Chapter 20

Error correction

correct an error caused by a transaction being recorded incorrectly or not at all

The _______ approach is used for correction of errors

retrospective

Change in accounting estimate

revise an estimate because of new information or new experience

Modified retrospective application for a change in accounting principle requires that no new standard is applied to the adoption period and

An adjustment is made to retained earnings at the beginning of the adoption period

When a company switches to LIFO why is the change not recorded retrospectively?

With a change to LIFO, companies may not have the necessary information related to the cost of inventory to retrospectively adjust retained earnings.

Modified retrospective approach

accounting change is applied only to the adoption period with adjustment of the balance of retained earnings at the beginning of the adoption period to capture the cumulative effects of prior periods

Examples of change in accounting principle

adopt a new accounting standard change methods of inventory costing change from cost method to equity method or vice versa

Previous years' financial statements are retrospectively restated to reflect the _____________ ___ ________

correction of error

New information that becomes available about an event or transaction frequently results in a change in

estimate

When its not possible to distinguish between a change in principle and a change in estimate, the change should be treated as a change in _______________

estimate

A change in depreciation methods is considered a change in __________, and as such is accounted for ____________.

estimate, prospectively

Examples of error correction

mathematical mistakes inaccurate physical count of inventory change from cash basis of accounting to accrual basis failure to record an adjusting entry recording an asset as an expense or vice versa fraud or gross negligence

The disclosure note should disclose the justification that the change is ___________, the effect of a change on any _________________ line items affected for all periods reported, and the effect of the change on ________ amounts affected for all periods reported.

preferable, financial statement, per share

A change in residual value is a change in estimate which is reported using a ____________ approach.

prospective

Changes in accounting estimates are accounted for _______________

prospectively

Changes in accounting principles are accounted for ___________

retrospectively

Changes in reporting entities are accounted for ___________

retrospectively

Examples of change in accounting estimate

change depreciation methods change estimate of useful life for depreciable asset change estimate of residual value of depreciable asset change estimate of periods benefited by intangible assets change actuarial estimates pertaining to a pension plan

Change in accounting principle

change from one generally accepted accounting principle to another

Change in reporting entity

change from reporting as one type of entity to another

Examples of change in reporting entity

consolidate a subsidiary not previously included in consolidated financial statements report consolidated financial statements in place of individual statements

Retrospective approach

financial statements issued in previous years are revised to reflect the impact of an accounting change whenever those statements are presented again for comparative purpose

Prospective approach

no modification of previous years nor journal entry is required; the accounting change is implemented in the present period, and its effects are reflected in the financial statements of the current and future years only

If an accounting error is made and discovered in the same accounting period, the original erroneous entry should be ______________ and the appropriate entry recorded.

reversed