FAR - Specific Transactions, Events, & Disclosures - Accounting Changes & Error Corrections

Question 1

Types of changes

Answer 1

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

Question 2

Accounting Approaches for Accounting Changes/Errors

Answer 2

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)

Question 3

2 mains aspects of retrospective application

Answer 3

1) J/E adjusts BOY R.E.

2) Prior yr financials presented comparatively with current yr financials to reflect new principle/error correction

Question 4

Adjustment to R.E. is called

Answer 4

1) Cumulative Effect - change in acct principle

2) Prior Period Adj - error correction

Question 5

Items appear as “acct principle changes” BUT are not

Answer 5

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

Question 6

date of application used by firms for accounting changes?

Answer 6

first day of the yr of change

Question 7

Change in reporting entity - retrospective application

Answer 7

• first time consolidation
• changes in set of entities in consolidated group
• change in acct for investee from cost to FV to equity method

Question 8

accounting change is often impracticable to compute a cumulative effect?

Answer 8

Change to LIFO

Question 9

amount recorded for the change in deferred taxes for a change in accounting principle?

Answer 9

pretax cumulative effect multiplied by the tax rate

Question 10

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?

Answer 10

RE

Question 11

pretax amount of the cumulative effect of a change in inventory method?

Answer 11

ifference in inventory balance for the new and old methods, at the beginning of the year of change

Question 12

amount of the cumulative effect reported in the earliest reported year of the retained earnings statement?

Answer 12

effect of the change on years before the earliest year reported

Question 13

true/false

Accounting changes are measured as of the beginning of the year of change

Answer 13

true

Question 14

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.

Answer 14

true

Question 15

Acct Est. Change

Answer 15

new info avail. affecting acct measurement

change in useful life of plan asset, est. warranty costs, uncollectible accts

Question 16

Prospective Application

Answer 16

new info doesn’t apply to past

no cumulative effect recorded/no prior period adj

new est applied to current/future periods

Question 17

disclosures are required for estimate changes?

Answer 17

Effect of the change on income from continuing operations and net income for the year of change

Question 18

rationale for applying the prospective method to estimate changes?

Answer 18

new information triggering the change is not applicable to prior years

Question 19

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

Answer 19

true

Question 20

Restatement

Answer 20

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

Question 21

when should prior period adj be recorded/reported?

Answer 21

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

Question 22

GAAP vs IFRS - Error restatement differences

Answer 22

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

Question 23

“counterbalancing error.”

Answer 23

error whose effect on retained earnings automatically corrects itself after a number of years

Question 24

How many years should be considered when computing the adjustment to the earliest year in the retained earnings statement?

Answer 24

All years before the earliest year in the statement affected by the error

Question 25

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.

Answer 25

true