Accounting Changes Flashcards
Why are accounting changes such a big deal in accounting?
It diminishes comparability!
How do you account for changes in estimate?
Prospective Approach
Example: Change in useful life, estimate in uncollectible accounts, estimate in warranty costs
How do you account for a change in principle/method?
Retrospective Approach
Example: Change from LIFO to FIFO
How do you account for an error correction?
Restatement approach
Any error in prior period financial statements
What are different types of change in estimate and a change in principle or method?
1) Changes in estimates result from current facts and circumstances that require an adjustment to the accounting for them, such as useful life
2) Accounting principle changes are changes from one acceptable GAAP to another acceptable GAAP
Example: At the end of year 6 of an assets life, the estimated life changed from 10 years to 8 years. No salvage value, asset cost $10,000.
How do you account for this going forward?
Depreciation taken: 10,000/10= 1,000 X6= $6,000 Dep.
10,000-6,000= 4,000
Remaining life: 2 years
4,000 / 2 = $2,000 deprecation in year 7 and 8
What are the most common accounting principle changes?
- Changes from LIFO to FIFO
- Changes in measurement date of goodwill
What are some exceptions to retroactive application?
- Most little GAAP does not require retroactive application
- Initial adoption of a principle to a new event or for transactions are not treated retroactively
- It is not applied to past transaction that was immaterial
- Change to equity accounting is a prospective approach
What does it mean to be retrospective application? How do you account it?
All financial statements for each prior period should reflect the new accounting principle.
The cumulative effect of the change to the new accounting principle for all period presented
Reflect change on prior period in assets and liabilities as of the beginning of the first period presented.
An offsetting adjustment, shall be made to the opening balance of retained earnings for the earliest period presented.
What is the impracticability assessment?
Retrospective application is impracticable if:
1) The entity has made every effort but is unable to make a reasonable estimate of the impact of change
2) It requires unsubstantiated assumptions about managements intent in a prior period
3) . It requires significant estimates that cannot be objectively made for the prior periods.
When an error is discovered in prior year, how do you account for the restatement?
Beginning retained earnings is adjusted.
