Accounting Changes Flashcards
Under IFRS, where is interest and dividends received recorded?
Either operating or investment section of cash flow
Under IFRS, where is interest and dividends paid recorded?
Either operating or financing section of cash flow
Changing from non-GAAP to GAAP is error correction. How should it be treated?
It is recorded by recording a prior period adjustment net of tax to the beginning balance of retained earnings for the earliest period presented.
When is gross profit (under the cost recovery method) recognized?
Gross profit is deferred and recognized only when the cumulative receipts exceed the cost of the asset sold.
Affect of errors
- Error in classification affects only one period.
- Nonsystematic errors in adjusting entries (e.g., an error in ending inventory of one period) affect two periods and are known as self-correcting (counterbalancing) errors. For example, overstating ending inventory of year 1 will overstate the income of year 1 and understate that of year 2.
- Other errors will affect the income of several periods such as misrecording the cost of a long-lived asset (i.e., depreciation will be misstated for all periods).
Changes in accounting estimates
Changes in accounting estimates are accounted for on a prospective basis in the period of the change and in future periods.
When is gross profit (under the installment sales method) recognized?
Under the installment sales method, gross profit is deferred to future periods and recognized proportionately to collection of the receivables. Installment receivables and deferred gross profit accounts must be kept separate by year, because the gross profit rate usually varies from year to year.
Three criteria for a prior period adjustment:
(1) the effect of the adjustment is material to income from continuing operations,
(2) the adjustment can be identified with a prior period,
(3) the amount of the adjustment could not be estimated in prior periods.
- ASC Topic 250 does not require that a prior period adjustment be attributable to economic events occurring subsequent to the prior period financial statements.
Systematic and rational allocation examples
- amortization of intangibles
- depreciation of assets
Segment reporting
- Intersegment sales are included in segment revenue to determine if the segment revenue is 10% or more of the combined segment revenues.
- Sales to unaffiliated customers are used to determine if 75% of unaffiliated revenues have been reported by the segments.
Three valuation techniques can be used to measure fair value: the market approach, the income approach, and the cost approach.
- The market approach uses prices and relevant information from market transactions for identical or comparable assets or liabilities.
- The income approach converts future amounts to a single current (discounted) amount.
- The cost approach relies on the current replacement cost to replace the asset with a comparable asset, adjusted for obsolescence.
Does IFRS mandate interim reporting?
IFRS does not mandate interim reporting.
The enterprise shall disclose the following about each reportable segment if the specified amounts are reviewed by the chief operating decision maker:
- Revenues from external customers
- Intersegment revenues
- Interest revenue and expense (reported separately unless majority of segment’s revenues are from interest and management relies primarily on net interest revenue to assess performance)
- Depreciation, depletion, and amortization expense
- Unusual items, extraordinary items
- Equity in the net income of investees accounted for by the equity method
- Income tax expense or benefit
- Significant noncash item
- COGS is not included as a required disclosure
Comprehensive income
Comprehensive income is the sum of net earnings (loss) and other comprehensive income. It requires disclosure of changes during a period of the following components of other comprehensive income: unrealized gains and losses on available-for-sale investments and foreign currency items, reclassification adjustments, gains and losses on the effective portion of cash flow hedges, and any adjustments necessary to recognize the funding status of pension plans or other postemployment benefits. Components of other comprehensive income can be shown either net of tax-related effects or before tax-related effects with the aggregate income tax effects shown as one amount.
Change in accounting principle
A change in accounting principle is accounted for through retrospective application of the new accounting principle to all prior periods, unless it is impracticable to do so. Retrospective changes require the following:
1) The cumulative effects of the change are presented in the carrying amounts of assets and liabilities as of the beginning of the first period presented.
2) An offsetting adjustment is made to the opening balance of retained earnings for that period (the beginning of the first period presented).
3) Financial statements for each individual prior period presented are adjusted to reflect the period-specific effects of applying the new accounting principle.
