INTERMEDIATE FINANCIAL ACCOUNTING CHAPTER 20 Accounting changes Accounting

INTERMEDIATE FINANCIAL ACCOUNTING CHAPTER 20 Accounting changes & Accounting Errors 1

Learning Objectives Recognize: ü a change in accounting estimate ü a change in accounting principle, and ü An error that needs correction how above reflected in the financial statements 1. The presentation: & F/S disclosures

ACCOUNTING CHANGES & ERRORS CORRECTIONS Ø SFAS No. 154 : Accounting Changes and Error Correction ü IFRS 8: … December 18, 2021 3

Accounting Changes

How to reflect changes in Accounting? Methods to Account for Changes: 1. Adjustments of the prior periods’ statements ü Retrospective method 2. Affect only the current and future years. Prospective method December 18, 2021 5

Retrospective method a change in accounting principle: to reflect the new method as though it had been applied all along. � ADJUSTMENT: � A corresponding adjustment must be recorded in the opening balance (of the earliest period restated) of retained earnings

Prospective method � use the new information or new method in preparing current and future financial statements � no restatement of previously issued financial statements. � Prior years’ statements are not revised.

Accounting Changes/Errors � � � Change in estimate: prospective Correction of an error: retrospective Change in principle: retrospective

CHANGE IN ESTIMATE - Uncollectible receivables - Inventory obsolescence - Useful lives - Salvage value - Warranty costs - Recoverable reserves - Change in depreciation method December 18, 2021 9

Change in Accounting Estimate/Principle � � Can a change in accounting principle effect change in estimate? One type of change in accounting estimate affected by changes in accounting principle (estimates is inseparable from the effect of a related change in accounting principle) Change in Depreciation Method December 18, 2021 10

ERROR CORRECTIONS Errors discovered currently in the course of normal accounting procedures. • • • Math errors Posting to the wrong account Misstating an account Omitting an account from the trial balance ……. Accounts effected December 18, 2021 11

Error Corrections � � If detected in current period, before books are closed: � Correct the account through normal accounting adjustment. If detected in subsequent period, after books are closed: �make adjustment directly to Retained Earnings �Disclosure note. December 18, 2021 12

DISCLOSURE NOTES After the change is made, a disclosure note is needed: ü ü ü Provide JUSTIFICATION for the change Identify that COMPARATIVE INFORMATION has been revised Report any EPS affected for the current and Prior periods. December 18, 2021 13

CHANGE IN ACCOUNTING METHODS � PART II: � Change from one GAAP to another December 18, 2021 14