and future financial statement periods. Example of such change: Depreciate and warranty expenses.
So, it's like a change in the Estimate determination method where switch one Depreciation method to another depreciation method (Straight line to Double decline or production or use method or vice versa). It's treated as a change in estimate (apply change on current financial statement and future financial statements).
Change in Accounting Princniple
Change in Accounting principle cause by
(a) by New US GAAP pronouncement or
(b) Company prefers to change to another accounting method because it's preferable to do so
This is done via Retroactive (retrospective) application of applying the new accounting method to change all the numbers measured on to ALL prior periods' financial statement unless it's impracticable.
Then: Cumulative effect of change is on Balance sheet's Carry values on Assets and liabilities
Then: Adjust the opening / beginning retained earnings balance for that beginning part of the First period shown.
If it's impracticable to determine cumulative effects on change in accounting principle >> then treat the change on a prospective basis.
Change in accounting principle:
What are direct effects?
What are indirect effects?
Direct effects are changes only in the prior (past) periods' financial statements.
Example: Change in inventory method, Change on deferred taxes or impairment adjustment.
Indirect effects: change in current and future Cash-flows coming from change in accounting principle. Other words - change in of accounting principle in the Current period.
Example: change in profit sharing or royalty payments based on revenue or net income (% royalty x sales revenue or net income)
These are reported in period in which the accounting change is made.
Change in Reporting entity
This is when there's a change in the Organization/company's structure which results in financial statements that represent a different or changed entity.
(1) Example: Presenting consolidated statements in place of individual statements, change in subsidiaries, or change in use of equity method for an investment.
Change in reporting entity is APPLIED RETROACTIVELY to finnancial statements to ALL prior periods SHOWN.
Previous INTERIM statements presented on retrospective basis.
Change in Reporting entity - Disclosure
Disclosure Footnotes includes:
(a) Nature and Reason for change in reporting entity
(b) Net income
(c) Comprehensive income
(d) And any related per share amounts for all periods presented.