1、Chapter 14-1Accounting Changes and Error AnalysisChapter 14Intermediate Accounting12th EditionKieso,Weygandt,and Warfield Prepared by Coby Harmon,University of California,Santa BarbaraChapter 14-21.Identify the types of accounting changes.2.Describe the accounting for changes in accounting principle
2、s.3.Understand how to account for retrospective accounting changes.4.Understand how to account for impracticable changes.5.Describe the accounting for changes in estimates.6.Identify changes in a reporting entity.7.Describe the accounting for correction of errors.8.Identify economic motives for chan
3、ging accounting methods.9.Analyze the effect of errors.Learning ObjectivesChapter 14-3Why are accounting changes made?New FASB pronouncementsChanging economic conditionsChanging internal circumstancesAccounting Changes Reporting Issues&ApproachesChapter 14-4 Essential issues in reporting accounting
4、changes:Whether an accounting change is allowed.Whether to restate prior years?financial statements.Whether to recognize the effect of the change in the current years net income or in the beginning retained earnings balance.Accounting Changes Reporting Issues&ApproachesChapter 14-5Type of Accounting
5、 ChangeDefinitionChange in Accounting PrincipleReplaces one GAAP with anotherChange in Accounting EstimateSubstitutes one good-faith estimate for another,according to new information or conditionsChange in Reporting EntityResults in financial statements of a different reporting entityAccounting Chan
6、gesChapter 14-6Type of Accounting ChangeDefinitionChange in Accounting PrincipleReplaces one GAAP with anotherChange in Accounting EstimateSubstitutes one good-faith estimate for another,according to new information or conditionsChange in Reporting EntityResults in financial statements of a differen
7、t reporting entityError corrections.Are not classified as accounting changes.Do affect the income of prior periods and require special treatment.Accounting ChangesChapter 14-7RelevanceConsistencyPublic ConfidenceObjectives of Reporting Accounting ChangesChapter 14-8Accounting Principle ChangesChapte
8、r 14-9The following are not accounting principle changes:lInitial adoption of an accounting principlelAdopting an accounting principle for a new group of assets or liabilities lChange from inappropriate accounting principle to GAAPlPlanned change to straight-line depreciationlChange in accounting pr
9、inciple that cannot be distinguished from a change in accounting estimateAccounting Principle ChangesChapter 14-10Three approaches for reporting changes:1)Currently(cumulative effect).2)Retrospectively.3)Prospectively(in the future).FASB requires use of the retrospective approach.Changes in Accounti
10、ng PrincipleChapter 14-11lA change in an accounting principle is accounted for by the retrospective application of the new accounting principle.lA change in an accounting estimate is accounted for prospectively.lA change in a reporting entity is accounted for by the retrospective application of the
11、new accounting principle.lA material error is accounted for by prior period restatement(adjustment).According to the provisions of FASB No.154:Basic PrinciplesChapter 14-12A company accounts for a change in principle by the retrospective application of the new accounting principle as follows:1.The c
12、ompany computes the cumulative effect of the change to the new accounting principle as of the beginning of the first period presented.That is,it computes the amounts that would have been in the financial statements if it had always used the new principle.Retrospective Adjustment MethodChapter 14-132
13、.The company adjusts the carrying values of those assets and liabilities(including income taxes)that are affected by the change.The company makes an offsetting adjustment to the beginning balance of retained earnings to report the cumulative effect of the change(net of taxes)for each period presente
14、d.Retrospective Adjustment MethodChapter 14-143.The company adjusts the financial statements of each prior period to reflect the specific effects of applying the new accounting principle.That is,each item in each financial statement that is affected by the change is restated to the appropriate amoun
15、t under the new accounting principle.The company uses the new accounting principle in its current financial statements.Retrospective Adjustment MethodChapter 14-154.The companys disclosures include(a)the nature and reason for the change in accounting principle,including an explanation of why the new
16、 principle is preferable,(b)a description of the prior-period information that has been retrospectively adjusted,(c)the effect of the change on income,earnings per share,and any other financial statement line item for the current period and the prior periods retrospectively adjusted,and(d)the cumula
17、tive effect of the change on retained earnings(or other appropriate component of equity)at the beginning of the earliest period presented.Retrospective Adjustment MethodChapter 14-16The following accounting principle changes are subject to the retroactive approach:Change from LIFO to another invento
18、ry methodChange in the method of accounting for long-term construction contractsChange to or from full-cost method in extractive industriesChanges in accounting principle made in conjunction with an initial public offering of equity securities(exemption available only once)Retrospective Adjustment M
19、ethodChapter 14-17The following accounting principle changes are subject to the retroactive approach:Change from retirement/replacement accounting to depreciation accounting for railroad track structuresChange to a principle required by a new pronouncement recognized as GAAP that requires retroactiv
20、e applicationChange to the equity method of accounting for investments in common stock(sometimes classified as a change in reporting entity)Retrospective Adjustment MethodChapter 14-18Example(Retrospective Change)Buildmore Construction Company used the completed contract method to account for long-t
21、erm construction contracts for financial accounting and tax purposes in 2007,its first year of operations.In 2008,the company decided to change to the percentage-of-completion method for financial accounting purposes.Income before long-term contracts and taxes in 2007 and 2008 was$80,000 and$100,000
22、.The tax rate is 40%and the company will continue to use the completed contract method for tax purposes.Retrospective Change ExampleChapter 14-19Example Income from Long-Term ContractsRetrospective Change ExampleChapter 14-20Example Comparative Income StatementsRetrospective Change ExampleChapter 14
23、-21Example Retained Earnings StatementRetrospective Change ExampleChapter 14-22ImpracticabilityChanges in Accounting PrincipleCompanies should not use retrospective application if one of the following conditions exists:1.Company cannot determine the effects of the retrospective application.2.Retrosp
24、ective application requires assumptions about managements intent in a prior period.3.Retrospective application requires significant estimates that the company cannot develop.If any of the above conditions exists,the company prospectively applies the new accounting principle.Chapter 14-23No cumulativ
25、e adjustment is made.Prior years results remain unchanged.New estimates are applied prospectively.Summary of the Approach for Changes in Accounting EstimatesProspective ApproachChapter 14-24Changes in Accounting EstimateThe following items require estimates.1.Uncollectible receivables.2.Inventory ob
26、solescence.3.Useful lives and salvage values of assets.4.Periods benefited by deferred costs.5.Liabilities for warranty costs and income taxes.6.Recoverable mineral reserves.7.Change in depreciation methods.Companies report prospectively changes in accounting estimates.Chapter 14-25Arcadia HS,purcha
27、sed equipment for$510,000 which was estimated to have a useful life of 10 years with a salvage value of$10,000 at the end of that time.Depreciation has been recorded for 7 years on a straight-line basis.In 2005(year 8),it is determined that the total estimated life should be 15 years with a salvage
28、value of$5,000 at the end of that time.Required:lWhat is the journal entry to correct the prior years depreciation?lCalculate the depreciation expense for 2005.Change in Estimate ExampleChapter 14-26Change in Estimate ExampleChapter 14-27Change in Estimate ExampleDepreciation expense 19,375Accumulat
29、ed depreciation 19,375Journal entry for 2005Chapter 14-28Reporting a Change in EntityExamples of a change in reporting entity are:1.Presenting consolidated statements in place of statements of individual companies.2.Changing specific subsidiaries that constitute the group of companies for which the
30、entity presents consolidated financial statements.3.Changing the companies included in combined financial statements.4.Changing the cost,equity,or consolidation method of accounting for subsidiaries and investments.Reported by changing the financial statements of all priorperiods presented.Chapter 1
31、4-29No cumulative adjustment is made.Prior years results are restated.Summary of the Approach for Changes in Reporting EntityReporting a Change in EntityChapter 14-30lNew principle must be preferable.lNature of change and justification disclosed in notes.JustificationsImproved matchingEnhanced asset
32、 valuationNew informationChanging conditionsCompliance with new reporting standards Justification for Accounting ChangesChapter 14-31I wonder why companies make accounting changes?It seems like a lot of trouble to me!Chapter 14-32Reporting a Correction of an ErrorAccounting errors include the follow
33、ing types:1.A change from an accounting principle that is not generally accepted to an accounting principle that is acceptable.2.Mathematical mistakes.3.Changes in estimates that occur because a company did not prepare the estimates in good faith.4.Failure to accrue or defer certain expenses or reve
34、nues.5.Misuse of facts.6.Incorrect classification of a cost as an expense instead of an asset,and vice versa.Chapter 14-33Reporting a Correction of an ErrorAll material errors must be corrected.Record corrections of errors from prior periods as an adjustment to the beginning balance of retained earn
35、ings in the current period.Such corrections are called prior period adjustments.For comparative statements,a company should restate the prior statements affected,to correct for the error.Chapter 14-341.The company computes the cumulative effect of the error correction on prior period financial state
36、ments.That is,it computes the amounts that would have been in the financial statements if it had not made the error.A company accounts for a change in accounting principle by prior period restatement as follows:Prior Period RestatementChapter 14-352.The company adjusts the carrying values of those a
37、ssets and liabilities(including income taxes)that are affected by the error.The company makes an offsetting entry to the beginning balance of retained earnings to report the cumulative effect of the error correction(net of taxes)for each period presented.Prior Period RestatementChapter 14-363.The co
38、mpany adjusts the financial statements of each prior period to reflect the specific effects of correcting the error.4.The companys disclosures include(a)that its previously issued financial statements have been restated,along with a description of the nature of the error,Prior Period RestatementChap
39、ter 14-374.(b)the effect of the correction of each financial statement line item,and any per share amounts affected for each prior period presented,and(c)the cumulative effect of the change on retained earnings(or other appropriate component of equity)at the beginning of the earliest period presente
40、d.Prior Period RestatementChapter 14-38Woods,Inc.Statement of Retained EarningsFor the Year Ended December 31,2007Balance,January 11,050,000$Net income360,000 Dividends(300,000)Balance,December 311,110,000$Before issuing the report for the year ended December 31,2007,you discover a$62,500 error that
41、 caused the 2006 inventory to be overstated(overstated inventory caused COGS to be lower and thus net income to be higher in 2006).Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2007?Assume a 20%tax rate.Retained Earnings StatementChapter 14-39Woods,I
42、nc.Statement of Retained EarningsFor the Year Ended December 31,2007Balance,January 1,as previously reported1,050,000$Prior period adjustment,net of tax(50,000)Balance,January 1,as restated1,000,000 Net income360,000 Dividends(300,000)Balance,December 311,060,000$Retained Earnings StatementChapter 1
43、4-40I.Errors occurred and discovered in the same accounting period.II.Errors occurred in previous period.A.Errors did not affect prior period net income.B.Errors did affect prior period net income.1.Counterbalancing errors2.Noncounterbalancing errorsAccounting ErrorsClassificationsChapter 14-41 Corr
44、ected by reversing the incorrect entry and then recording the correct entry(or by making an entry to correct the account balances)Errors Occurred and Discovered in Same PeriodChapter 14-42lInvolves incorrect classification of accounts.lRequires correction of previously issued statements(retroactive
45、approach).lIs not classified as a prior period adjustment since it does not affect prior income.lDisclose nature of error.Previous Period Errors Not Affecting Net IncomeChapter 14-43lCounterbalancing errors discovered after two or more years do not require a correcting entry.lCounterbalancing errors
46、 discovered in the second year of the cycle require a correcting entry.-Treated as a prior period adjustment(net of tax)to beginning Retained Earnings balance.Counterbalancing Errors Affecting Prior Net IncomeChapter 14-44lThese errors do not automatically correct themselves after two years.lCorrect
47、ion of a noncounterbalancing error usually requires a prior period adjustment(retroactive approach).Noncounterbalancing Errors Affecting Prior Net IncomeChapter 14-45E22-19(Error Analysis;Correcting Entries)A partial trial balance of Julie Hartsack Corporation is as follows on December 31,2008.Error
48、 Analysis ExampleInstructions(a)Assuming that the books have not been closed,what are the adjusting entries necessary at December 31,2008?Chapter 14-46Error Analysis Example1.A physical count of supplies on hand on December 31,2008,totaled$1,100.2.Accrued salaries and wages on December 31,2008,amoun
49、ted to$4,400.(a)Assuming that the books have not been closed,what are the adjusting entries necessary at December 31,2008?Chapter 14-47Error Analysis Example3.Accrued interest on investments amounts to$4,350 on December 31,2008.4.The unexpired portions of the insurance policies totaled$65,000 as of
50、December 31,2008.(a)Assuming that the books have not been closed,what are the adjusting entries necessary at December 31,2008?Chapter 14-48Error Analysis Example(a)Assuming that the books have not been closed,what are the adjusting entries necessary at December 31,2008?5.$28,000 was received on Janu
