9C Accounting Changes Flashcards
Type of Accounting Change: change in estimate
Definition
Change of estimated financial statement amount based on
New information or experience
Type of Accounting Change: Change in Accounting Principle
Definition
Change form use of one generally accepted accounting
Principle to another generally accepted accounting principle
Type of Accounting Change: change in reporting entity
Definition
Change that results in financial statements representing a
Different entity
Change in accounting principle:
Financial statement treatment
Retrospective application
Change in estimate:
Financial statement treatment
Prospective
Change in reporting entity:
Financial statement treatment
Retrospective application
Change in accounting principle:
Retrospective application on financial statements
Report cumulative effect of change in carrying amounts of assets
And liabilities as beginning of 1st period presented
With offsetting adjustment to opening balance of retained earnings
For that period
For retrospective application of a change in an accounting principle, financial statements for each period are adjusted to reflect…
Period specific effects of the change for direct effects
Change in estimate:
Prospective treatment for financial statements
Report in period of change and future periods
Don’t adjust financial statements of previous periods
Change in reporting entity:
Retrospective application of financial statements
Report financial statements of all periods to show financial info
For the new reporting entity for those periods
Change in accounting principle
Financial statement disclosures:
Disclose the nature and…
Reason for change
Change in accounting principle
Financial statement disclosures:
Disclose the method of…
Applying the change
Change in accounting principle
Financial statement disclosures:
Disclose the description of…
Prior period info that is retrospectively adjusted
Change in accounting principle
Financial statement disclosures:
Disclose the effect of change on…
Income from continuing operations, net income and other
Financial statement line item
Change in accounting principle
Financial statement disclosures:
Disclose the per share amounts for…
Current period and adjusted periods
Change in accounting principle
Financial statement disclosures:
Disclose the description of the…
Indirect effects of the change and related per share amounts
Change in estimate
Financial statement disclosures: 3
1 effect on income form continuing operations
2 net income
3 related per share amounts (if change affects several future periods)
Change in reporting entity
Financial statement disclosures:
How it affects…5
1 type of change and reasons for change
2 related effects on income before extraordinary items
3 net income
4 other comprehensive income
5 related per share effects on EPS for all periods presented
Correction of an error:
Correction of an error in previously issued financial statements requires…
A prior period adjustment by restating financial statements
What are the 3 kinds of accounting changes?
1 changes in accounting principle
2 changes in accounting estimate
3 changes in reporting entity
There is no change in the definition and treatment of…
Corrections of errors
Corrections of errors are not…
Accounting changes
Corrections of errors are done as…
Prior period adjustments to the beginning balance of retained
Earnings, net of tax effect
The term “restatements” is reserved only for describing…
Corrections of errors to financial statements
Comparative financial statements for publicly traded companies:
Number of years for income statement, cashflow statement and balance sheet?
3 years for comparative statements for statement of cashflows and income Statement
2 years for comparative statements for balance sheet
Steps in dealing with changes in accounting principle:
Just use the new accounting principle in…
The current accounting period
Steps in dealing with changes in accounting principle:
Take the cumulative effect and adjust…
The carrying values of assets and liabilities as of the beginning
Of the first period presented
Cumulative effect (change in accounting principle)
Difference between old and new accounting principle since
Company first started business
until beginning of first period Presented
Changes in accounting principle, taking the cumulative effect and adjusting the carrying values of assets and liabilities:
The offsetting debit or credit is made to…
The beginning balance of retained earnings (net of tax) for
First period presented
Changes in accounting principle, taking the cumulative effect and adjusting the carrying values of assets and liabilities:
Only direct effects are…
Part of the cumulative effect
Changes in accounting principle, taking the cumulative effect and adjusting the carrying values of assets and liabilities:
Indirect effects are reported in…
The period the change is made
Steps in dealing with changes in accounting principle:
Presentation of prior periods in comparative financial statements:
The financial statements of each prior period presented are adjusted for…
Period specific effects
Retrospective treatments means that you can apply…
The new accounting principle to prior periods’ financial statements
As the new accounting principle has been used in those periods
During change of an accounting principle, if the cumulative effect can be calculated, but the period specific effects can only be determined for some of the accounting periods presented (not all of them), the financial statements of earth prior period presented are…
2) and adjust that prior period’s…
Adjusted for period specific effects in earliest prior period
Possible
2) beginning balances for assets, liabilities and retained earnings
Change in accounting principle, if the cumulative effect can’t be calculated, then…
Apply the new accounting principle prospectively
Prospective application of an accounting principle is the easiest for…
Managment, so FASB made it tough to qualify
To qualify for prospective implementation of a change in an accounting principle entity must meet…
At least 1 of the 3 criteria of impracticability
3 criteria of impractibility
1 after making every reasonable effort to apply new principle
Retrospectively but you’re unable to do so
2 there are assumptions about management’s intentions that can’t
Be independently substantiated
3 significant estimates are required and you can’t obtain objective
Info to make estimates
Cindy’s example of: there are assumptions about management’s intentions that can’t be independently substantiated
You couldn’t read management’s mind
Cindy’s example of: significant estimates are required and you can’t obtain objective info to make estimates
You are really bad at guessing
Classic example of impracticability
Converting from FIFO to LIFO because of those pesky LIFO layers
Changes in accounting principles:
No distinction is made between special and…
Non special changes
All changes in accounting principles are treated in the same
manner
Changes in depreciation, amortization and depletion methods are treated as…
Changes in accounting estimates
Examples of common changes in accounting principles 2
1 change in inventory flow method (FIFO, LIFO, Weighted-Avg./
Moving-Avg)
2 change in construction accounting method (percentage of
Completion, completed contract)
Change in accounting principle:
Direct effects (of the cumulative effect)
Effects to the assets, liabilities, DITA, DITL, and impairment losses
As result of the new accounting principle
Change in accounting principle:
Indirect effects (of the cumulative effect)
Effects to current and future cash flows as result of new accounting
Principle
Ex. Royalties and profit sharing
2 steps in dealing with changes in accounting estimate
1 just use new accounting estimate in current accounting period
2 do not adjust financial statements of prior periods presented
What are changes in accounting estimates besides changes in depreciation, amortization and depletion methods?
2 other examples
1 change in percentages for BDX or Warranty expense
2 changes in salvage value or estimated useful life for
Depreciable assets
2 steps in dealing with changes in reporting entity
1 just use new reporting entity in current accounting period
2 apply the new reporting entity retrospectively to the financial
Statements of all prior periods presented
Retrospective treatment for changes in reporting entity:
What did it used to be called in the old accounting standard?
Retroactive treatment
2 examples of changes in reporting entity
1 leaving out a subsidiary when it’s being controlled by bankruptcy
Court, but including it once it emerges from bankruptcy
2 leaving out foreign subsidiary when it’s being controlled by
A foreign gov, but including it when there’s a change in Foreign
gov’s policy
Straight line depreciation expense equation
Depreciation expense =
(Historical cost - salvage value)/useful life
In bankruptcy court, entity is controlled by…
Bankruptcy trustee
A change in depreciation method is a change in method that is not…
Not distinguishable from a change in estimate and is accounted
For as a change in an estimate
Change in an accounting estimate is reported on a…
Prospective basis in current and future years
A change in depreciation method is no longer given…
Cumulative effect treatment on the income statement
Because a change in depreciation method is no longer given cumulative effect treatment on the income statement, there are…
No deferred income tax liability effects
No net of tax calculation is appropriate for…
Prospective calculations in an accounting change
An accounting change that is a change in reporting entity is given…
Retrospective application to the earliest period presented, if
Practicable
Calculations for double declining balance
(1/useful life x 2) x (historical cost - acc. Depr.)
IFRS Change in accounting principle:
The rules for accounting changes are similar to…
US GAAP
IFRS Change in accounting principle:
Accounting changes may occur only when…2
1 change is required by IFRS
Or
2 there’s a voluntary change in accounting methods
IFRS Change in accounting principle:
In the case of a new IFRS pronouncement, the transition rules in…
The new IFRS statement should be followed
IFRS Change in accounting principle:
A voluntary change in accounting method may only be made if it provides…
Reliable and relevant information about the transactions,
Entity’s financial position, performance or cash flows
IFRS Change in accounting principle:
A voluntary change in accounting method is given…
Retrospective application by applying the policy as if the new
policy had always been applied
IFRS Change in accounting principle:
Retrospective application provides that opening balance of equity is…
2) and that other amounts are disclosed for…
Adjusted for the earliest period presented
2) each period as if the new accounting policy had always been
applied
IFRS Change in accounting principle:
If it is impracticable to determine the effects of the change then the change may be…
Applied on a prospective basis
IFRS Change in accounting principle:
Disclosures include…4 things
1 the title of IFRS requiring the change
2 nature of the change
3 amount of adjustments to each financial statement line item
4 effects on EPS
IFRS change in accounting estimate:
Change in accounting estimate occurs due to…
Uncertainties in measuring items on financial statements
IFRS change in accounting estimate:
Changes in estimates include changes in estimates for…5
1 bad debts 2 inventory obsolescence 3 FV financial of assets and liabilities 4 useful life of depreciable asset 5 warranty obligations
IFRS change in accounting estimate:
A change in estimate is accounted for on…
A prospective basis in period of change (current and future periods)
A change in method of accounting for long term contracts requires…
Retrospective application to earliest year practicable
Notes to the financial statements to describe a change in accounting principle must include:
Nature and reason for…
Change and explanation as to why new method is preferable
Notes to the financial statements to describe a change in accounting principle must include:
The method of…
Applying the change
Notes to the financial statements to describe a change in accounting principle must include:
A description of the…
Prior period information that is retrospectively adjusted
Notes to the financial statements to describe a change in accounting principle must include:
The effect of the change on…4
1 income from continuing operations
2 net income
3 other affected financial statement line item
4 any affected per share amounts for current period and all
Periods adjusted retrospectively
Notes to the financial statements to describe a change in accounting principle must include:
The cumulative effect of the…
Change on retained earnings or other components of equity or
Net assets as of the earliest period presented
Notes to the financial statements to describe a change in accounting principle must include:
If retrospective application is impracticable…
The reason, and description of how change was reported
Notes to the financial statements to describe a change in accounting principle must include:
A description of indirect…
Effects of change, including amounts recognized in current period
And related per share amounts
Notes to the financial statements to describe a change in accounting principle must include:
Unless impracticable, the amounts of…
The indirect effects of the change and the per share amounts
For each prior period presented
Change in accounting principle:
Disclosures are also required for…
Interim periods
In the year of the change to the new accounting principle, interim financial state,nets should disclose…3 things
1 the effect of the change on income from continuing operations
2 net income
3 related per share amounts for the post change interim periods
Change in accounting principle:
Once the change in method is disclosed, financial statements in subsequent periods…
Don’t need to repeat the disclosure
The effect of a change in accounting principle which is inseparable from the effect of a change in accounting estimate should be accounted for as…
A change in accounting estimate
Changes in estimate should be accounted for in the period of…
Change and affected future periods as a component of income
From operations
Financial statements are only restated for…
Changes due to error
If the cumulative effect of applying an accounting change can be determined, but the period specific effects on all periods can’t be determined, the cumulative effect of the change should be applied to…
The carrying value of assets and liabilities at the beginning of
The earliest period that can be determined
