Accounting Changes

Question 1

What are changes in accounting principles from GAAP to GAAP?

Answer 1

• Change in valuation method for inventory (FIFO to LIFO)
• Changes from completed contract method to % of comp.

Retroactively Restated

Question 2

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?

Answer 2

A change of principle.

Applied retrospectively.

Question 3

Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate? How would this change be applied?

Answer 3

A change in accounting principle.

Applied retrospectively.

Question 4

How is a change in accounting estimate applied?

Answer 4

A change in accounting estimate is applied prospectively (going forward).
No backwards adjustment is made.

Question 5

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?

Answer 5

Change in depreciation method would be a change in accounting estimate. It is applied prospectively.

Question 6

How is a correction of an accounting error made?

Answer 6

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.

Question 7

What are the requirements for a prior period adjustment?

Answer 7

Effect is Material
Is identifiable in Prior Period
Couldn’t be estimated in Prior Periods

Question 8

How is a change from a non-GAAP accounting method to a GAAP method recorded?

Answer 8

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

Question 9

How does an inventory error effect the financial statements?

Answer 9

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.

Question 10

How is a change in entity recorded?

Answer 10

Applied retrospectively.
All prior periods presented for comparative purposes must reflect the change
Footnote disclosures must be made
(Ex: Changing to Consolidated Statements)

Question 11

What is the difference between Forecasted and Projected Financial Statements?

Answer 11

Both are considered Prospective Financial Statements b/c they represent info about the future

Forecast - what management EXPECTS to occur (General or Limited Use)

Projection - What management BELIEVES will occur given certain hypothetical assumptions (Limited Use ONLY)

Question 12

Accounting Treatment for a Change in Accounting Principle under IFRS:

Answer 12

Retrospective application by applying the policy as if it has always been applied.

(Same as GAAP)

Question 13

Accounting Treatment for a Change in Accounting Estimate under IFRS:

Answer 13

Prospective application

Same as GAAP

Question 14

Accounting Treatment for a Change in Reporting Entity under IFRS:

Answer 14

Not allowed under IFRS

Question 15

Accounting Treatment for a Correction of an Error under IFRS:

Answer 15

Retrospective (Similar to GAAP)

Unlike GAAP, if error is impracticable to determine the effect - may be reported prospectively

Question 16

Under IFRS, when an entity retrospectively restates its F/S, or reclassifies items, how many statements are required for comparative purposes?

Answer 16

3 years of statements of financial position (balance sheets) and 2 years of each of the other F/S

Question 17

A change in the periods benefited by a deferred cost because additional information has been obtained is what type of accounting change and how should this be reflected in the financial statements?

Answer 17

A change in estimate - that should be reported in the period of change and future periods if the change affects both