Accounting changes and error corrections

Question 1

What are the 3 general classifications of accounting changes?

Answer 1

1. changes in accounting principle
2. changes in accounting estimate
3. changes in reporting entity
   These types of changes and error corrections require special disclosure in the FS to enhance comparability among accounting periods.

Question 2

What is a change in accounting principle?

Answer 2

The adoption of a generally accepted principle from one used previously for reporting purposes. The term “principle” includes methods of applying principles. Ex: change in inventory method

Question 3

What is a change in accounting estimate?

Answer 3

The preparation of FS requires estimation. Future events and their effect cannot be determined in advance with certainty. Accounting estimates change as new events occur, as more experience is acquired or as additional information becomes available. Ex est of service lift, est. of uncollectible AR, changes in depreciation

Question 4

What is a change in reporting entity?

Answer 4

Changes in reporting entity result as the combination of companies making up a reporting enterprise differ between periods. Ex - consolidated statements, subsidiaries

Question 5

What is a correct of error?

Answer 5

It is not a accounting change but includes some of the same characteristics. Ex - correcting math error, correcting oversight or misuse of facts

Question 6

FASB ASC 250-10-2 requires that in the absence of a specific statement by the FASB tot he contrary, accounting changes should be accounted for using what approach?

Answer 6

the retrospective approach

Question 7

What is the retrospective approach for accounting for accounting changes?

Answer 7

All PY’s FS presented should be restated and the cumulative effect of the change should be reported in the RE statement (or in the statement of changes in stockholders’ equity) as an adjustment of the beginning of period balance of RE of the earliest year presented.

Question 8

FASB ASC 250-45-7 specifies that an entity should report a change in accounting principle using the retrospective approach unless it is impracticable to do so. FASB ASC 250-10-45-9 holds that it should be deemed impracticable to apply the effects of a change in accounting principle using the retrospective approach only if any of what 3 conditions exist?

Answer 8

1. after making every reasonable effort to do so, the entity is unable to apply the requirement
2. retrospective application requires assumptions about management’s intent in a prior period that cannot be independently substantiated
3. retrospective application requires significant estimates of amounts, and it is impossible to distinguish objectively information about those estimates that:
   a. provides evidence of circumstances that existed on the date(s) at which those amounts would be recognized, measured, or disclosed under retrospective application, and
   b. would have been available when the FS for that prior period were issued.

Question 9

Prior to the retrospective approach for accounting changes, what method was required?

Answer 9

the current approach

Question 10

What is the current approach to accounting changes?

Answer 10

The cumulative effect of the change would be reported net of any related income tax effect in net income of the year of change, with prior years not being restated. The current approach can be used only for changes made pursuant to a specific authoritative pronouncement in which the authoritative body specifies that the current approach must be used.

Question 11

What basis is changes in accounting estimates handled?

Answer 11

on a prospective basis - in the current yare and future years. Disclosure includes an explanation and justification for the change and the impact on current income and EPS.

Question 12

What 2 disclosures should be made for a change in accounting estimates?

Answer 12

1. explanation and justification of the change

2. impact on the income and EPS

Question 13

When are consolidated FS normally prepared?

Answer 13

When the parent company (or controlling entity) has control over another entity(ies). The reporting entity is the consolidated entity.

Question 14

How is a change in reporting entity shown in the FS?

Answer 14

A change in reporting entity is reported by restating all prior years’ FS presented as if the new reporting entity existed during all of those years. In addition, the cumulative effect of the change up to the beginning of the first year presented is shown as an adjustment of the beginning RE of the earliest year presented.

Question 15

What approach is used for a change in reporting entity?

Answer 15

The retrospective approach

Question 16

Whenever it is impossible to determine whether a change in accounting estimate or a change in accounting principle as occurred, how should it be considered?

Answer 16

as a change in estimate

Question 17

How is a correction of an error in PY’s FS reported?

Answer 17

It is reported in the year of correction by restating all prior years affected by the error. The cumulative effect of the error on periods prior to those presented must be reflected in the carrying amounts of the assets and liabilities as of the beginning of the earliest year presented in the current period’s financial report. In addition, the offsetting amount of this cumulative effect must be reported as an adjustment to the opening balance of RE of the earlier year presented in the current period’s financial report.

Question 18

The FASB chose to describe corrections of error not as a retrospective application but what?

Answer 18

as a restatement

Question 19

Does IFRS address the reporting of indirect effects of changes in accounting principles?

Answer 19

no

Question 20

IFRS allow what kind of exception to reporting changes in accounting principles and to the correction of errors?

Answer 20

impracticality

Question 21

IFRS allows an “impracticality” exception to reporting changes in accounting principles and to the correction of errors? Does GAAP have this exception?

Answer 21

only for changes in accounting principle