F1 - M6 - Accounting Changes and Error Corrections

Question 1

Changes in Accounting “Estimate”

Answer 1

Do NOT restate prior periods, PROSPECTIVE application, current and future income, not an error, current period and continue in future periods (“Income from continuing operations”), if several future periods & affects NI and per share put in “Notes”

-	Examples:
o	Change asset lives
o	Adjustment of year end officers’ salaries
o	Write downs of inventory 
o	IRS Adjustments
o	Settlement of litigation
o	“Changes in accounting principle” 
	     To LIFO, change in Depreciation Method

Question 2

Changes in “Accounting Principle”

Answer 2

Retrospectively, “GAAP to GAAP”, change if required by GAAP and/or preferred with “fairly presents” information. (Non-GAAP to GAAP is an error), can’t “income smooth” by making F/S better

“Exceptions” – To LIFO or Change in Depreciation method – IMPRACTICAL to ESTIMATE
o PROSPECTIVE, like a change in estimate

Cumulative Effect 
o	Noncomparative
	     Not showing prior periods F/S. Retrospective, what Retained earnings would have been, ADJUST BEGINNING RE IN PERIOD OF CHANGE 
o	Comparative 
	     RESTATE

Question 3

IFRS – 3 balance sheets

Answer 3

(end of current, end of prior and beginning of prior) for comparative change in principle

Question 4

Change in “Accounting Entity”

Answer 4

Retrospective, entity changed “composition”, consolidated or combined F/S

• If current year, all F/S, current and previous, should be restated.
• IFRS does not include this concept

Question 5

“Error” Correction

Answer 5

Prior period adjustment
- Not accounting changes. Include:
o Recognition, measurement, presentation or disclosure, Non-GAAP to GAAP (cash basis to accrual basis)
- Correct the information if the year is presented, correct prior F/S
- If year is not presented, adjust beginning retained earnings (NET OF TAX)