Section 18 - Accounting Changes & Error Corrections

Question 1

What are the three types of accounting changes?

Answer 1

1) Change in accounting principle
2) Change in accounting estimate
3) Change in reporting entity

Question 2

What is “Change in Accounting Principle”?

Answer 2

• Change in method from GAAP to GAAP
• RETROSPECTIVE (today and yesterday)

ie. change in valuation method for inventory (FIFO to LIFO)

Question 3

What is the J/E for “Change in Accounting Principle”?

Answer 3

Inventory X1 weighted average at $700
Inventory X2 FIFO at $900
Tax rate 40%

Inventory $200
Current income tax liability $80 ($200 x 40%)
Retained Earnings $120 ($200 x 60%)

Question 4

What is “Change in Accounting Estimate”?

Answer 4

• Change in ESTIMATE result from availability of new information
• PROSPECTIVE (today and tomorrow)

ie. bad debts, DEPRECIATION METHOD, sales discounts and sales, returns and allowances, service lives and salvage values of depreciable or amortizable assets, and warranty obligation

Question 5

What is “Change in Reporting Entity”?

Answer 5

• Restating consolidated financial statements, changing entities in combined financial statements, change between the use of equity method of accounting and consolidation of a subsidiary
• RETROSPECTIVE (today and yesterday)

Question 6

What is “Correction of an Error/ Prior Period Adjustment”?

Answer 6

Not consider an accounting change, however is accounted for in a manner similar to a change in accounting principles.

• correction is made in opening balance of Retained Earnings as a Prior Period Adjustment
  ie.
• change from NON-GAAP to GAAP (cash to accrual, direct write off method for bad debt)
• mathematical error
• mistakes of applying GAAP (failure to record depreciation expense)
• inventory errors

Question 7

After how many years does inventory error correct themselves?

Answer 7

2 years

Question 8

What is the Statement of Retained Earnings formula?

Answer 8

Beginning RE
\+- Prior period adjustment (net of tax)
=Adjusted beginning RE
\+Net Income
-Dividends
=Ending Retained Earnings

Question 9

What is the first footnote always included in the F/S disclosure?

Answer 9

Summary of significant accounting policies

Question 10

Under IFRS, when is the change in accounting policies permitted?

Answer 10

When the result is RELEVANT and RELIABLE

Question 11

Under IFRS, what is the term for “principle”?

Answer 11

Policy

Question 12

Under IFRS, does the “Change in Reporting Entity”? exist?

Answer 12

No

Question 13

Under IFRS, when an entity makes a retrospective restatement, how many of the financial statements are required?

Answer 13

Balance Sheet - 3

Other financial statements - 2