Accounting Changes

Question 1

What are the four types of accounting changes and error correction?

Answer 1

Accounting Principle Changes
Accounting Estimate Changes
Changes in REporting Entity
Corrections of Errors

Question 2

What does retrospective mean?

Answer 2

application of a principle to prior periods as if that principle had always been used. The procedure records the effect of the change on prior years as an adjustment to the beginning balance in retained earnings for the year of change rather than in income

Question 3

What does prospective mean?

Answer 3

apply the change to current and future periods only; prior year statements are unaffected.

Question 4

What is a restatement?

Answer 4

the term reserved specifically for error changes. Restatement requires correcting the comparative financial information presented along with correcting the opening retained earnings balance

Question 5

What accounting approach is used for an accounting principle change?

Answer 5

Retrospective

Question 6

What accounting approach is used for an accounting principle change when you cannot determine prior year effects?

Answer 6

Prospective

Question 7

What accounting approach is used for an accounting estimate change?

Answer 7

Prospective

Question 8

What accounting approach is used for a change in reporting entity?

Answer 8

Retrospective

Question 9

What accounting approach is used for a correction of accounting error?

Answer 9

restatement

Question 10

What is a change in accounting principle

Answer 10

A change from one generally accepted accounting principle to another when there are at least two acceptable principles, or when the current principle used is no longer generally accepted. A change in the method of applying a principle is also considered a change in accounting principle

Question 11

What steps are taking when using a retrospective application?

Answer 11

1. The cumulative effect of the change on periods before those presented is reflected in the carrying amounts of affected assets and liabilities as of the beginning of the earliest period presented, along with an offsetting adjustment to the opening balance of retained earnings for that period.
2. The financial statements for prior periods presented comparatively are recast to reflect the period-specific effects of applying the new principle. Each account affected by the change is adjusted as if the new method had been used in those periods.
3. Through a journal entry, the beginning balance of retained earnings in the year of the change is adjusted to reflect the use of the new principle through that date. The amount of this cumulative effect is generally not the same amount as that for step 1 above because different periods are covered in each.

Question 12

Does a retrospective approach affect retained earnings or the income statement?

Answer 12

It is closed to retained earnings and will not show in the income statement

Question 13

When is the retrospective approach not applied?

Answer 13

After making a reasonable effort to apply the principle to prior periods, the entity is unable to do so;
Assumptions about management’s intent in prior periods are required and such assumptions cannot be independently substantiated;
Retrospective application requires estimates of amounts based on information that was unavailable in the prior periods or on circumstances that did not exist in the prior periods.

Question 14

What is a change in reporting entity?

Answer 14

A change in reporting entity results in financial statements of a different reporting entity. A change in reporting entity is limited mainly to:

1. Presenting consolidated or combined financial statements in place of financial statements of individual entities;
2. Changing the set of subsidiaries that make up a consolidated group;
3. Changing the entities included in combined financial statements;
4. Change from cost or fair value method for accounting for an investment to the equity method for investment.

Question 15

How do you treat a change from cost to FV accounting for an investment to equity method?

Answer 15

Retrospective

Question 16

How do you treat a change from equity method to cost or FV method?

Answer 16

Prospective

Question 17

What are some examples of a change in estimate?

Answer 17

Bad debts, warranties, depreciation, pension accounting, lower of cost or market, asset impairment, and many others are examples.

Question 18

What does a prospective application mean?

Answer 18

Changes in accounting estimate are accounted for in the current and future periods (if affected). Prior period statements are not affected in anyway nor are there disclosures with respect to prior statements.

There is no cumulative effect account

Question 19

How do you treat changes in depreciation estimates?

Answer 19

the book value at the beginning of the current period is used as the basis for expense recognition over the asset’s remaining useful life, along with new estimates of salvage value and useful life if necessary. The new method is applied as of the beginning of the period of change.

Question 20

What is an error ina prior period financial statement?

Answer 20

caused when information existed at the time the statements were prepared enabling correct reporting, but a misstatement was made causing erroneous recognition, measurement, or disclosure

Question 21

How do you correct an error in financial statements?

Answer 21

restatement

Question 22

Waht is restatement?

Answer 22

The effect of the error correction on periods before those presented is reflected in the affected real accounts as of the beginning of the earliest period presented, including an adjustment to the opening balance of retained earnings (prior period adjustment) for that period, for the effect of the change on all periods before that date;
The financial statements for prior periods presented comparatively are recast to reflect the effect of the error correction;
Through a journal entry, the beginning balance of retained earnings in the year of the correction is adjusted to reflect the correct accounting through that date (prior period adjustment).

Question 23

What is a counter balancing error?

Answer 23

“self-correct” after a certain period of time if they are not corrected. These errors require no entry to correct retained earnings or other current account balance after the error counterbalances. However, prior year financial statements remain in erro