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 (current & 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
Three Types of Accounting Changes
- Change in Accounting Principle - Retrospective
- Change in Accounting Estimate - Prospective
- Change in Reporting Entity - Retrospective
Changes in Accounting Estimate Include:
- Depreciation, Amortization, & depletion
- Bad Debt Expense, Warranty Expense
- Change in salvage value
- Change in periods Benefited by a deferred cost because of additional information
Double Declining Balance Method
1/Life x 2 Do not include salvage value
When do you consolidate an entity for which you own shares?
When you own more than 50% of the shares outstanding
What are the direct effects of changing Accounting Principle?
Affects assets, liabilities,deferred income tax assets, deferred income tax liabilites, & impairment charges
Cumulative; Adjust the carrying value of the assets/liab as of the beginning of the first period being presented
The offsetting DR/CR is made to Beginning Balance of R/E (Net of Tax) for the first period presented
What are the indirect effects of changing accounting principle?
Effects to future & current cash flows
Non-cumulative; reported in the period the change is made
Ex: Profit Sharing & Royalties
Three Criteria for applying a Change in Accounting Principle prospectively
- Every reasonable effort must be made
- Mgmt’s intentions cannot be substantiated
- Significant estimates are required and objective information cannot be obtained
The effect of a change in Accounting Principle which is inseparable from the effect of a change in estimate should be accounted for how?
As a change in accounting estimate
LIFO
Last In First Out
Known for Higher COGS & Lower NI
Companies prefer LIFO because it reduces tax liablity
FIFO
First In First Out
Known for Lower COGS & Higher NI
Percentage of Completion Method
Recognize revenue as contract is worked
Completed Contract Method
No revenue recognition until contract is complete
Error Corrections
Restate prior period FS
Cumulative effects is reflected in the carrying value of the asset/liab
Offsetting adjustment is made to the beginning balance of RE for that period