F2 - M2 - Accounting Changes and Error Corrections Flashcards
When you have a change in accounting estimate, do you have to change prior years?
No, when this occurs, you don’t do any prior period adjustments and have a prospective approach. That basically means you adjust in the current year, and the future years.
Do you have to disclose a change in accounting estimate in the footnotes?
If they are material and will impact future periods then yes. If not, you can disclose but do not need to.
What are the changes in accounting principle that are treated as a change in estimate?
When you change an accounting principle, that means a retrospective approach where you have to change prior years. There are two changes in principle that are treated as an estimate, and we do not change prior years.
Going to LIFO - When we change our inventory method to LIFO.
Depreciation method
When you change the depreciation useful life from 10 years to 5 years, would that impact my quality of earnings? More conservative or aggressive?
Yes, since you decreased the useful life, that means that you are taking more depreciation expense each year which is lowering your earnings. For that reason, you are more conservative.
When you adjust retained earnings for the retrospective approach, do you make that adjustment net of tax?
Yes, because retained earnings is net of tax, we want any prior period adjustment to also be net of tax.
What is a change of accounting principle?
This is when you make a change from one acceptable method of accounting GAAP to GAAP. If you go from non-GAAP to GAAP, that is a fix of an error, and not a change in accounting principle.
What are some examples of when a change in accounting principle is justified and when it is not?
Allowed:
When it is required to meet certain GAAP requirements.
If the change will more accurately represent the financial statements.
Not allowed:
Income smoothing - Making the income go up by finding ways to decrease expenses.
For noncomparative financial statements, how would you calculate change in accounting principle?
Use the new method in the current fiscal year
Calculate what earnings would have been if the new method had always been used.
Adjust beginning retained earnings net of tax.
For comparative financial statements, how would you calculate change in accounting principle?
Use the new method for all the years presented. For example, if you have 2022, 2023, and 2024, use the method for all those years.
Change the beginning retained earnings in the first year shown, ex: 2022.
Make the adjustment to beginning retained earnings net of tax.
What are changes in accounting entity, are these retrospective?
If comparative, would you have to change the prior years shown on the financials?
This is when the entity changes either due to a merger, acquisition, divestiture, etc.
Yes, retro, and yes you would. You would have to adjust the prior years, as if the company had always been there.
Need full disclosure of this
What are some examples of accounting errors? Do these require prior period adjustments?
If an error was made in prior years, you would have to adjust prior year financial statements. These include:
Mathematical mistakes, mistakes in application of US GAAP, oversight, or going from not GAAP to GAAP.
If comparative financial statements are presented, how would you adjust an accounting error that requires a prior period adjustment?
What about for non comparative?
If the year is presented in the comparative financial statements - Just fix the error in that year that is presented and that is it. For example, if the years are 2024, 2023, and 2022, and the error occurred in 2023, just fix it in 2023.
Now if the error happened before the years are presented, lets say 2019, then you need to adjust retained earnings for the earliest year presented.
Non comparative - Adjust for the year that is shown.
