Accounting Changes

Question 1

How are changes in accounting principle applied?

Answer 1

• Applied Retrospectively
• Adjust Prior Periods
• Adjust Retained Earnings
  Ex: Completed Contract to % Completion
  Ex: LIFO to FIFO

Question 2

Would a change from Completed Contract to Percentage of Completion be a change in accounting principle- or a change of estimate?

How would it be applied?

Answer 2

• A change of principle.
• Apply retrospectively.

Question 3

Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate?

How would this change be applied?

Answer 3

• A change in accounting principle.
• Applied retrospectively.

Question 4

How is a change in accounting estimate applied?

Answer 4

• A change in accounting estimate is applied prospectively (change in current period and going forward).
• No backwards adjustment is made.

Question 5

Would a change from straight line depreciation to double declining balance be a change in accounting principle or a change in estimate?

How would this change be applied?

Answer 5

-Change in depreciation method would be a change in accounting estimate.

-Apply prospectively.

Question 6

How is a correction of an accounting error made?

Answer 6

• Beginning balances of Asset & Liabilities get adjusted

-must include in footnotes.

- If comparative financial statements, earliest periods (A&L) get adjusted

Question 7

What are the requirements for a prior period adjustment?

Answer 7

-Material effect

-Identifiable in Prior Period

-Couldn’t estimate in Prior Periods

Question 8

How is a change from a non-GAAP accounting method to a GAAP method recorded?

Answer 8

• Treated as a correction of an accounting error.

Cumulative effect of error:
- Adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements

-Included in the footnotes

Question 9

How does an inventory error effect the financial statements?

Answer 9

• Effect on Ending Inventory : Effect on Net Income

-If one is overstated- both overstated.
- If one is understated- both understated.

-Misstating inventory corrects itself after TWO periods.

Question 10

How is a change in entity recorded?

Answer 10

-Apply retrospectively.

-All prior periods presented for comparative purposes must reflect the change

-Footnote disclosures required

-Change to Consolidated Statements