9C Accounting Changes Flashcards
Correction of errors
1) Correction of errors are not accounting changes. They are done as prior period adjustments to the beginning balance of retained earnings, net of tax effect.
Restatement
Correction of errors to the financial statements
Public Company FS
3 years IS and CF, 2 years BS
What are changes in accounting principle?
Any change from one GAAP to another GAAP.
1) change in inventory method (FIFO, LIFO, Weighted average)
2) change in construction accounting method (% completion, completed contract)
When is a change in accounting principle allowed?
Only if the change is required by a newly issued accounting pronouncement or if the entity can justify the use because it is preferable
How is a change in principle accounted?
Retrospectively
What is retrospective treatment?
New accounting principle is applied to the prior periods’ financial statemetns as if the new accounting principle had been used in those periods.
How to deal with changes in accounting principle?
1) Just use the new accounting principle in the current accounting period
2) Take the cumulative effect (difference between old and new since company started until the beginning of the first period presented) and adjust the carrying values of assets and liabilities as of the beginning of the first period presented
i) The offsetting debit or credit made to the beginning balance of retained earnings (net of tax effect) for the first period presented
ii) Only direct effects are part of the cumulative effect
iii) Indirect effects are reported in the period the change is made
3) Presentation of prior periods in comparative financial statements
What if prior period effects cannot be determined?
1) If cumulative effect can be calculated, but if period-specific effects can only be determined for some of the prior accounting periods presented, then present the changes to the earliest prior period possible and adjust that prior perod’s beginning balances for assets, liabilities, and RE. An offsetting adjustment is made to the opening balance of retained earnings for the period.
What if cumulative effect cannot be calculated?
Apply prospectively but only if one of the conditions are met:
1) After making every reasonable effort to apply the new principle to a previous period (retrospective application), you are unable to do so (you tried and tried, but couldn’t do it); or
2) there are assumptions about management’s intentions that cannot be independently substantiated (you can’t read management’s mind)
3) significant estiamtes are required and you cannot obtain objectivei nformation to make estimates (you are really bad at guessing)
Example of impractibility: converting from FIFO to liFo because of those pesky LIFO layers
How are changes in depreciation, amortization, and depletion methods treated?
As changes in accounting estimates
Distinction between special vs. non-special changes
No distinction is made. All changes in accounting principle are treated in the same manner.
What are direct effects?
Effects to the assets, liabilities, DITA, DITL, and impairment losses as a result of the new accounting principle. Eg: effect on deferred taxes or impairment adjustment, adjustment to inventory from change in inventory valuation method
What are indirect effects?
Effects to current and future cash flows as a result of the new accounting principle. Eg: royalties and profit sharing.
What should the notes to the FS say to describe a change in accounting principle?
1) The nature and reason for the change, and why the new method is better
2) The method of applying the change
3) Description of prior period info that is retrospectively adjusted
4) Effect of the change on income from continuing operations, net income, and any other affected financial statement line item, and any affected per share amoutns for the current period and all periods adjusted retrospectively
5) cumulative effect of the change on retained earnings or toher components of equity or net assets as of the earliest period presented
6) if retrospective application is impracticable, the reason and a description of how the change was reported
7) description of the indirect effects of the change, including amounts recognized in the current period and related per share amounts
8) unless impracticable, the amounts of the indirect effects of teh change and the per share amounts for each prior period presented.