Accounting Changes Flashcards
How should the accounting policy be presented in the financial statements if it is not practicable to determine the period-specific effects of changing the policy on comparative information for all of the prior periods presented?
The new accounting policy should be applied on a cumulative basis to the opening and closing statements of financial position (balance sheet) at the earliest period for which retrospective application is practicable, (may be the current period), and a corresponding adjustment is made to the opening balance of equity.
If it is impracticable to determine the cumulative effect, at the beginning of the current period, the new policy should be applied prospectively from the earliest date practicable.
What does impracticable mean?
Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so.
How should a change in estimate be applied in the financial statements?
A change in estimate should be applied prospectively.
How should an error be applied in the financial statements?
A correction of an error should be applied retrospectively.
Under ASPE, is there any exception when one does not have to correct an error retrospectively?
No. Errors must always be corrected retrospectively and there is no exemption where it is impracticable to do so.
<p>What are the 2 significant differences between the ASPE and IFRS Handbook Sections on Accounting Changes?</p>
Under ASPE errors must always be corrected retrospectively by adjusting prior period Financial Statements, while under IFRS there is an exemption if it is impracticable.
There are 7 situations under ASPE (none under IFRS) when an entity can change accounting policies without meeting the regular criteria (reliable and more relevant information).\n
Under ASPE, in which situations is one allowed to change an accounting policy, without meeting the regular criteria (i.e. providing reliable and more relevant information)? (7 situations)
7 Situations where an accounting policy can be changed without meeting the regular criteria of providing reliable and more relevant information:\n\n \t
- Consolidating subsidiaries ? using cost or equity method\n \t
- Significant influence investments ? account usingcost or equity method\n \t
- jointly controlled enterprises -to accountfor interests in joint interests in jointly controlled enterprises using the cost or equity method or by accounting for rights to the individual assets and obligations for the individual liabilities, in accordance with INTERESTS IN JOINT ARRANGEMENTS, Section3056\n \t
- Capitalize or expense expenditures on internally generated intangible assets during the development phase\n \t
- Measure a defined benefit obligation for which an appropriate funding valuation has been prepared using that funding valuation or a separate actuarial valuation prepared for accounting purposes\n \t
- Income Taxes - account using the taxes payable method or the future income taxes method\n \t
- Initially measure the equity component of a financial instrument that contains both a liability and an equity component at zero\n
<p>How should the following be accounted for in the financial statements - At the beginning of the current year a company which previously used the completed contract method began to use the percentage of completion method and started to track percentage of completion for each job?</p>
The financial statements should be adjusted for retrospectively by restating opening retained earnings in the current year’s financial statements. Although the company will not have sufficient information to adjust individual prior periods, sufficient information should be available to compute the cumulative impact on prior periods, by determining the extent of completion of each contract as at the beginning of the current year. Hence it would be appropriate to apply the change in policy retrospectively, by making a cumulative adjustment to the opening balance of retained earnings for the current year’s financial statements.
How should the following be accounted for in the financial statements - A company was originally depreciating a machine over 6 years; due to technological developments that took place in the 2nd year in which the company owned the machine, it now appears that the machine will only be used for only 5 years?
The financial statements should be adjusted for prospectively, as there has been a change in circumstances, which constitutes a change in estimate.
How should the following change in accounting policy be accounted for in the financial statements - At the beginning of the current year a company which previously used the completed contract method began to use the percentage of completion method and started to track percentage of completion for each job?
The financial statements should be adjusted for retrospectively by restating opening retained earnings in the current year?s financial statements.\n\nAlthough the company will not have sufficient information to adjust individual prior periods, sufficient information should be available to compute the cumulative impact on prior periods, by determining the extent of completion of each contract as at the beginning of the current year. Hence it would be appropriate to apply the change in policy retrospectively, by making a cumulative adjustment to the opening balance of retained earnings for the current year?s financial statements.
What are the 2 situations in which one is allowed to change an accounting policy?
It is only permitted to change an accounting policy if: it is required by a primary source of GAAP (e.g. new handbook section issued, section revised etc.). results in financial statements providing reliable and more relevant information.
How is a change in accounting policy applied in the financial statements?
Accounting policy changes are normally applied retrospectively. As long as it is practicable to do so, one would adjust the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied.
How does one account for an event that has characteristics of both a change in policy and a change in estimate?
It is treated as a change in estimate.
Under IFRS, is there any exception when one does not have to correct an error retrospectively?
Yes ? if it is impracticable to restate the error retrospectively, it could be applied in a limited way retrospectively (i.e. only adjust opening retained earnings) or, if that is not practicable, it would be applied prospectively.
