16.01 Accounting Changes & Error Corrections

Question 1

What is the definition of an accounting change?

Answer 1

ASC 250 defines an accounting change as one of the following: change in accounting principle; change in accounting estimate; change in reporting entity.

Question 2

How can accounting changes be accounted for?

Answer 2

Retrospectively, prospectively, or as a retroactive adjustment depending on the type of change.

Question 3

True or false: the correction of an error in previous financial statements is an accounting change.

Answer 3

False. The correction of an error in previous FS is not an accounting change; however, the procedures for recording are the same as for accounting principle changes.

Question 4

What is the accounting treatment for a change in accounting principle?

Answer 4

Retrospective.

Question 5

What is the accounting treatment for a change in accounting estimate?

Answer 5

Prospective.

Question 6

What is the accounting treatment for a change in reporting entity?

Answer 6

Retrospective.

Question 7

What is the treatment of an error correction?

Answer 7

Retroactive.

Question 8

What are examples of a change in accounting principle?

Answer 8

Change in inventory valuation method (e.g. LIFO to FIFO); Change in long-term contract revenue recognition (e.g. over time instead of at a point in time)

Question 9

What are examples of a change in accounting estimate?

Answer 9

Credit losses; Inventory obsolescence; Sales returns and allowances; Salvage values of depreciable assets; Warranty obligations.

Question 10

What are examples of a change in reporting entity?

Answer 10

Consolidated FS instead of individual FS; Changing the specific subsidiaries presented in consolidated FS.

Question 11

What are examples of an error correction?

Answer 11

Cash basis to accrual basis; Accelerated depreciation to straight-line depreciation.

Question 12

What does retrospective mean?

Answer 12

Retrospective means that the change is applied to prior periods as if that principle had always been used.

Question 13

What does prospective mean?

Answer 13

Prospective means that the change is applied to current and future periods only.

Question 14

What is a change in accounting principle?

Answer 14

A change in accounting principles includes the following: a change from one generally accepted principle to another generally accepted principle when there are two or more acceptable alternative accounting treatments; a change to a generally accepted principle when the current principle in use by the entity is no longer acceptable; a change in the method of applying an accounting principle.

Question 15

What is the difference between a change in accounting principle and an error correction?

Answer 15

A change from one GAAP method to another GAAP method is a change in accounting principle. A change from a non-GAAP method to a GAAP method is an error correction.

Question 16

When can an entity change an accounting principle?

Answer 16

An entity may only change an accounting principle if either: the change is required as a result of an authoritative pronouncement; or the entity can justify the change in hat it is preferable.

Question 17

What is a change in accounting estimate?

Answer 17

A change in accounting estimate is derived from new information and is a change that causes the carrying amount of an asset or liability to change or that changes the subsequent accounting for an asset or liability. Estimate changes are the most frequent type of accounting change.

Question 18

What is a change in reporting entity?

Answer 18

A change in reporting entity results in FS that are essentially those of a different reporting entity.
A change due to ownership, such as a business combination reported under the acquisition method is not a change in reporting entity.

Question 19

What is an error correction?

Answer 19

An error in prior period FS is caused when correct information existed at the time the statements were prepared, but a misstatement was made causing erroneous recognition, measurement, or disclosure. It is presumed that the correct reporting could have been accomplished in the past.

Question 20

What are the required note disclosures for a change in accounting principle?

Answer 20

Nature of and reason for change (including explanation of why new change is preferable); Method of applying change; For current and prior periods adjusted retrospectively, the effect of the change on net income and any other affected FS line item and per-share amounts; Cumulative effect of change on RE as of the beginning of the earliest period presented; If retrospective application is impracticable, the reasons why and a description of alternative method used; Description of indirect effects of the change, including amounts recognized in the current period and related per-share amounts; Summaries of financial results (e.g. major FS subtotals for the previous ten years) as reported in the notes are also retrospectively adjusted for the change.

Question 21

What are the required note disclosures for a change in accounting estimate?

Answer 21

If change is material, effect of change on comprehensive income and per-share amounts.

Question 22

What are the required note disclosures for a change in reporting entity?

Answer 22

Nature of and reason for change; Effect of change on comprehensive income and related per-share amounts.

Question 23

What are the required note disclosures for an error correction?

Answer 23

A statement that previously issued FS were restated and nature of error; Effect of correction on each FS line item and any per-share amounts for each prior period presented; Cumulative effect of the change no RE as of the beginning of the earliest period presented; Pre- and post-tax effects of the correction on net income for each prior period presented.