Intermediate Accounting - Chapter 20
Explain how and why changes in estimates are reported prospectively. (p. 1180)
Actual events ever go exactly as forecasted, and so changes in estimate are reported prospectively as revisions are viewed as a natural consequence of making estimates.
Describe the situations that constitute a change in reporting entity. (p. 1182)
Change in reporting entity occurs as a result of 1) presenting consolidated financial statements instead of statements of individual companies; or 2) changing specific companies that constitute the group for which consolidated or combined statements are prepared. Change in reporting entity requires that financial statements of prior periods be retrospectively revised to report the financial information for the new reporting entity in all periods.
Explain how and why some changes in accounting principle are reported prospectively. (p. 1178)
Lack of information would make it impracticable to report a change retrospectively so the new method is simply applied prospectively.
Describe how changes in accounting principle typically are reported. (p. 1174)
Most changes to accounting principle are reported with a retrospective approach; Previous years ** Financial statements are revised ** Statements are made to appear as if the newly adopted accounting method had been applied all along or error never occurred ** Then; journal entry is created to adjust all account balances affected
Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery. (p. 1186)
Step 1: a journal entry is made to correct any account balances that are incorrect as a result of the 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). 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) Step 4: a disclosure note should describe the nature and the impact of its correction on each financial statement line item and any per-share amounts affected for each prior period presented.
Differentiate among the three types of accounting changes and distinguish among the retrospective, modified retrospective, and prospective approaches to accounting for and reporting accounting changes.(p. 1172)
The three different types of accounting changes are: - Change in Accounting Principle ** changes from one generally accepted principle to another; examples: a) new accounting standard; b) change methods of inventory costing; c) change from cost method to equity method (or vice versa) - Change in Accounting Estimate ** revise an estimate because of new information or new experience; examples: a) change in depreciation methods; b) change in useful life of depreciable asset; c) change estimate of residual value of depreciable asset; d) change of estimate of periods benefited by intangible assets; e) change of actuarial estimates pertaining to a pension plan - Change in Reporting Entity ** change from reporting as one type of entity to another type of entity; examples: a) consolidate a subsidiary not previously included in consolidated financial statements; b) report consolidated financial statements in place of individual statements. -Retrospective approach; Previous years § Financial statements are revised § Statements are made to appear as if the newly adopted accounting method had been applied all along or error never occurred § Then; journal entry is created to adjust all account balances affected - Modified retrospective approach; Current period § New standard applied only to current period § Adjust retained earnings balance at the beginning of the year - Prospective approach; Current & future years § Effects of a change are reflected in the financial statements of only the current and future years.
Discuss the primary differences between U.S. GAAP and IFRS with respect to accounting changes and error corrections. (p. 1192)
When correcting errors in previously issued financial statements, IFRS (IAS No. 8) permits the effect of the error to be reported in the current period if it's not considered practicable to report it retrospectively, as required by US GAAP.
