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ACCO 310 > 21.1 Changes in Accounting Policies and Estimates, and Errors > Flashcards

21.1 Changes in Accounting Policies and Estimates, and Errors Flashcards

1
Q

What are the three types of accounting changes recognized by IFRS and ASPE?

A

Change in accounting policy

Change in accounting estimate

Correction of prior period error

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2
Q

What is a change in accounting policy?

A

A change in the choice of specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.

Examples include switching from a weighted average cost flow formula to FIFO.

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3
Q

What is a change in accounting estimate?

A

A change in the estimated value of an asset or liability, often due to new information.

Examples include changes in the estimated useful life of an asset, depreciation patterns, or net realizable value of accounts receivable.

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4
Q

What is a correction of a prior period error?

A

An adjustment made for mistakes or omissions in financial statements from previous periods that could have been identified using reliable information available at the time.

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5
Q

What does “Underlying Concept 21.1” state about the usefulness of accounting information?

A

While accounting methods may improve usefulness, changes in methods can weaken the characteristics of comparability and consistency.

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6
Q

What is the GAAP hierarchy under ASPE for selecting accounting policies?

A

Primary sources of GAAP (e.g., Sections 1400 to 3870)

Policies consistent with primary sources, using professional judgment and concepts from Section 1000.

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7
Q

How does IFRS define its hierarchy for selecting accounting policies?

A

The primary sources are the IFRS standards, supported by professional judgment when no specific standard applies, using the Conceptual Framework as guidance.

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8
Q

Under what two conditions is a change in accounting policy acceptable under IFRS?

A

A primary source of GAAP requires the change.

The voluntary change presents more reliable and relevant financial information.

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9
Q

What additional situations allow for a change in accounting policy under ASPE?

A

ASPE permits voluntary changes for specific situations such as:

Investments in subsidiary companies

Defined benefit plans

Measuring equity components of compound financial instruments

Costs of agricultural inventories

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10
Q

What does “Underlying Concept 21.2” state about accounting standards?

A

Relevance and reliability are the primary criteria used in choosing accounting methods.

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11
Q

What is the main purpose of the qualitative characteristics in financial reporting?

A

They are used to choose among accounting alternatives by balancing relevance and reliability, ensuring comparability and consistency.

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12
Q

When is a change in accounting policy not considered a change?

A

When a different policy is applied to new transactions or when transactions that occurred previously were immaterial and are now significant.

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13
Q

What are some examples of accounting items that require estimates?

A

Uncollectible receivables
Inventory obsolescence
Fair value of financial assets or liabilities
Useful lives of depreciable assets
Liabilities for warranty costs

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14
Q

How does a change in accounting estimate differ from a change in accounting policy?

A

A change in estimate adjusts the carrying amount of an asset or liability based on new information.

It only affects future periods, not past ones.

A change in policy involves adopting a new principle or method that affects the accounting for all future periods.

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15
Q

In cases where it is unclear whether a change is one of policy or estimate, how should it be treated?

A

The change should typically be treated as a change in estimate unless it involves the initial adoption of an accounting policy.

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16
Q

What are some key factors that differentiate errors from changes in accounting estimates?

A

Errors result from mistakes or omissions that occurred in prior periods, while changes in estimates arise from new information or experience.

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17
Q

What are some common types of accounting errors?

A

Change from an unacceptable policy to an acceptable one

Arithmetic mistakes

Misestimates made in bad faith

Omissions due to oversight

Recognition errors

Misappropriation of assets

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18
Q

What is a prior period error?

A

A prior period error is an omission or misstatement in a company’s financial statements from a previous period, which could have been corrected with reliable information available at that time.

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19
Q

What is the difference between correcting a prior period error and making a change in estimate?

A

A prior period error corrects mistakes made in previous financial statements, while a change in estimate adjusts an asset or liability based on new information affecting only future periods.

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20
Q

How do companies handle changes in accounting estimates related to depreciation?

A

Changes in depreciation methods or estimates for useful lives of assets are treated as changes in accounting estimates and are applied prospectively.

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21
Q

What are the three alternative methods for reporting accounting changes?

A

Retrospective application: Apply the new accounting policy as if it had always been used, adjusting past financial statements.

Current method: Apply a “catch-up” adjustment in the current year, without restating prior periods.

Prospective application: Apply the new policy to current and future periods without adjusting past periods.

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22
Q

What is retrospective application, and when is it used?

A

Retrospective application involves applying a new accounting policy to prior periods as if it had always been used.

It is used when restating financial statements to ensure comparability and consistency.

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23
Q

What is the current method of applying accounting changes?

A

The current method, also known as the “catch-up” method, applies the cumulative effect of the accounting change in the current period’s financial statements without adjusting prior periods.

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24
Q

What is prospective application, and when is it used?

A

Prospective application applies a new accounting policy only to the current and future periods, with no adjustments to past periods.

It is used when retrospective application is impractical or when the change relates only to future transactions.

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25
Q

Which methods are permitted for accounting changes under GAAP?

A

Only retrospective and prospective treatments are permitted for accounting changes under GAAP.

26
Q

What are the accounting methods applied for different types of accounting changes under GAAP?

A

Change in accounting policy (primary source): Apply the method approved in the transitional provisions or use retrospective application.

Voluntary change in accounting policy: Use retrospective application if practicable; otherwise, apply prospectively.

Change in accounting estimate: Apply prospectively.

Correction of an error: Use retrospective restatement.

27
Q

What are transitional provisions in accounting, and how do they affect changes in accounting policies?

A

Transitional provisions provide guidelines for how an entity should handle changes when new or revised GAAP standards are adopted.

They may require retrospective application or allow for prospective application, depending on the nature of the change.

28
Q

What is retrospective application in accounting policy changes?

A

Retrospective application involves applying a new accounting policy to financial statements as if the policy had always been in use, including restating prior periods for comparability.

29
Q

What does Underlying Concept 21.3 state regarding the retrospective application of accounting policies?

A

The cost-benefit constraint is always considered by standard setters when determining appropriate accounting policies, ensuring that the benefits of restating outweigh the costs.

30
Q

1.

Under what circumstances is retrospective application considered impracticable?

A

Retrospective application is considered impracticable if:

The effects of the retrospective application cannot be determined.

Assumptions about management’s intent in prior periods are required.

Significant estimates are needed for prior periods, and it is no longer feasible to make these estimates.

31
Q

What is the process of retrospective application with full restatement?

A

An accounting entry is made to recognize the effects of the new policy.

Financial statement amounts for prior periods are restated to reflect the new policy.

Disclosures are made to help users understand the changes and their effects on comparability.

32
Q

What does Underlying Concept 21.4 say about full retrospective treatment?

A

Full retrospective treatment and related disclosures aim to restore the comparability of financial statements with those of prior periods and other entities.

33
Q

What is partial retrospective application?

A

When full retrospective application is impracticable, partial retrospective application is used.

This involves restating the earliest prior period for which information is available, adjusting the opening balances as needed.

34
Q

What is the main reason for applying retrospective application in accounting changes?

A

The primary reason is to ensure that financial information remains consistent and comparable across all periods, providing users with reliable trend data for analysis.

35
Q

What is the journal entry to record a change in accounting policy using retrospective application?

A

Dr Buildings (asset) $220,000
Cr Future Tax Liability (liability) $66,000
Cr Retained Earnings (equity) $154,000

36
Q

How does the retrospective application affect the statement of cash flows?

A

Although the cash flows for prior periods do not change, restating financial statements may result in reclassification of certain cash flows, such as interest capitalized as an investing outflow rather than an operating outflow.

37
Q

What are the required disclosures when applying full retrospective application?

A

Disclosures must explain the nature of the change, its effects on financial statements, and ensure comparability with prior periods.

Adjustments to opening balances and significant estimates must be included.

38
Q

What disclosures are required when there is a change in accounting policy under IFRS/ASPE?

A

Disclosures must include:

The title and nature of the change.

The reason why the new policy provides more relevant and reliable information.

The effects of the change on each financial statement line item, both in the current period and prior periods.

Additional details if full retrospective application is impracticable.

39
Q

What additional disclosures are required under IFRS when a change in accounting policy might affect future periods?

A

Entities must report:

The expected effect on future periods.

The impact on earnings per share (EPS).

An opening balance sheet at the beginning of the earliest comparative period.

Reliable information about new standards issued but not yet applied.

40
Q

What is required when a change in accounting policy involves an initial application of a primary source of GAAP?

A

Disclosures must include the title of the GAAP, the nature of the change, and how the transitional provisions are being applied.

41
Q

Why might a company provide additional information when full retrospective application is impracticable?

A

If full retrospective application is impracticable, the company must disclose why, which periods are affected, and how the change was handled, ensuring transparency for users of financial statements.

42
Q

What is retrospective restatement used for in accounting?

A

Retrospective restatement is used to correct material errors in prior financial statements by restating the comparative figures or, if necessary, adjusting the opening balances for the earliest period presented.

43
Q

How does ASPE handle retrospective restatement for an error correction?

A

Under ASPE, full retrospective restatement is required, meaning prior periods must be adjusted to reflect the error correction, with no partial restatement allowed.

44
Q

When is partial retrospective restatement allowed under IFRS for error corrections?

A

Partial retrospective restatement is allowed under IFRS when it is impracticable to determine the effects of an error on specific prior periods.

In such cases, the opening balances for the earliest period presented are adjusted.

45
Q

How are errors affecting one prior period corrected in the financial statements?

A

Errors affecting a prior period are corrected by adjusting the beginning balance of retained earnings and restating the comparative figures in the financial statements for the year in which the error was discovered.

46
Q

What journal entry is needed to correct an understatement of $20,000 in depreciation expense for 2022 (assuming the books are closed)?

A

Dr Retained Earnings $14,000
Dr Future Tax Liability $6,000
Cr Accumulated Depreciation - Buildings $20,000

47
Q

How does the correction of an error affect retained earnings?

A

The retained earnings account is adjusted by the net income effect of the error for the prior period.

Any cumulative income effects of the error are reflected in the opening retained earnings balance.

48
Q

How is a comparative balance sheet adjusted for the correction of an error affecting one prior period?

A

The balance sheet is adjusted to reflect the corrected balances for accumulated depreciation, retained earnings, and any tax-related accounts for the affected periods.

49
Q

How does retrospective restatement affect the comparative income statement when correcting an error?

A

The income statement is adjusted to reflect the corrected figures for depreciation expense, tax expense, and net income for the affected prior periods.

50
Q

How are errors affecting multiple prior periods corrected in financial statements?

A

Errors affecting multiple prior periods require adjustments to all comparative statements, with corrections made to each prior period that was affected, and the opening balances for the earliest period presented adjusted as needed.

51
Q

What are the required disclosures for the correction of an accounting error?

A

The nature of the error.

The amount of the correction made to each affected financial statement for each prior period presented.

The amount of the correction made at the beginning of the earliest prior period presented.

52
Q

What additional disclosures does IAS 8 require for accounting errors?

A

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors requires two additional disclosures:

Circumstances leading to any impracticability.

How the error was corrected.

53
Q

What is prospective application in accounting changes?

A

Prospective application refers to the treatment of changes in estimates, where adjustments are applied from the date of the change forward, without adjusting past periods.

It’s a normal recurring correction and is applied to the current and future periods only.

54
Q

What are the IFRS disclosure requirements for a change in accounting estimate?

A

The required disclosures for changes in estimates include:

The nature of uncertainty.

Assumptions made when estimating.

Sensitivity of carrying amounts to changes in assumptions.

Expected resolution of uncertainty.

Any additional explanations needed to help users understand the change.

55
Q

What are the steps to account for a change in estimate, such as the depreciation of an asset?

A

Steps:

Calculate the new depreciation based on the revised estimate.
Prepare the necessary journal entry for depreciation.
Ensure no adjustments are made to previous periods.

Example:

Depreciation charge formula:

Depreciation charge = (Carrying amount of asset - Residual value) / Remaining service life

56
Q

How is a change in depreciation estimate recorded in journal entries?

A

For the year the change occurs:

Debit: Depreciation Expense
Credit: Accumulated Depreciation

57
Q

What is the primary objective of recommendations for reporting accounting changes?

A

The primary objective is to ensure the accuracy and full disclosure of financial statements while avoiding any misleading inferences.

This involves applying professional judgment to resolve accounting problems related to the diversity of situations and characteristics in practice.

58
Q

What are the accounting approaches to applying changes in accounting policy when transitioning from one source of GAAP to another (e.g., IFRS and ASPE)?

A

Method Indicated in the Standard: Required (✔)

Full Retrospective: If practicable

Partial Retrospective: If full retrospective treatment is not practicable

Prospective: If partial retrospective treatment is not practicable

58
Q

How should an entity apply changes in accounting policy when the change is voluntary or within the allowed choices in GAAP (IFRS/ASPE)?

A

Method Indicated in the Standard: ✔

Full Retrospective: If practicable

Partial Retrospective: If full retrospective treatment is not practicable

Prospective: If partial retrospective treatment is not practicable

59
Q

How is a correction of an error under IFRS typically applied?

A

Full Retrospective: If practicable

Partial Retrospective: If full retrospective treatment is not practicable

Prospective: If partial retrospective treatment is not practicable

60
Q

How is a correction of an error under ASPE typically applied?

A

Full Retrospective: If practicable

Partial Retrospective: If full retrospective treatment is not practicable

Prospective: If partial retrospective treatment is not practicable

61
Q

What is the general method of applying changes in accounting estimates under IFRS and ASPE?

A

Prospective Application: This is the general method used for changes in accounting estimates.

ACCO 310 (42 decks)

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