Accounting Changes and Error Corrections-pg 17-33 book 2 Flashcards
Retrospective
Records effect of change on prior yrs as adj to beginning balance in RE rather than in income-prior yr FS reported comparatively w/ current yr are also changed to reflect new
Prospective
apply change to current and future periods only
Restatement
- Reserved specifically for error changes
- Requires correcting comparative financial info presented along w/ correcting the opening RE balance. Entity must disclose nature of error and effect on current and prior periods
Accounting Change and Approaches
- Accting Principle Change
- Accting Principle Change-determining prior yr effects impracticable
- Accting Est Change
- Change in Reporting Entity
- Correction in Accting Error (Prior Period Adj)
- Retrospective-limited to direct effects
- Prospective
- Prospective (depreciation/amortization/depletion caused by principle change)
- Retrospective
- Restatement
NOT Accounting Principle Changes
- Initial adoption of new principle to new events for first time or events immaterial in effect in past (capitalizing interest for 1st time bc in past firm not involved in construction activities to significant extent)
- Adoption or modification of principle for transaction clearly diff in substance from those in past
- Change in method planned procedure as part of normal application of method (change to SL deprecation late in life on double-declining balance method)
- Change from principle not generally accepted to one that is accepted (treat as error correction)
Steps to Retrospective Application
- Cumulative effect of change on periods b4 those presented is reflected in carrying amts of affected A/L as of beginning of earliest period presented-along w/ offsetting adj to opening balance to RE for that period
- FS for prior periods presented comparatively are recast to reflect period-specific effects of applying new principle. Each acct changed
- Through JE beg bal of ER in yr of chagne is adjusted to reflect use of new principle through that date.
-CAUTION: When new accting standard adopted causing change in accting principle retrospective application may not be required. Transitional guidance of new standard is to be followed
Direct Effects/Indirect Effects
Direct Effects: Those recognized changes in A/L necessary to effect the change (change in inventory due to change in cost flow assumption-also related effect on deferred tax accts or impairment adj resulting from applying LCM valuation to new inventory balance)
Indirect Effects: Changes in current/future cash flows resulting from making change in accting principle applied retrospectively-these changes recognized in period of change-prior period FS not changed, but Footnote disclosed (increase in profit sharing due to principle change and more income recognized in prior yrs but pmt made this yr so indirect– also litigation settlements from lawsuites)
Disclosures for Principle Changes (these not need to be repeated in future yrs)
- Name and reason change including why new change is preferable
- Method of applying change
- Current/Prior Periods retrospectively adjusted effect of change on income from Cont operations and net income and all other affected line items (may disclose entire statements as adjusted or only provide line item info)
- Cumulative Effect on RE as beginning of earliest period presented
- If not practicable to apply retrospective method to all periods reason why and description of alternative method used to report change
- Summaries of financial results (major FS subtotals for previous 10 yrs) as reported in notes also retrospectively adjusted for change
When not to use Retrospective Approach
- After making reasonable effort to apply principle to prior periods, entity is unable to do so
- Assumptions about mgmt’s intent in prior periods are required and such assumptions cannot be independently substantiated
- Retrospective application requires estimates of amts based on info that was unavailable in prior periods or on circumstances that didn’t exist in prior periods
Change in Reporting Entity
Limited Mainly to:
1. Presenting consolidated or combined FS in place of FS of individual entities
2. Changing set of subsidiaries make up consolidated group
3. Changing entities included in combined FS
4. Change from cost or FV method for accting for investment to equity method for investment
>Change from cost or FV to equity IS RETROSPECTIVE
> Change from equity to cost or FV IS PROSPECTIVELY
Prior FS are recast as if new entity existed in those prior periods
Disclosures Required:
- Nature of change and reasons
- Effect of change on income for CO/net income/OCI/and related per share amts
Prospective Application (Estimate changes)
- No “cumulative effect”
- New estimate used and usual accting procedures apply
- BV @ beginning of current yr used as basis for applying new estimate
- Changes in methods of depreciation/amortization/depletion BV @ beginning of period basis for expesne recognition over remaining useful life
Disclosures for Estimate Changes
Effect of change on income from continuing operations, net income, and related per share amts for period of change in estimates and future periods
IF only effects period of change disclosures arent required
Error in FS
- Restatement:Same as retrospectively, but in order to distinguish the two the term for errors is restatement
- Adj to RE and other accts and FS affected by error @ beginning of earliest period presented
Disclosures for Error in FS
These disclosures only needed in period of correction
- Statement that previous FS were restated and nature of error
- Effect of correction on each FS line items and related per share amts for each prior period presented
- Total cumulative effect of change on RE as beginning of 1st period presented
- Pre/Post tax effects of correction on net income for each prior period presented
ARO (Asset Retirement Obligations)
- These must stem form legal obligation
- Requires firms to capitalize future asset retirement cost (cost of dismantling an asset, removal, site reclamation, nuclear decommissioning and closing mines) in underlying asset acct and ARO liability
- FV (PV of future cash flows) used to measure amt to be recognized @ time cost becomes reasonable estimable–amt debited to asset and credited to ARO
- If PV technique is used to measure FV then probability- weighted estimates of Future Cash Flows are discounted using credit-adjusted risk free rate
- Applies to all LEGAL obligations associated w/ retirement of tangible non-current assets but NOT to environmental obligations
- After initial measurements 1)Total depreciation/depletion exp over asset’s life is increased by amt capitalized initially 2) ARO increased each yr due to passage of time firm recognizes ACCRETION EXPENSE.
