Chapter 20 - Accounting Changes/Estimates/Errors

- retrospective - modified retrospective - prospective (appropriate method will be designated in new standard)

approaches that can be used for mandated changes in accounting principle

a change from one acceptable accounting method to another

change in accounting principle

change in estimate that is achieved by a change in accounting principle

change in depreciation, amortization, or depletion

when switching TO LIFO - you can elect to use prospective method

exception for voluntary changes: when could you not use retrospective??

- apply new standard only to current period but no prior periods shown - put prior period adjustment as an adjustment to this year's beginning RE

how to account for change in accounting principle - modified retrospective approach

- apply new standard only to current period (and future periods) - no modification or adjustment to prior periods (don't revise anything) - mention new method in note to FS

how to account for change in accounting principle - prospective approach

- apply new standard to all periods shown (including all prior periods) - include cumulative net income impact of all previous periods not shown as an adjustment to beginning RE of the earliest year shown (prior period adjustment)

how to account for change in accounting principle - retrospective approach

- prospective approach - remaining book value is depreciated using the new method over the remaining useful life - provide justification for why new method is preferable

how to account for change in depreciation, amortization, or depletion

- prospective approach - if effect is material, provide disclosure note to describe the change and its effect on net income and EPS

how to account for other changes in estimates

- retrospective approach - apply new standard to all periods shown (including all prior periods)

how to account for voluntary changes for change in accounting principle

journal entry to fix it

how to treat a mistake made and found in the same year

- retrospective approach - record JE for current year to adjust any accounts to their appropriate levels (if temporary account from a prior year was affected, use RE in JE instead since temporary accounts have been closed) - if error happened before any year shown in 10k and impacted net income, include a prior period adjustment to RE of the earliest year shown - revise any prior periods' financials that are presented in the comparative financials that were impacted by the error - include disclosure note to communicate impact of error on prio periods' net income

how to treat mistake made in one year and discovered in subsequent year if it IS material

journal entry to fix it

how to treat mistake made in one year and discovered in subsequent year if it is NOT material

treat as an error correction

how would you treat a change in estimate because the original estimate was based on erroneous information, bad calculations, or have not been made in good faith

change in estimate

what kind of change would these represent: bad debts expense, warranties expense, useful life of an asset, residual value of an asset