Accounting Changes & Error Corrections Flashcards
WHAT are the effects of a company’s decision to change from a cash-basis of accounting to accrual-basis of accounting?
THIS is considered a “correction of an error” and requires:
(1) An offsetting adjustment, if necessary, is generally made to the opening balance of retained earnings
(2) Financial statements for each period presented will reflect the correction of the effects of the error
(3) The cumulative effect of the error on periods prior to the earliest period presented is reflected as of the beginning of the earliest period presented (i.e. in the carrying values of assets and liabilities)
WHAT is it considered when a company decides to change from a cash-basis of accounting to accrual-basis of accounting?
As a prior-period adjustment (net of tax)
NOTE: This Requires an adjustment to the beginning balance of Retained Earnings
True or False.
A Change in Depreciation Method is considered a Change in Principle.
FALSE.
A Change in Depreciation Method is considered a Change in Estimate recognized prospectively (i.e. adjusted for “today” and “tomorrow”)
WHAT should be done when there is a prior-year error that involves multi-year comparative financial statements?
THERE should be an adjustment to the affected asset and liability accounts as of the beginning of the current year and a prior period adjustment to beginning retained earnings
Under FASB, WHAT related-party transactions require disclosure?
THOSE other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business.
I.e. This helps to make financial statement users aware of transactions other than those in the ordinary course of business
WHAT disclosures should prospective financial statements include?
A Summary of:
(1) Significant Accounting Policies
(2) Significant Assumptions
Significant Assumptions should also be included because when a company prepares prospective financial statements, they should also disclose a summary of significant assumptions
HOW should a change be reported in the Financial Statements when the change is in the “reporting entity?”
Retrospectively, including note disclosures, and application to all prior period financial statements presented.
WHY? - So that the change recognized as if it had already occurred as of the beginning of the earliest period presented
True or False.
A disclosure requirement related to the correction of a material prior-period error under IFRS includes;
> A description of the internal controls put in place to prevent the occurrence of the error in the future periods
FALSE.
Disclosures required under this circumstance include:
> The amount of the correction at the beginning of the earliest period presented
> The impact of the correction on basic and diluted earnings per share for each period presented
> The nature of the error
WHAT would be considered “required” disclosure about a related party transaction?
(1) Amounts due to or from related parties as of the balance sheet date
(2) Amounts of purchases from or sales to related parties
WHAT happens when the cumulative effect of the change in Accounting Principle is NOT practicable to determine?
THE change is accounted for through prospective application to the “earliest period practicable”
WHAT is a consequence of using interim financial statements as emphasized by their characteristics?
Interim financial reports are designed to provide users with timely information, useful in the making of decisions, at the sacrifice of reliability.
WHEN would an injury or incident be recognized if it occurred at an interim period?
In the interim period in which it occurred.
i.e. If it occurred in the third quarter of the year and the amount received was $60,000 , the $60,000 would be recognized in the third quarter in which the transaction occurred.
True or False.
A loss on the disposal of a business segment is recognized uniformly over the year to which the amount provided applies.
FALSE.
A loss on the disposal of a business segment is recognized in the interim period in which it occurs.
i.e. If it occurred in the third quarter, it would all be recognized in the third quarter.
True or False.
Under IFRS, If interim financial statements are presented, four basic financial statements and selected notes are required.
TRUE.
According to IFRS, If an entity provides interim financial statements, it will include a minimum of four condensed financial statements and selected notes.
