FAR - Specific Transactions, Events, & Disclosures - Accounting Changes & Error Corrections Flashcards
Types of changes
1) estimate changes - change useful life of an asset
2) Acct principles - LIFO to FIFO
3) Error corrections - discovery of item affecting prior yr income
Accounting Approaches for Accounting Changes/Errors
1) Prospective - apply change to current/future periods only (estimate changes/acct principle)
2) Retrospective - apply change to prior yrs (acct principles + change in reporting entity) correct comparative financials & R.E. Balance. J/E recorded, improves consistency
3) restatement - prior period adjustment (acct error correction)
2 mains aspects of retrospective application
1) J/E adjusts BOY R.E.
2) Prior yr financials presented comparatively with current yr financials to reflect new principle/error correction
Adjustment to R.E. is called
1) Cumulative Effect - change in acct principle
2) Prior Period Adj - error correction
Items appear as “acct principle changes” BUT are not
1) change in erroneous principle to correct principle - error correction
2) initial adoption of new principle to new events/past immaterial transactions
3) change indistinguishable from estimate change
date of application used by firms for accounting changes?
first day of the yr of change
Change in reporting entity - retrospective application
- first time consolidation
- changes in set of entities in consolidated group
- change in acct for investee from cost to FV to equity method
accounting change is often impracticable to compute a cumulative effect?
Change to LIFO
amount recorded for the change in deferred taxes for a change in accounting principle?
pretax cumulative effect multiplied by the tax rate
account is debited when an accounting principle change causes income in prior years to decrease?
account records the effect of principle change on prior years?
RE
pretax amount of the cumulative effect of a change in inventory method?
ifference in inventory balance for the new and old methods, at the beginning of the year of change
amount of the cumulative effect reported in the earliest reported year of the retained earnings statement?
effect of the change on years before the earliest year reported
true/false
Accounting changes are measured as of the beginning of the year of change
true
true/false
Cumulative effects are reported net of tax as an adjustment to the beginning balance of retained earnings in the year of the change.
true
Acct Est. Change
new info avail. affecting acct measurement
change in useful life of plan asset, est. warranty costs, uncollectible accts
Prospective Application
new info doesn’t apply to past
no cumulative effect recorded/no prior period adj
new est applied to current/future periods
disclosures are required for estimate changes?
Effect of the change on income from continuing operations and net income for the year of change
rationale for applying the prospective method to estimate changes?
new information triggering the change is not applicable to prior years
true/false
When it is impossible to determine whether the change is an estimate or a change in accounting principle, the change should be considered a change in estimate and accounted for prospectively
true
Restatement
used for error correction, distinguished from a voluntary principle change -> prior period adj
error = info existed at time financials prepared, but that info wasn’t used = misstatement of recognition OR estimate changes based on negligence/bad faith
when should prior period adj be recorded/reported?
1) if BOY RE is incorrect, then record PPA in J/E
2) if earliest RE balance is incorrect, PPA must be reported in RE
GAAP vs IFRS - Error restatement differences
GAAP
1) Acct principles
2) Indirect effects of A/P change are retrospective
3) Impracticability exception for AP change only
IFRS
1) Acct policies
2) No specific guidance on indirect effects
3) Impracticability exception for errors and AP change
“counterbalancing error.”
error whose effect on retained earnings automatically corrects itself after a number of years
How many years should be considered when computing the adjustment to the earliest year in the retained earnings statement?
All years before the earliest year in the statement affected by the error
true/false
When there is an error in prior period financial statements and those statements are presented with the current year, the error should be corrected in years 1 and 2 so they are comparative to year 3. The effect of the error should be reflected in the year 3 beginning balances of the appropriate asset and liabilities.
true
