F2 - M2 - Accounting Changes and Error Corrections Flashcards
What accounting period(s) does a change in estimate affect?
Changes in estimates affect only the current and subsequent periods (not prior periods and not retained earnings).
What accounting period(s) does an accounting change of principle affect?
An accounting change of principle is shown net of tax on the retained earnings statement.
What accounting period(s) does an error affect?
When comparative financial statements are shown for prior period adjustments of subsequently discovered corrections of errors, changes in entity or changes in accounting principle, restating prior years financial statements is required.
The carrying amounts of the assets and liabilities for prior years will be corrected in each year’s financial statements and restated. The cumulative effect of the error will have been corrected and reflected in the carrying amounts of the affected assets and liabilities.
Per U.S. GAAP, what are the rules regarding accounting changes that result in financial statements that are, in effect, the statements of a different reporting entity?
Financial statements of all prior periods presented should be restated when there is a “change in entity” such as resulting from:
- Changing companies in consolidated financial statements.
- Consolidated financial statements versus previous individual financial statements.
Cumulative-effect adjustments are reported in the retained earnings statement in the year of change.
What is the rule for when there is a change from the cost to the equity method of accounting or vice versa?
Per GAAP, changes involving the cost and equity methods of accounting for investments are not considered to be changes in accounting principle.
A change from the cost method to the equity method requires restatement; however, a change from the equity method to the cost method does not require restatement and is accounted for prospectively.
How should the effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate be reported?
When the effect of a change in accounting principle is inseparable from the effect of a change in accounting estimate, the reporting treatment for the overall effect is as a change in estimate. Thus, the effect is reported prospectively as a component of income from continuing operations.
What should be done when it is impossible to determine whether a change in accounting estimate or a change in accounting principle has occurred?
If a change in accounting estimate cannot be distinguished from a change in accounting principle, the change is considered a change in accounting estimate treated as a change in accounting estimate and is accounted for prospectively.
If a company changes its inventory costing method from LIFO to FIFO, how should company present this change?
If comparative financial statements are presented, the cumulative effect of a change in accounting principle is presented net of tax as an adjustment to beginning retained earnings in the statement of stockholders’ equity.
How should a change from the cash basis of accounting to the accrual basis of accounting be treated?
The cash basis for financial reporting is not a generally accepted accounting basis of accounting (GAAP); therefore, it is an error. Correction of an error from a prior period is a reported as prior period adjustment to retained earnings.
Under U.S. GAAP, if a company is NOT presenting comparative financial statements, where should the correction of an error in the financial statements of a prior period be reported?
The correction of an error in the financial statements of a prior period should be reported, net of tax, in the current statement of retained earnings as an adjustment of the opening balance.
How should errors with respect to accumulated depreciation be treated?
Accumulated depreciation (and original depreciation expense) are booked at a gross level (prior to accounting for any tax impact).
