Accounting Changes and Error Corrections

Reporting a Change in Accounting Principle made in an Interim Period

- A change in an interim period shall be reported by retrospective application - When retrospective application to change interim periods is impracticable, the desired change may only be made at the beginning of a following fiscal year. - If a public entity that regularly reports interim information makes an accounting change during the fourth quarter of its fiscal year and does not report the data in a separate fourth-quarter report or in its annual report, that entity shall include disclosure of the effects of the accounting change in a note to the annual financial statements for the fiscal year. - Whenever possible, entities should adopt any accounting changes during the first interim period

Define change in accounting principle

A change from one general accepted accounting principle to another - retrospective application

Accounting changes are:

A change in an accounting principle, an accounting estimate, or the reporting entity. The correction of an error in previously issued financial statements is not an accounting change.

Restatement of statements

Accounting for error correction

Explain Impracticality

• It is impracticable to use the retrospective application for change in accounting principle if any of the following conditions exist: o After making every reasonable effort to do so, the entity is unable to apply the requirement. o Cannon get management's intent validated. o If it is impossible to get the evidence now of circumstances that existed on the date(s) and the information would have been available when the financial statements for that prior period were issued.

Retrospective application:

- An entity shall report a change in accounting principle through retrospective application of the new accounting principle to all prior periods. - Retrospective application requires all of the following: • The cumulative effect of the change to the new accounting principle on periods prior to those presented shall be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented. • An offsetting adjustment should be made to the opening balance of retained earnings for that period. • Financial statements for each individual prior period presented shall be adjusted to reflect the period-specific effects of applying the new accounting principle. - A retrospective change only has to go back as far as the earliest year presented. - Retrospective application shall include only the direct effects of a change in accounting principle, including any related income tax effects.

Prospective

Change in accounting estimate

Retrospective

Change in accounting principle

Recast / Retrospective statement

Change in reporting entity

What is a change in reporting entity?

a. A change that results in financial statements that are those of a different reporting entity. b. A change in the reporting entity is limited mainly to the following: - Presenting consolidated or combined financial statements instead of as individual, separate entities - Changing specific subsidiaries that make up the group of entities for which consolidated financial statements are presented - Changing the entities included in combined financial statements

Explain how to account for a correction of an error.

a. If it is in the current year we just go back in and change it b. If it is from prior years, we have to go back and change the prior statements c. 45-22 Net income shall not include corrections of errors from prior periods both annual and interim periods d. 45-23 Any error in the financial statements of a prior period discovered after the financial statements are issued shall be reported as an error correction, by restating the prior-period financial statements. e. Shall be shown as adjustments of the opening balance of retained earnings

Explain the accounting treatment for a change in accounting estimate.

a. Prospective treatment b. A change in accounting estimate shall be accounted for in the period of change if the change affects that period only or in the period of change and future periods if the change affects both. c. A change in accounting estimate shall NOT be accounted for by restating or retrospectively adjusting amounts reported in financial statements of prior periods. d. If the change affects future periods, then the change will likely have an accounting impact in those periods, as well. e. Disclose the change in estimate if the amount is material. f. If the change affects several future periods, note the effect on income from continuing operations, net income, and per share amounts.

Define change in accounting estimate

a. Prospective treatment b. Change that has the effect of adjusting the carrying amount of an existing asset or liability or altering the subsequent accounting for existing or future assets or liabilities. c. A change in accounting estimate is a necessary consequence of the assessment of the present status and expected future benefits and obligations associated with assets and liabilities. d. Changes in accounting estimates result from new information. e. Examples of items for which estimates are necessary are uncollectible receivables, inventory obsolescence, service lives and salvage values of depreciable assets, and warranty obligations.