1、7/25/2022Intermediate Accounting,10th Edition,Chapter 23(Kieso et al.)1 Chapter 23:Accounting Changes and Error Analysis Intermediate Accounting,10th EditionKieso,Weygandt,and WarfieldPrepared byKrishnan Ranganathan,Angelo State University,San Angelo,Texas7/25/2022Intermediate Accounting,10th Editio
2、n,Chapter 23(Kieso et al.)2Types of Accounting ChangesuAPB Opinion No 20 limits the flexibility in accounting treatments for similar situationsuThe types of accounting changes are:Changes in Accounting PrincipleChanges in Accounting EstimatesChanges in Reporting EntityErrors in Financial Statements7
3、/25/2022Intermediate Accounting,10th Edition,Chapter 23(Kieso et al.)3Changes in Accounting PrincipleuA changes in principle involves a change from one generally accepted principle to anotheruA change in principle does not result from the adoption of a new accounting principleuA change to a generall
4、y accepted principle(from an incorrect principle)is a correction of an error7/25/2022Intermediate Accounting,10th Edition,Chapter 23(Kieso et al.)4Changes in Accounting PrincipleuChanges in accounting principle are classified into:Cumulative-effect type of accounting change Retroactive-effect type o
5、f accounting change Change to the LIFO method of inventory 7/25/2022Intermediate Accounting,10th Edition,Chapter 23(Kieso et al.)5Cumulative-Effect Type of Accounting ChangeuThe catch up method should be used to account for these changesuFinancial statements for prior periods are not restateduFor al
6、l prior periods,the following items are shown on an as-if basis(as if the new principle had been applied):income before extraordinary items net income7/25/2022Intermediate Accounting,10th Edition,Chapter 23(Kieso et al.)6Cumulative-Effect Type of Accounting ChangeuThe adjusting entry is effective as
7、 of the beginning of the yearuPro forma information is shown only as supplementary informationuSuch information may be reported:in the income statement in a separate schedule in the notes to the financial statements7/25/2022Intermediate Accounting,10th Edition,Chapter 23(Kieso et al.)7Cumulative Eff
8、ect:Example XYZ company changes from the sum-of-the-years digits method to the straight line method of depreciation.The depreciation amounts are:Year SYD ST.LINE2000$15,000$8,0002019$14,000$8,000 The companys tax rate is 40%Record the change as of the beginning of 20197/25/2022Intermediate Accountin
9、g,10th Edition,Chapter 23(Kieso et al.)8Cumulative Effect:Example YearSYDSL Diff Tax Effect 2000$15,000$8,000$7,000$2,800 2019$14,000$8,000$6,000$2,400 -$13,000$5,200 -Tax liability increases by$5,200 Tax effect is the difference times the tax rate7/25/2022Intermediate Accounting,10th Edition,Chapte
10、r 23(Kieso et al.)9Cumulative Effect:Example Journal Entry:Accumulated Depreciation$13,000 Deferred Tax Asset$5,200 Cumulative Effect of Change in Principle$7,800The debit to accumulated depreciation restores the account balance on a straight line basisThe credit to Cumulative Effect is the income e
11、ffect(net of tax effect)7/25/2022Intermediate Accounting,10th Edition,Chapter 23(Kieso et al.)10Income Statement Presentationl The following information must be presented in whole dollar amounts and as per share amounts:Income before Extraordinary Itemand Cumulative Effect of Change:$XXXExtraordinar
12、y Item(Net of Tax):$XXCumulative Effect on Prior Yearsof Retroactive Application:$XXNet Income:$XX7/25/2022Intermediate Accounting,10th Edition,Chapter 23(Kieso et al.)11Retroactive-Effect Type of Accounting ChangeuThe cumulative effect of the new method at the beginning of the period is determined
13、uPrior period statements are recast based on the new principleuAny cumulative effect of prior periods is adjusted to the beginning retained earnings balance7/25/2022Intermediate Accounting,10th Edition,Chapter 23(Kieso et al.)12Retroactive-Effect Type of Accounting ChangeuThe five situations requiri
14、ng restatement of all prior period statements are:A change from the LIFO inventory method to another method A change in the method of accounting for long term construction type contracts A change from or to the full cost method in extractive industries Issue of financials to obtain first time financ
15、ing A pronouncement recommending retroactive adjustment7/25/2022Intermediate Accounting,10th Edition,Chapter 23(Kieso et al.)13Income Statement Presentation Retained Earnings account is shown as follows:Balance at beginning of year:$XXX Adjustment for the CumulativeEffect on Prior Years:$XX Balance
16、at beginning(as adjusted):$XX Net Income:$XXX Balance at end of year:$XXX7/25/2022Intermediate Accounting,10th Edition,Chapter 23(Kieso et al.)14Reporting a Change in EntityuChanges in estimates are accounted for on a prospective basis uSuch changes are viewed as normal,recurrent adjustmentsuWhen un
17、certainty exists as to whether a change in principle or a change in estimate has occurred:the change should be treated as a change in estimateuEstimates that are later determined to be incorrect should be corrected as changes in estimatesu Examples of changes in estimates involve:inventory obsolesce
18、nce;salvage values of assets7/25/2022Intermediate Accounting,10th Edition,Chapter 23(Kieso et al.)15Reporting a Change in EntityuAn accounting change may result in a different reporting entityuFinancial statements are then restated for all prior periods presenteduExamples of a change in reporting en
19、tity are:consolidated statements in lieu of individual financials changes in subsidiaries in a consolidated group accounting for pooling of interests a change in method for accounting for subsidiaries and investments7/25/2022Intermediate Accounting,10th Edition,Chapter 23(Kieso et al.)16Reporting th
20、e Correction of an ErroruCorrections are treated as prior period adjustments to retained earnings for the earliest period being reporteduExamples of accounting errors are:A change from an accounting principle that is not generally accepted to one that is accepted Mathematical errors Changes in estim
21、ates that were not prepared in good faith A failure to properly accrue or defer expenses or revenues A misapplication or omission of relevant facts 7/25/2022Intermediate Accounting,10th Edition,Chapter 23(Kieso et al.)17When is a Change in Accounting Principle Appropriate?uChanges are appropriate wh
22、en the new principle is preferable to the existing accounting principleuThe new principle should result in improved financial reportinguA change is considered preferable if a FASB standard:creates a new accounting principle,or expresses preference for a new principle,or rejects a specific accounting
23、 principle7/25/2022Intermediate Accounting,10th Edition,Chapter 23(Kieso et al.)18Motivations for ChangeuManagers and others may have a self interest in adoptingprinciples or standards:Companies may want to be less politically visible to avoid regulation;A companys capital structure may affect its s
24、election of accounting standards;Managers may select accounting standards to maximize their performance-related bonuses;Companies have an incentive to manage or smooth earnings 7/25/2022Intermediate Accounting,10th Edition,Chapter 23(Kieso et al.)19Error Analysis in GeneraluFirms do not correct erro
25、rs that are insignificantuThree questions must be answered in this regard:What type of error is involved?What correcting entries are needed?How are financial statements to be restated?uError corrections are reported as prior period adjustments to the beginning retained earnings balance in the curren
26、t year 7/25/2022Intermediate Accounting,10th Edition,Chapter 23(Kieso et al.)20Types of ErrorsuErrors can occur in the following financial statements:Balance sheet Income statement Balance sheet and the income statementuErrors can be:Counterbalancing(or self-correcting over twoaccounting periods)Non
27、-counterbalancing(more than two periods needed)7/25/2022Intermediate Accounting,10th Edition,Chapter 23(Kieso et al.)21Counterbalancing ErrorsuQuestions to be considered are:Are the books closed?Are comparative statements presented?uAn entry is needed to adjust the beginning retained earnings balanc
28、e if:the books are closed,and the error is not counterbalanced,or the books are not closed,and the company is in the second year,and the error is already counterbalanced7/25/2022Intermediate Accounting,10th Edition,Chapter 23(Kieso et al.)22Changing from and to the Equity Methodw For a change to or
29、from the Equity method,restatement of all prior period statements is requiredw A change from the equity method to the fair value method must be made when:the investors level of influence falls below the requiredpercentage of ownershipw A change from the fair value method to the equity method must be
30、 made when:the investors level of influence rises above the required percentage of ownership7/25/2022Intermediate Accounting,10th Edition,Chapter 23(Kieso et al.)23Changing from the Equity MethodThe cost basis for accounting purposes is the carrying amount of the investment at the date of the change
31、 The earnings and losses(previously recognized)remain part of the carrying value Any amortization previously needed under the equity method ceasesTo the extent that dividends received by investor exceed investors share of investees earnings in subsequent periods:such excesses are reductions of the i
32、nvestment carryingamount 7/25/2022Intermediate Accounting,10th Edition,Chapter 23(Kieso et al.)24Changing to the Equity MethodThe following amounts are retroactively adjusted(as if the investor had held the investment during all prior periods)a the carrying value of the investmentb the results of cu
33、rrent and prior period operationsc the retained earnings of the investor Any balances in unrealized holding gains and losses are eliminatedThe available-for-sale classification is also removed.7/25/2022Intermediate Accounting,10th Edition,Chapter 23(Kieso et al.)25Copyright 2019 John Wiley&Sons,Inc.
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