F1 - M6 - Accounting Changes and Error Corrections

Question 1

Prospective vs. Retrospective

Answer 1

Prospective - Change is implemented in the current period and continued in future periods. No restatement.

Retrospective - Prior period adjustments are needed. If prior period financials are presented, a restatement is required. If not, the earliest presented retained earnings is adjusted.

Question 2

Change in Accounting Estimate

Answer 2

Occurs when it is determined that the estimate previously used is incorrect.

Not a correction of error, just a change in method.

Prospective Application

Question 3

What could cause a change in estimate?

Answer 3

• Changing lives of fixed assets
• Adjustments of year end accrual
• Write Downs (Inventory)
• Material, nonrecurring IRS adjustments
• Settlement of litigation
• Change in accounting principle that is inseparable from a change in estimate (Ex: To LIFO, Depn Method)
• Revisions of estimates

Question 4

Change in Accounting Principle

Answer 4

Going from one GAAP principle to another GAAP principle

Going from Non-GAAP to GAAP = Error

Retrospective Application

Question 5

When to change accounting principle?

Answer 5

1) If mandated by GAAP OR
2) If alternative principle is preferable and more fairly presents the information

Must have justification to change principle

Question 6

Comparative vs. Non-comparative Financial Statements

Answer 6

Comparative - Prior periods that are presented on the financial statement (i.e., 2 years ago)

Non-Comparative - Prior periods that are no longer presented on the financial statements (i.e., 10 years ago)

Question 7

How to adjust retrospective changes for non-comparative financial statements?

Answer 7

Calculate the difference between beginning retained earnings in the period of change and what retained earnings would have been if the change was retroactively applied to all affected prior periods (net of tax)

Question 8

How to adjust retrospective changes for comparative financial statements?

Answer 8

Calculate the difference between beginning retained earnings in the FIRST period presented and what retained earnings would have been if the change was retroactively applied to all affected prior periods (net of tax)

Question 9

Direct Effects of Change

Answer 9

Adjustments that would be necessary to restate the financial statements of prior periods

Question 10

Indirect Effects of Change

Answer 10

Differences in nondiscretionary items based on earnings that would have occurred if the new principle had been used in prior periods

Question 11

Retrospective Application (IFRS vs. GAAP)

Answer 11

IFRS requires the entity to present at least three balance sheets.

• End of current period
• End of prior period
• Beginning of prior period

Question 12

What happens if a change in principle is impractical to estimate?

Answer 12

It is handled line a change in estimate (prospectively)

Example: Change to LIFO

Question 13

Changes in Depreciation Method

Rule Exception

Answer 13

Both a change in accounting principle and estimate

Changes are handled as a change in estimate (prospectively)

Question 14

Change in Accounting Entity

Answer 14

Occurs when entity has a change in composition (i.e., consolidations)

Retrospective Application

Not allowed by IFRS

Question 15

What are examples of error corrections?

Answer 15

• Math mistakes
• GAAP application mistakes
• Oversight/misuse of facts
• Non-GAAP to GAAP

Question 16

Impracticality Exemption for Errors

Answer 16

IFRS requires restatements from earliest date that it is practicable.

GAAP does not have an impracticality exemption for error corrections

Question 17

Statement of Retained Earnings

Answer 17

Purpose is to reconcile the beginning balance of retained earnings with the ending balance.

Immediately follows the income statement OR is a component of the Statement of Stockholders Equity