Accounting Changes and Error Correction

Question 1

Error Correction - Explain which account needs to be modified when correcting and error, and in what time reference ?

Answer 1

Correction of an error is done by restating the beginning retained earnings of the year when the error occurred if that year is presented. If not, then restatement must be done for the earliest year presented.

Note: ending Retained earnings for one year is equal to the Beginning Retained Earnings for the following year.

Question 2

Error Correction -What are the Error Correction disclosure requirements under IFRS?

Answer 2

Disclosure Requirements:

1- Disclose the nature of the error in the foot notes
2- Restatement of the Financial Statements in the year the error has occurred. If Not possible, then modifying the Retained Earnings Account to the earliest year presented.
3- Show the impact of the correction on basic and diluted earnings per share.

Question 3

Show the impact of an undervalued Ending Inventory from a Balance Sheet perspective for 2 consecutive years?

Answer 3

Year 1:

Beginning Inventory
Plus: Net purchases
Less: Ending Inventory (U)
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Cost of goods sold (O)

Year 2:

Beginning Inventory (U)
Plus: Net Purchases
Less: Ending Inventory
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Cost of Goods Sold (U)

Question 4

Show the impact of an undervalued Ending Inventory from a Income Statement perspective for 2 consecutive years?

Answer 4

Year 1:

Revenues
Less: Cogs (O)
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Net Income (U)
Retained Earnings (U)

Year 2:

Revenues
Less: Cogs (U)
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Net Income (O)
Retained Earnings (Corrected)

Question 5

Accounting Change - How would a change in an Estimate be handled ?

Answer 5

A change in estimate is handled Prospectively, for that no cumulative effect is recorded, and no separate line is shown for that on the Income Statement.

Question 6

Accounting Change - How would you treat a change in accounting principle that is inseparable from a change in estimate, like the depreciation method?

Answer 6

When changing the Depreciation Method, which is inseparable from a change in Estimate we treat the change Prospectively. The new depreciation method must be used as of the beginning of the year of change, the current book value of the asset must be used as well.

Question 7

Accounting Change - How would a change in an accounting principle be handled?

Answer 7

A change in an Accounting Principle must be handled Retrospectively. That requires the restatement of the beginning balance of Retained Earnings for the earliest year presented by the cumulative amount of the change. For the Years presented, financial statements must be fully restated.

Question 8

Accounting Change - How would a change in accounting To LIFO be handled.

Answer 8

An change to LIFO must be handled Prospectively.

Any other accounting principle change that is considered impractical to calculate should also be handled Prospectively.

Question 9

Accounting Change - When is it allowed to change an accounting principle?

Answer 9

An accounting principle may be changed ONLY if required by GAAP or IFRS, or if the alternative principle is preferable and more fairly presents the information.

Question 10

Accounting Change - what would be a change in accounting principle and what would be a fixing of an error?

Answer 10

If the change in the method used is from one accounting principle to another acceptable accounting principle under GAAP or IFRS, that is considered a change in accounting principle.

on the other hand going from non-GAAP to GAAP is merely a fixing of an Error.

Question 11

Accounting Change - Under IFRS, what would be the disclosure requirements when a company showing comparative financial statements undergoes an Accounting Principle Change?

Answer 11

The Company is required to show:

3 BS ( end of current period, end of prior period, beginning of prior period), and 2 of each of IS, CF, SE.

The cumulative effect of the change is recorded in the beginning Retained Earnings of the Balance Sheet for the beginning of prior period.

US GAAP does not have 3 BS minimum Requirement.

Question 12

Accounting Change - What are the 2 main effects of changing the inventory valuation method (which is an accounting principle change) both in the BS and IS ?

Answer 12

When the principle change is a change in the inventory valuation method ( FIFO, LIFO, Weighted average, specific identification), the change takes 2 effects:

1- The cumulative difference between COGS for all years of operation ( IS effect)

2- the year of change difference in Inventory Level ( BS effect)