Accounting Changes and Asset Retirement 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 (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 Materially 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
What are the types of accounting changes?
1) Accounting principle changes
2) Accounting estimate changes
3) Changes in reporting entity
4) Corrections of errors in PY financials
What is restatement?
A term reserved specifically for error changes - requires correcting the comparative financial info presented along with correcting the opening RE balance. Remember, term “Prior Period Adj” = Correction of accounting error
What are asset retirement obligations?
Future costs (liability) that are integral to the operations of an asset (dismantling an asset, removal, site reclamation, nuclear decommission, closing a mine). Covered by ASC 410-20.
How are asset retirement obligations measured?
Fair value (the amount the firm would be reasonably expected to pay today to cover the future costs) at the time the cost becomes reasonable estimable.
Accounting for Asset Retirement Obligations
Requires capitalization of future asset retirement costs in the underlying asset account and as a liability (must be a legal obligation, ex: required because a mine).
The amount capitalized is the probability weighted present value of the future costs to retire the asset.