F2 - Revenue Recognition, Accounting changes & Errors Flashcards
How do you report the decision to change from cash-basis accounting to accrual-basis accounting?
It is an error because the cash-basis accounting is a non-GAAP method. Therefore, it should be reported (net of tax) as a prior-period adjustment to beginning retained earnings.
A change in accounting ESTIMATE is….
accounted for prospectively, in current and future periods and will be reported income from continuing operations. We do not go back. Does not effect previous periods.
Rule: It affects only the current and subsequent periods (not prior periods and retained earnings).
How do you account an error correction?
by adjusting prior period financial statements, net of tax, to correct the error. It should be reported In the current statement or retained earnings as an adjustment of beginning balance, For example, if the error discovered in Y3, financial statements for Y1 and Y2 should be restated.
If you cannot distinguish the effect of a change in accounting principle from the effect of a change in accounting estimate,
you should consider it as the effect of a change in accounting ESTIMATE and report it prospectively (not going back) as a component of income from continuing operations.
How do you account a change in accounting PRINCIPLE?
Prospectively. If comparative financial statements are presented, then the adjustment made to the beginning retained earnings of the current year. It is not determined by a weighted average or as of the date the decision made!
What is the difference between recognizing revenue over time and at a point in time as a seller?
If the buyer benefits as the seller performs as per contract terms, revenue should be recognized over time.
If the physical possession of the asset transfers to the buyer revenue should be recognized at a point in time.
If the rewards and ownership remains with the seller, revenue cannot be recognized.
