Advance Financial Reporting: Chapter 20

Change in Accounting Principle

- Adopt a new Accounting Standard - Change methods of inventory costing - Change from cost method to equity method, vice versa

If Modified Retrospective Approach is allowed:

- Apply the new standard only to the current period - Adjust the balance of retained earnings at the beginning of the adoption period to capture the cumulative effects of prior periods without actually adjusting the numbers in the prior periods reported

Change in Accounting Estimate

- Change of depreciation method - Change estimate of useful life of depreciable asset - Change estimate or residual value of depreciable asset - Change estimate periods benefited by intangible assets - Change actuarial estimates pertains to a pension plan

Change in Reporting Entity

- Consolidate a subsidiary not previously included in consolidated financial statements - Report consolidated financial statements in place of individual statements

Note Disclosure must include:

- Explain why the change was needed as well as its effects on items not reported on the face of primary statements - Point out that comparative information has been revised - Reporting any per share amounts affected for the current period and all prior periods presented

Disclosure notes for Prospective Approach include:

- Income from continuing operations - Net Income - Per Share Amount

Error Correction

- Mathematical mistakes - Inaccurate physical count of inventory - Change from the cash basis of accounting to the accrual basis - Failure to record an adjusting entry - Recording an asset as an expense, vice versa - Fraud or gross negligence

Error Disclosure Note Included:

- Nature of the Error - (IF) Impact on net income - (IF) Income from continuing operations - (IF) Earnings per share

Modified Retrospective Approach

- new standard is applied to the current period only - adjust retained earnings balance at BOY

Two ways the Prospective Approach can be implemented:

1. Impractical to determine some period-specific effects 2. Impractical to determine the cumulative effects of prior years

Depreciation Method

A change in depreciation methods is a change in estimate that is achieved by a change in accounting principle

Is not a change in accounting principle

A change in the useful life of depreciable asset

Error step 4:

A disclosure note should describe the nature of the error and the impact of its correction on net income.

Change in Reporting Entity

Change form reporting as one type of entity to another the of entity

What is not a change in accounting principle usually accounted for by retrospectively revising prior financial statements?

Change from SYD to DDB (Estimate)

Change in Accounting Principle

Change from one generally accepted accounting principle to another

Error Correction

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

Prospective Approach

Effects of a change are reflected in the financial statements of only the current and future years

The one exception of changing principles:

If any method is switched to LIFO, you use prospective! So no change to prior periods

Error step 3:

If retained earnings is one of the accounts incorrect as a result of the error, the correction is reported as a prior period adjustment to the beginning balance in a statement of shareholders' equity (or statement of retained earnings if that's presented instead).

Big Merchandisers changed from Fifo to Weighted Average Method during X8. When X8 is reported, the X7 inventory amount will

Increase or decrease, depending on how prices changed during 2018

If inventory method is changed and your COGS has decreased due to the change, what would the journal entry to be made?

Inventory xxx Retained Earnings xxx (Amount would be the cumulative difference)

Errors step 1:

Journal entry is made to correct any account balances that are incorrect as a result of the error.

Disclosure Notes

Must be provided in the first set of financial statements after the change to justify the application of the new method

Error step 2:

Previous years' financial statements that were incorrect as a result of the error are retrospectively restated to reflect the correction (for all years reported for comparative purposes).

Change from equity method to another method of accounting for long-term investments, GAAP requires the prospective application of the new method

Requires a change in estimate that is achieved due to a change in principle. So prospective is used

Change in Account Estimate

Revise an estimate because of new information or new experience

When it's impracticable to reporting a change retrospectively:

The prospective approach is used.

A change in accounting principle that usually should not be reported by revising the financial statements of prior periods is a change from:

The weighted-average method to the LIFO method

Sum of Year's Digits (SYD) and Double Decline Balance (DDB)

WILL BE FUKING GIVEN ON THE EXAM FOR ACCUMULATED DEPRECIATION

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.