CPA - FAR - 18, 19, 20 - Accounting Changes & Error Corrections; Interim Financial Reporting; Segment Reporting

On 12/31/X2, Maxx Manufacturing, Inc. committed to a plan to discontinue the operations of its Alpha division in 20X3. Maxx estimated that Alpha's 20X3 operating loss would be $500,000 and that the proceeds from the disposal of the segment's assets will be $300,000 less than their carrying amounts. Alpha's 20X2 operating loss was $1,400,000. Maxx's effective tax rate is 30%. In its 20X2 income statement, what amount should Maxx report as loss on disposal of discontinued segment?

$300k loss on sale of assets + $1,400k NOL for 20X2 = $1,700k x 70% after tax = $1,190k One of the objectives of financial reporting is that financial statements provide predictive value. As a result, income from continuing operations will only include those items that are expected to recur in future periods. As a result, regardless of when during the period an entity decides to dispose of a segment of its business, the results for the entire year are reported, net of tax, as discontinued operations. In addition, when assets have carrying values that exceed their fair values, impairment losses will be recognized, which will also be included in discontinued operations since the assets are related to the discontinued segment. The resulting loss to be reported will include the $1,400,000 loss from operat6ions and the $300,000 impairment loss for a total of $1,700,000, which will be reduced by taxes at a rate of 30% or $510,000 to give a net loss of $1,190,000. The anticipated loss for 20X3 will be reported in the period in which it occurs.

Retrospective, prospective, or retroactive: 1. Change in accounting principle 2. Change in accounting estimate 3. Change in reporting entity 4. Correction of an error (PPA)

1. Change in accounting principle: Retrospective 2. Change in accounting estimate: Prospective 3. Change in reporting entity: Retrospective 4. Correction of an error (PPA): RetroACTIVE. This term is used specifically for corrections of errors.

Segment reporting: Disclosure tests required for 1. Operations in different industries 2. Foreign operations (geographic areas) 3. Major customers (and export sales)

1. Operations in different industries: Do all 3 tests (Revenue, Profit, Asset). If any one of them is met, disclose all 3. 2. Foreign operations (geographic areas): Do test #1 & 3 (Revenue and Asset). If any one of them is met, disclose all 3. 3. Major customers (and export sales): Do test #1 (Revenue). If #1 is met, disclose #1.

1. Retrospective 2. Retroactive 3. Prospective

1. Retrospective: F/S for all years impacted s/b retrospectively restated. Beginning RE is adjusted for the beginning of the earliest period presented (for comparative F/S): Beg RE + PPA, net of tax = Adj Beg RE, Add NI, Less Dividends = Ending RE. 2. Retroactive: Same as retrospective. Prior periods are restated, but the term "Retroactive" is used specifically for corrections of errors. 3. Prospective: Going forward.

In 20X8, Jane Co. changed from FIFO to LIFO method of accounting for inventory. Because of the length of time Jane has been in business, the cumulative effect of the change is not practicable to determine. Under ASC 250, it is acceptable for Jane Co. to report this change in which of the following ways? 1. Change in estimate on a prospective basis. 2. Prior period adjustment with separate disclosure. 3. Earliest prospective application to the extent it is practicable.

3. Earliest prospective application to the extent it is practicable. Sometimes it is not practicable to determine the cumulative effect of a change in accounting principle, such as may be the case in a change from FIFO to LIFO, since historical prices for some of the earliest layers may not be determinable. In such a case, the change is accounted for through prospective application to earliest period practicable.

Which of the following disclosures should prospective financial statements include? I. Summary of significant accounting policies II. Summary of significant assumptions

Both I and II. A summary of significant accounting policies is always required to inform financial statement users of the choices made by management in selecting among acceptable accounting treatments for its various events and transactions. When a company prepares prospective financial statements, they should also disclose a summary of significant assumptions.

Lemu Co. and Young Co. are under the common management of Ego Co. Ego can significantly influence the operating results of both Lemu and Young. While Lemu had no transactions with Ego during the year, Young sold merchandise to Ego under the same terms given to unrelated parties. In the notes to their respective financial statements, should Lemu and Young disclose their relationship with Ego?

Both. When the results of operations or financial position of a company could change significantly as a result of an ownership or management relationship with another company, the companies are considered related parties. The nature of the ownership or management control should be disclosed, even if there are no transactions between the entities.

Journal entry for correction of an error: Inventory was understated in prior year by $200. Tax rate is 30%.

DR Inventory, $200 CR RE (net of tax), $140 CR Current tax liability, $60

Revenue test: True or false: Total sales/revenues only include sales to unaffiliated companies.

False. The revenue test applies to both unaffiliated and intersegment sales. See p. 20-2.

Segment reporting: Operating profit test

For each segment: Sales Less Operating expenses (don't include corporate-level exp) = Income before common costs Less Common costs = Operating profit Combine segments with 1) operating profits and 2) operating losses. Compare result of segment operating profit with the HIGHER of 1) operating profits and 2) operating losses. See p. 20-2.

IFRS allows a change in accounting policy when:

IFRS ONLY allows a change in accounting policy when it either: 1. Is required by IFRS, or 2. Results in F/S that provide information that is more relevant and reliable. This is similar to GAAP, concerning changes in accounting principle (IFRS uses term "policy"). Changes are generally applied retrospectively.

Accounting changes: IFRS vs. GAAP

IFRS: A change in reporting entity doesn't require a provision, because it doesn't exist under IFRS. IFRS uses the term "policy." GAAP: A change in reporting entity requires retrospective adjustments/restatement. GAAP uses the term "principle."

IFRS vs. GAAP: Interim financial reporting

IFRS: IFRS doesn't mandate interim reporting. Interim financial statements must be prepared using the same principles and practices used in preparation of the most recent annual financial statements. GAAP: Certain principles and practices may be modified when preparing interim financial statements. For example, certain costs may be allocated to interim periods based on estimates of time expired, benefit received, or other activity associated with the interim period.

When a change in accounting principle is inseparable from a change in accounting estimate, how is it accounted for?

It is accounted for as a change in accounting estimate (prospectively). Example: Depreciation, amortization.

Segment Reporting

Required for public companies that regularly evaluate revenues, expenses, etc. of different groups of activities of the entity. Segments can be ID'ed by activity, product, or customer. Segments are reportable if they contribute at least 10% of the total for all segments of one or more of revenues, assets, or profits (operating income only).

Segment reporting: Revenue test

The 10% test is applied to total sales, which includes both intersegment and external company sales. Additional test: For all reported segments, the total sales to unaffiliated/outside companies must be at least 75% of total sales to unaffiliated/outside companies (of the whole company). So if, after ID'ing all of the reportable segments, total outside sales for the reported segments only account for 70% of total outside sales of the company, additional segments must be added until the 75% threshold is met.

For changes in accounting principle (retrospective): How is it reported if it is impracticable to determine the cumulative effect to any of the prior periods?

The new accounting principle is applied as if the change was made prospectively at the earliest date practicable.

Management approach

This is relevant for public entities. The definition of a "segment" is based on the management approach, where a segment represents any group of activities with revenues and expenses that are regularly evaluated by management as a single unit.

Inventory errors correct themselves after ___ years.

Two years.

Disclosures required for L-T Obligations

Users must report legal commitments to cash payments in connection with: 1. Notes and bonds payable 2. Obligations to make payments to a bond sinking fund 3. Leases (both operating and financing) 4. Unconditional purchase obligations extending more than one year 5. Payments due within the next 5 years 6. Payments due after the next five years are aggregated into a single amount