Ch 22 - Accounting Changes
Presenting consolidated financial statements this year when statements of individual companies were presented last year is
an accounting change that should be reported by restating the financial statements of all prior periods presented
The cumulative effect of a change in accounting principle is reported as:
an adjustment to beginning retained earnings of the earliest year presented
Not a reason why companies prefer certain accounting methods
asset structure
IFRS & GAAP
-FASB has issued guidance on changes in accounting principles, changes in estimates, and corrections of errors, which essentially converges U.S. GAAP to IAS 8. -IFRS and U.S. GAAP require restatement of previously issued financial statements for error corrections, (U.S. GAAP is an absolute standard, with no exception to this rule). -for both, if determining the effect of a change in accounting principle is considered impracticable, then a company should report the effect of the change in the period in which it believes it practicable to do so, which may be the current period
Changes in reporting entity
-change the financial statements of all prior periods presented. The revised statements show the financial information for the new reporting entity for all periods -disclose in the financial statements the nature of the change and the reason for it, the effect of the change on income before extraordinary items, net income, and earnings per share
NOT a counterbalancing error
-failure to record depreciation -failure to adjust for bad debts
Examples of counterbalancing errors:
-failure to record prepaid expenses -understatement of purchases -overstatement of ending inventory -failure to record accrued wages
Failure to record depreciation expense in a given year must be accounted for as a:
-prior period adjustment
All of the following are parts of applying the current and prospective approach in accounting for a change in an estimate
-reporting current and future financial statements on a new basis -making no adjustments to current period opening balances for purposes of catchup -disclosing in the year of change the effect on net income and earnings per share data for that period only
Reasons why companies prefer certain accounting methods:
-smooth earnings -bonus payments -political costs
The general rule for differentiating between a change in an estimate and a correction of an error can be understood in which way?
A careful estimate that later proves to be incorrect should be considered a change in an estimate.
Journal entry for direct effect of inventory change
Add change in COGS for all the previous yrs before the change. This amnt is the DR to Inventory or CIP. This amnt x tax rate = DTL. The rest goes to RE. Tax rate = 1 - [Income effect / excess COGS]
indirect effects related to a change in accounting principle
Any change to current or future cash flows of a company that results from making a change in accounting principle that is applied retrospectively. An example is the change in payments in a profit-sharing plan arising from a change in accounting principle. Indirect effects do not change prior period amounts. A company includes in the financial statements a description of the indirect effects and discloses the amounts recognized in the current period and related per share information. -Expense in current period
direct effects of change in accounting principal
Changes in assets and liabilities that result directly from making a change in accounting principle. An example is the change in the inventory balance when a company changes from one inventory method to another. Companies report direct effects retrospectively
periodic vs perpetual inventory
COGS based on Inv account in periodic perpetual has no effects
direct effects of change in accounting principle
Changes in assets and liabilities that result directly from making a change in accounting principle. An example is the change in the inventory balance when a company changes from one inventory method to another. Companies report direct effects retrospectively.
What describes a change in reporting entity?
Changing the companies included in combined financial statements
Which of the following is not classified as an accounting change by IFRS?
Errors in financial statements.
Incorrect statement about IFRS for changes in accounting principle
IFRS explicitly addresses the accounting and disclosure of indirect effects related to a change in accounting principle.
During the current year a company changed to the FIFO inventory method after 2 years using NIFO. How should the effect of this change be reported, net of applicable income taxes?
In the current retained earnings statement as an adjustment of the opening balance.
misclassification of balances on a financial statement:
It is not as significant to investors as other errors
Retained Earnings adj:
Ret Earn, Jan 1 Add/Less: cumulative effect between old & new method Ret Earn, Jan 1 as adjusted Add net income Ret Earn, Dec 31
Change from one GAAP principle to another
Retrospective application: -adj fin stmts for every prior period presented -adj carrying amnts of assets/liab @ beg of 1st yr presented -adj retained earnings
IFRS requires companies to use which method for reporting changes in accounting policies?
Retrospective approach
example of a correction of an error in previously issued financial statements
a change from the cash basis of accounting to the accrual basis of accounting
Changing specific subsidiaries that constitute the group of companies for which consolidated financial statements are prepared is an example of:
change in reporting entity
Restating the financial statements of all prior periods presented and disclosing in the year of change the effect on net income and earnings per share data for all prior periods presented is most likely the result of:
change in reporting entity
Why would a company chooses a accounting method that would have an income-decreasing approach?
political costs
Not part of applying the current & prospective approach in accounting for a change in estimate
restating prior period financial statements
