3.2 Accounting Changes and Error Corrections

Question 1

Accounting Changes – Overview:

Identify the 3 types of accounting changes

Answer 1

1 - change in accounting principle (retrospective application)

2 - change in accounting estimate (prospective application)

3 - change in the reporting entity

Question 2

Accounting Changes – Overview:

What is the assumption in regards to applying principles in preparing financial statements?

Answer 2

adopted principles must be applied consistently

Question 3

Accounting Changes – Overview:

When is it appropriate for an entity to make voluntary changes in accounting principles?

Answer 3

only when the new principle can be justified as preferable

Question 4

Accounting Changes – Overview:

Why is it important to apply the same principle consistently?

Answer 4

so that financial information can be comparable and consistent

Question 5

Change in Accounting Principle (Retrospective Application):

A change in accounting principle occurs when an entity…

HINT (3)

Answer 5

1 - adopts a generally accepted principle different from the one previously used

2 - changes the method of applying a generally accepted principle, or

3 - changes to a generally accepted principle when the principle previously used is no longer generally accepted

Question 6

Change in Accounting Principle (Retrospective Application):

When is retrospective application required?

Answer 6

• for all direct effects and the related income tax effects of a change in principle

Question 7

Change in Accounting Principle (Retrospective Application):

Provide an example of a direct effect for retrospective application

Answer 7

• an adjustment of an inventory balance to implement a change in the method of measurement

Question 8

Change in Accounting Principle (Retrospective Application):

What is retrospective application?

Answer 8

• requires the carrying amounts of (1) assets, (2) liabilities, and (3) retained earnings (or other components of equity or net assets) at the beginning of the first period reported to be adjusted for the cumulative effect (CE) of the new principle on the prior periods

Question 9

Change in Accounting Principle (Retrospective Application):

How are the periods presented impacted by retrospective application?

Answer 9

• all periods presented must be individually adjusted for the period-specific effects (PSE) of the new principle

Question 10

Change in Accounting Principle (Retrospective Application):

Define the course of action if it is impracticable to determine the CE of a new principle an any prior period.

Answer 10

• The new principle must be applied as if the change had been made prospectively at the earliest date practicable

Question 11

Change in Accounting Principle (Retrospective Application):

Define the course of action if it is practicable to determine the cumulative effect (CE) of applying the new principle to all prior periods but not the period specific effect (PSE).

Answer 11

• CE adjustments must be made to the beginning balances for the first period to which the new principle can be applied

Question 12

Change in Accounting Estimate (Prospective Application):

What is a change in accounting estimate?

Answer 12

• a reassessment of the future status, benefits, and obligations of assets and liabilities due to new information

-

Question 13

Change in Accounting Estimate (Prospective Application):

When are the effects of an accounting change accounted for?

Answer 13

• the period of change and

- any future periods affected (prospectively)

Question 14

Change in Accounting Estimate (Prospective Application):

How is the prospective application applied?

Answer 14

• from the beginning of the accounting period in which the accounting estimate was changed

Question 15

Change in Accounting Estimate (Prospective Application):

Identify the 2 things an entity must not do when applying a change in estimate

Answer 15

1 - Restate or retrospectively adjust prior-period statements or

2 - Report pro forma amounts for prior periods

Question 16

Change in Accounting Estimate (Prospective Application):

How is a change in estimate inseparable from a change in principle accounted for?

Answer 16

• change in estimate

- prospective application

Question 17

Change in Accounting Estimate (Prospective Application):

Provide an example of a change in estimate inseparable fro a change in principle

Answer 17

• change in method of depreciation, amortization, depletion of long-lived financial assets

Question 18

Change in the Reporting Entity:

How are the financial statements effected by a change in the reporting entity?

Answer 18

• results in statements that are effectively those of a different entity

Question 19

Change in the Reporting Entity:

When do changes in the reporting entity mainly occur?

HINT: (3)

Answer 19

1 - Consolidated or combined statements replace those of individual entities

2 - Consolidated statements include different subsidiaries, or

3 - Combined statements include different entities

Question 20

Change in the Reporting Entity:

Is a business combination or consolidation of a variable interest entity considered a change in reporting entity?

Answer 20

No

Question 21

Change in the Reporting Entity:

How is a change in the reporting entity applied to financial statements?

Answer 21

• retrospectively applied to interim and annual statements

Question 22

Error Correction:

An error in prior period statements results from what?

HINT (3)

Answer 22

1 - A mathematical mistake

2 - A mistake in the application of GAAP, or

3 - An oversight or misuse of facts existing when the statements were prepared

Question 23

Error Correction:

How do you consider a change to a generally accepted accounting principle from one that is not?

Answer 23

• as an error correction and not an accounting change

Question 24

Error Analysis:

What is a correcting journal entry?

Answer 24

• combines the reversal of the error with the correct entry

Question 25

Error Analysis:

Correcting journal entries require a determination of (3)….

Answer 25

1 - Journal entry originally recorded

2 - Event or transaction that occurred, and

3 - Correct journal entry

Question 26

Error Analysis:

What 4 items do error analyses address?

Answer 26

1 - Whether an error affects prior-period statements

2 - The timing of error detection

3 - Whether comparative statements are presented, and

4 - Whether the error is counterbalancing

Question 27

Error Analysis:

What is a counterbalancing error?

Answer 27

• an error that affects prior-period net income and self-corrects over 2 periods

Question 28

Error Analysis:

Provide an example of a non-counterbalancing error

Answer 28

• misstatement of depreciation

- prior period adjustment necessary