CH 21 MIDTERM 2 Flashcards
Q: What causes changes in accounting policies?
Changes in accounting standards, economic conditions, technology, or errors.
What are the objectives of accounting change standards?
A: Limit types of changes, standardize reporting, and provide information to understand the effects on financial statements.
What is a change in accounting policy?
A change in the principles, rules, or practices used to prepare financial statements.
Example of a change in accounting policy?
Adopting a new accounting standard or changing inventory cost flow methods.
What is a change in accounting estimate?
An adjustment to the value of assets or liabilities based on new information or future expectations.
Example of a change in accounting estimate?
Changing the estimated useful life of an asset.
What is a prior period error?
Mistakes or omissions in past financial statements that were made due to misuse or failure to use reliable information.
Example of a prior period error?
Failing to recognize depreciation on assets in prior periods.
What conditions allow a change in accounting policy under GAAP?
Changes are required by GAAP or the change provides more relevant and reliable information.
What does ASPE allow for voluntary changes?
ASPE allows certain changes without needing to prove “more reliable and relevant” information, like for subsidiaries or investments
What is a policy change that is not considered a policy change?
Adopting a different policy for new or immaterial transactions.
What happens if an accounting policy change is impractical to apply retrospectively?
The change is applied prospectively from the earliest date practicable.
What is required to disclose for a change in accounting policy?
Title, nature of the change, how transitional provisions were used, and effects on financial statements.
Under ASPE, what disclosures are required for voluntary policy changes?
Explain why the new policy was chosen, even if it doesn’t meet the “reliable and relevant” test.
What additional disclosures are required under IFRS for changes in policy?
Disclose if the change will affect future periods and the impact on EPS.
What is retrospective application in accounting?
Adjusting prior period financial statements as if the new policy was always used.
What happens if retrospective application is impractical?
Limited retrospective application can be used, or the change is applied prospectively.
What is full retrospective application under IFRS?
It includes adding an opening balance sheet for the earliest period presented, adjusting EPS, and showing changes in equity.
What is the difference between retrospective and prospective applications?
Retrospective changes past periods, while prospective applies changes going forward.
When is prospective application used for changes in estimates?
When a change in estimate does not require adjusting past periods, and it affects future periods.
How are changes in estimates disclosed?
The nature and amount of the change affecting the current period, and how it may impact future periods.
What is required when correcting an accounting error?
Restate prior periods to reflect the correction, and adjust the opening balance of retained earnings.
What happens if an error correction is impractical?
IFRS allows partial retrospective restatement, while ASPE requires full restatement.
What is required to disclose when correcting an error?
The nature of the error, the correction amount for each affected item, and the effect on EPS.
What economic motives influence accounting method changes?
Political costs, capital structure, bonus payments, and smoothing earnings.
How can political costs affect accounting methods?
Companies may report lower income to avoid scrutiny by regulators.
How does capital structure impact accounting methods?
Companies may choose methods that increase income to avoid violating debt covenants.
Why do managers change accounting methods for bonuses?
Managers may choose methods that maximize income to earn higher bonuses tied to profits.
How do companies use accounting methods to smooth earnings?
Companies may adjust methods to avoid dramatic fluctuations in reported income.
What challenge do accounting changes create for trend data?
Changes can shift earnings from one period to another, making trend analysis harder.
What should users of financial statements do when accounting changes occur?
A: Carefully analyze changes and adjust trend data accordingly.
Why is disclosure important for accounting changes?
Disclosures help users understand the effect of changes on financial statements and adjust their analysis.
What’s the main difference between IFRS and ASPE in handling errors?
IFRS allows partial retrospective restatement, while ASPE requires full retrospective restatement
How does ASPE differ from IFRS in voluntary changes?
ASPE allows voluntary changes without needing to prove the “reliable and more relevant” test.
What disclosures are required under IFRS for changes not yet in effect?
Disclose the effect of new standards on future periods and their impact on EPS.
Q: How are errors corrected under IFRS and ASPE?
Both require retrospective restatement, but IFRS allows partial restatement if impractical.
What does IFRS require for the correction of an error regarding EPS?
The effect of the error correction on basic and diluted EPS for prior periods must be disclosed.
What is the primary difference in accounting between IFRS and ASPE?
IFRS requires more detailed disclosures and allows partial retrospective application for errors, while ASPE mandates full retrospective restatement.
Income Tax Act
Capital Cost Allowance
(CCA) (assets divided into
classes, fixed percentage per class)
Estimated Expenses: We can
only claim actual costs as we incur
them (estimates not allowed)
Modified Cash Basis for
Revenue: Installment sales are
claimed when cash received, not
when we earn the revenue
Meals and Entertainment:
Only 50% deductible for tax
purposes
Golf Club Memberships /
Dues: 0% deductible for tax
purposes (i.e. not a valid expense
for tax purposes)
Please note that this is not a complete list of all the
differences between IFRS or ASPE and the Income Tax
Act
