F1_Module 6 Accounting Changes and Error Corrections Flashcards
Are changes in accounting estimates applied retrospectively (historically) or prospectively (going forward)? When does a change in accounting estimate occur?
The changes in accounting estimates have prospective application (going forward). The change in accounting estimate occurs when it is determined that the estimate previously used by the company is incorrect.
What are some events that may results in “Estimate” changes (i.e. change in estimated useful life etc.)?
1- Changes in the lives of assets.
2- Adjustments of YE accruals of officer’s salaries and/or bonuses.
3- Write-downs of obsolete inventory.
4- Material, non-recurring IRS adjustments.
5- Settlement of litigation.
6- Changes in accounting principle inseparable from a change in estimate (when uncollectible accounts can be estimated you may choose to use the immediate recognition from installment method of estimating).
7- Revisions of estimates regarding discontinued operations.
Should the change in accounting estimate be reported?
Yes, if the estimate affects future periods, and if it’s material.
Are changes in accounting principles applied retrospectively (historically) or prospectively (going forward)? When does a change in accounting principle occur?
The changes in accounting PRINCIPLEs (non-GAAP -> GAAP, i.e. error Or GAAP -> GAAP) have retrospective application. Rule of Preferability says the principle may be changed only if it’s required by GAAP (a newly issued codification update) or if the alternative principle is preferable and more fairly presents the information.
How are changes in accounting principles applied to the financial statements?
In general it should be recognized by adjusting Retained Earnings for the EARLIEST period presented for the CUMULATIVE effect (along with prior period/comparative financial statements).
What are exceptions to the retrospective application of accounting principle change?
(1) If it’s impractical to Estimate.
(2) If the change is in methods of depreciation, amortization, or depletion which are considered both a change in accounting principle and a change in estimate.
What is the cumulative effect to be reported on the Retained Earnings statement?
The difference between RE at the beginning of the earliest period and RE that would have been reported after recognizing all effects and the income tax effect.
Should an accounting change be made for a transaction or event in the past that has been terminated or is non-recurring?
No.
Should an accounting change be disclosed if it’s not considered material in the current year of change but is reasonably expected to become material in later periods?
Yes, it should be fully disclosed in the year of change, including the cause and the nature plus changes in income from Continuing Operations, Net Income, and retained earnings.
Are error corrections accounting changes?
No but you should make the changes retrospectively if comparative FS are presented and in the opening balance of the FS if comparative FS are not presented.
