Accounting Changes Flashcards
How are changes in accounting principle applied?
Retrospective Application:
Prior Periods adjusted
Retained Earnings adjusted
Completed Contract to % Completion
Ex: LIFO to FIFO
Would a change from Completed Contract to Percentage of Completion be a change in accounting principle- or a change of estimate?
How would it be applied?
A change of principle.
Applied retrospectively.
Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate?
How would this change be applied?
A change in accounting principle.
Applied retrospectively.
How is a change in accounting estimate applied?
A change in accounting estimate is applied prospectively (going forward).
No backwards adjustment is made.
Would a change from straight line depreciation to double declining balance be a change in accounting principle or a change in estimate?
How would this change be applied?
Change in depreciation method would be a change in accounting estimate.
It is applied prospectively.
How is a correction of an accounting error made?
Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements.
The correction of the error must be included in the footnotes.
What are the requirements for a prior period adjustment?
Effect is Material
Is identifiable in Prior Period
Couldn’t be estimated in Prior Periods
How is a change from a non-GAAP accounting method to a GAAP method recorded?
It is treated as a correction of an accounting error.
Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements
Correction of the error must be included in the footnotes
How does an inventory error effect the financial statements?
Effect on Ending Inventory : Effect on Net Income
If one is overstated- both overstated. If one is understated- both understated.
Misstating inventory corrects itself after TWO periods.
How is a change in entity recorded?
Applied retrospectively.
All prior periods presented for comparative purposes must reflect the change
Footnote disclosures must be made
Changing to Consolidated Statements
What is Change in Accounting Principle?
a change in a method used, such as using a different depreciation method or switching from LIFO to FIFO.
- Companies Must handle retrospectively
- Error of Correction
- need to restate in financial statement
- require full disclosure in the footnotes of the financial statements to describe the justification and financial effects of the change.
What is Change in Accounting Estimate?
an accounting estimate change could be the recalculation of machine’s estimated life due to wear and tear.
-does not need to be restated
What is the effect of LIFO inventory method ?
Reduce in Income=> Reduce in Income Tax
What happen to Income Tax using LIFO inventory method?
Income tax will reduced because LIFO REDUCE Income
A change in “Accounting Principle” that is Inseparable from a change in “Accounting Estimate” should report as
As a component of income from continuing operations, in the period of change and future periods if the change affect both
the effective income tax rates for operations for the full year should reflect
Anticipated foreign tax rates and available tax planing alternative. the effect of other anticipated tax credits, capital gains rates, and foreign tax credits should be included.
A change in depreciation method is now considered
to be both a change in principle and a change in estimate.
A change from LIFO to FIFO for inventory valuation (costing) is
a change in accounting principle.
Rule: The cumulative effect of a change in accounting principle equals the difference between retained earnings at the beginning of period of the change and what retained earnings would have been if the change was applied to all affected prior periods.
Rule: The cumulative effect of a change in accounting principle equals the difference between retained earnings at the beginning of period of the change and what retained earnings would have been if the change was applied to all affected prior periods.
A change in the composition of the elements of cost such as changing from the individual item approach to the aggregate approach in applying the lower of FIFO cost or market to inventories (LCM is covered in F4) is an example of a change in accounting principle. The cumulative effect of the change in accounting principle should now be shown on the retained earnings statement as an adjustment to the beginning balance of retained earnings, in what is called retrospective application.
A change in the composition of the elements of cost such as changing from the individual item approach to the aggregate approach in applying the lower of FIFO cost or market to inventories (LCM is covered in F4) is an example of a change in accounting principle. The cumulative effect of the change in accounting principle should now be shown on the retained earnings statement as an adjustment to the beginning balance of retained earnings, in what is called retrospective application.
Rule: The cumulative effect of a change in accounting principle equals the difference between retained earnings at the beginning of period of the change and what retained earnings would have been if the change was applied to all affected prior periods.
Rule: The cumulative effect of a change in accounting principle equals the difference between retained earnings at the beginning of period of the change and what retained earnings would have been if the change was applied to all affected prior periods.
Rule: “Development stage enterprises” present their FS in accordance with GAAP and make additional disclosures such as: cumulative net losses, cumulative deficit, cumulative sales and expenses.
Rule: “Development stage enterprises” present their FS in accordance with GAAP and make additional disclosures such as: cumulative net losses, cumulative deficit, cumulative sales and expenses.
Deficits accumulated during the development stage of a company should be reported as a part of stockholders’ equity.
Rule: Development stage enterprises should present FS in accordance with GAAP and make additional disclosures such as: cumulative net losses, cumulative deficit (as part of equity), cumulative sales & expenses (part of I/S), cumulative statement of cash flows and supplementary “shareholders equity.”
Deficits accumulated during the development stage of a company should be reported as a part of stockholders’ equity.
Rule: Development stage enterprises should present FS in accordance with GAAP and make additional disclosures such as: cumulative net losses, cumulative deficit (as part of equity), cumulative sales & expenses (part of I/S), cumulative statement of cash flows and supplementary “shareholders equity.”
what is Change in an Accounting Principle?
- Change in accounting method
- LIFO inventory method to FIFO, others
What is a Change in Accounting Estimate?
- change in depreciation method for new assets
- Not a change in accounting principle
- retrospective application : changed in RE statement
Prior Period Adjustments
- adjustments are related to accounting errors
- adjusted in Retained Earning Statement, NOT INCOME Statement.
retrospective application
The cumulative effect of the change in accounting principle should now be shown on the retained earnings statement as an adjustment to the beginning balance of retained earnings
Rule: To be significant enough to report on, a segment must be at least 10% of:
Combined revenues (whether intersegment or unaffiliated customers), or Operating income, or Identifiable assets.
Combined revenues (whether intersegment or unaffiliated customers), or
Operating income, or Identifiable assets *** Does Not included Interest Income***
YIV, Inc. is a multidivisional corporation, which has both intersegment sales and sales to unaffiliated customers. YIV should report segment financial information for each division meeting which of the following criteria?
Segment revenue is 10% or more of combined revenue of all the company segments.
Rule: To be significant enough to report on, a segment must be at least 10% of:
Combined revenues (whether intersegment or affiliated customers), or Operating profit (of all segments not having an operating loss), or Identifiable assets.
reportable segments
Rule: A segment must be at least 10% of:
Combined revenues (whether intersegment or unaffiliated customers), or Operating income (of all segments not having an operating loss), or Identifiable assets.
The concept of faithful representation includes
neutrality, completeness, and freedom from error.
accounted for prospectively
- in current and future periods
- change in estimate
IFRS prohibits the reporting of gains/losses as extraordinary. Therefore, none of the infrequent items are extraordinary under IFRS:
IFRS prohibits the reporting of gains/losses as extraordinary. Therefore, none of the infrequent items are extraordinary under IFRS:
If a change in accounting estimate cannot be distinguished from a change in accounting principle, the change is considered
considered a change in accounting estimate treated as a change in accounting principle and is accounted for prospectively.
Differentiating between a change in accounting estimate and a change in accounting principle is more difficult than differentiating between a change in accounting estimate and a correction of an error, because a change can be essentially both a change in accounting estimate and a change in accounting principle. An example of this situation is a change in depreciation method. It is a change in accounting principle, but also a change in the estimated future benefits of the asset.
Differentiating between a change in accounting estimate and a change in accounting principle is more difficult than differentiating between a change in accounting estimate and a correction of an error, because a change can be essentially both a change in accounting estimate and a change in accounting principle. An example of this situation is a change in depreciation method. It is a change in accounting principle, but also a change in the estimated future benefits of the asset.
