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FA3 Lesson 8. Accounting changes

FA3 Lesson 8. Accounting changes. Types of accounting changes Dealing with accounting changes Framework for analyzing accounting changes Correcting accounting errors. 1. Types of accounting changes. Changes in accounting policy (e. g., FIFO to average cost)

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FA3 Lesson 8. Accounting changes

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  1. FA3Lesson 8. Accounting changes • Types of accounting changes • Dealing with accounting changes • Framework for analyzing accounting changes • Correcting accounting errors

  2. 1. Types of accounting changes • Changes in accounting policy (e. g., FIFO to average cost) • Changes in accounting estimate (e. g., bad debt expense, useful life of long-lived assets) • Change in reporting entity (e. g., business segment is discontinued) • Reporting the correction of an error

  3. Policy change vs. new accounting policy • A change in accounting policy is said to occur if the change is motivated by different reporting circumstances, and not by any material change in economic circumstances • A new accounting policy is applied if transactions/events are materially different from those reported previously, or if a new standard is adopted by AcSB

  4. Policy change vs. change in estimate • A change in accounting policy is said to occur if the change is motivated by different reporting circumstances, and not by any material change in economic circumstances • A change in estimate is deemed to occur if new information comes to light that was not known previously • If unsure, assume a change in estimate EXAMPLE: A22-1

  5. 2. Dealing with accounting changes • Retroactive-with-restatement • Retroactive-without-restatement • Prospective

  6. 2.1. Retroactive-with-restatement This method should be used to account for changes in accounting policy, changes in accounting entity (discontinued operations) and correction of errors. • New policy/correction should be applied retroactively. • Prior period financial statements included for comparison should be restated to reflect new policy/correction. • Change and its effect on key financial statement variables should be disclosed.

  7. 2.2. Retroactive-without-restatement This method should be used to account for changes in accounting policy if cumulative effect can be determined, but effect on individual periods cannot. • Cumulative effect of policy change shown in adjustment to opening retained earnings. • Prior period financial statements included for comparison are not restated. • Change and its effect on key financial statement variables should be disclosed.

  8. 2.3. Prospective This method should be used to account for changes in accounting policy if even cumulative effect cannot be determined, and for changes in accounting estimates. • New policy/estimates are used in current and future periods only. • Prior period financial statements included for comparison are not restated. • Note disclosure of the nature of the change.

  9. Example: Accounting change I

  10. Example: Accounting change II

  11. Example: Accounting change III

  12. 3. Framework for analyzing accounting changes (retroactive with restatement)

  13. EXAMPLES A22-17 A22-23

  14. 4. Correcting accounting errors Three questions must be addressed: • What kind of error is involved? (income statement, balance sheet, both) • Is a journal entry necessary to correct the error? • Do any of the financial statements to be published in this year’s annual report need to be restated?

  15. 4. Correcting accounting errors • What kind of error is involved? (income statement, balance sheet, both) • Income statement OR balance sheet (not both) – usually just a presentation error; restate statements properly • Both I/S and B/S – usually a revenue/expense and associated asset/liability that are misstated; restate statements and perhaps a correcting journal entry is necessary

  16. 4. Correcting accounting errors • Is a journal entry necessary to correct the error? • Books are closed • Error counterbalanced: no entry required • Error not counterbalanced: must adjust RE and other affected B/S account • Books are not closed • Error counterbalanced: in year after error, must adjust current period I/S item and beginning RE • Error not counterbalanced: must adjust beginning RE, I/S item and affected B/S account

  17. 4. Correcting accounting errors • Do any of the financial statements to be published in this year’s annual report need to be restated? • Restatement is always necessary, whether or not a journal entry is required, if any of the past financial statements affected by the error are presented in current or future financial statements for comparison purposes

  18. Error correction: Gabby Ltd.

  19. Error correction: Gabby Ltd.

  20. EXAMPLE A22-27

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