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Lo/Fisher,
Intermediate
Accounting
Vol.2Chapter
20Copyright
©
2014
Pearson
Canada
Inc.20
-
1Accounting
ChangesLo/Fisher,
Intermediate
Accounting
Vol.2LEARNING
OBJECTIVESCopyright
©
2014
Pearson
Canada
Inc.20
-
2L.O.
20-1.Evaluate
whether
an
accounting
change
is
anerror
correction,
a
change
in
accountingpolicy,
or
a
change
in
estimate.L.O.
20-2.Apply
the
prospective
and
retrospectivetreatments
for
accounting
changes.L.O.
20-3.Evaluate
the
effects
of
retrospectiveadjustments
and
record
those
effectsaccounting
recordsLo/Fisher,
Intermediate
Accounting
Vol.2A:
TYPES
OF
ACCOUNTING
CHANGECopyright
©
2014
Pearson
Canada
Inc.20
-
3L.O.
20-1Accounting
changes
occur
regularlyThere
are
three
types:Changes
in
accounting
policyCorrections
or
errors
from
prior
periodsChanges
in
accounting
estimatesLo/Fisher,
Intermediate
Accounting
Vol.2TYPES
OF
ACCOUNTING
CHANGE(Continued)Copyright
©
2014
Pearson
Canada
Inc.20
-
4
The
three
types
of
accounting
changes
differsignificantly
based
on:whether
choice
or
fact
triggered
the
changei.ii.
If
a
matter
of
fact,
whether
information
wknown
or
should
have
been
knownLo/Fisher,
Intermediate
Accounting
Vol.21.
Changes
in
Accounting
PolicyCopyright
©
2014
Pearson
Canada
Inc.20
-
5
A
change
in
accounting
policy
–
an
accountingpolicy
change
made
at
the
discretion
ofmanagement;
from
one
acceptable
GAAP
toanother
acceptable
GAAP.For
example,
a
switch
from
FIFO
to
weightedaverage
method
of
inventory
costing
Accounting
policy
changes
are
infrequent
now;restrictedby
GAAPLo/Fisher,
Intermediate
Accounting
Vol.2Changes
in
Accounting
Policy
(continued)Copyright
©
2014
Pearson
Canada
Inc.20
-
6
IFRS(IAS
8)
permits
accounting
policy
changeswhen:New
IFRS
requirements
are
introduced,orthe
voluntary
change
will
enhancethe
reliability
and
relevapresentedfinancial
informatioExhibit
20-1
presents
examples.Lo/Fisher,
Intermediate
Accounting
Vol.2Examples
of
Changes
in
Accounting
PolicyCopyright
©
2014
Pearson
Canada
Inc.20
-
7Lo/Fisher,
Intermediate
Accounting
Vol.22.
Corrections
of
Errors
from
Prior
PeriodsCopyright
©
2014
Pearson
Canada
Inc.20
-
8
A
correction
of
an
error
-
an
accounting
changemade
necessary
by
the
discovery
of
an
incorrectamount
given
the
information
available
at
the
timethe
amount
was
reportedWhenever
errors
are
found,
they
must
be
correctedLo/Fisher,
Intermediate
Accounting
Vol.2Corrections
of
Errors
from
Prior
Periods(Continued)Errors:Could
be
simple
arithmetic
errors
such
as:-
Calculation
of
bad
debts-
Omission
of
residual
value
in
calculatingdepreciationCould
be
complex
errors
in
judgment,such
as:-
misapplying
the
revenue
recognition
criteriaExhibit
20-2
presents
examples
of
errors
and
non-errorsCopyright
©
2014
Pearson
Canada
Inc.20
-
9Lo/Fisher,
Intermediate
Accounting
Vol.220-A.3
Changes
in
Accounting
EstimatesCopyright
©
2014Pearson
Canada
Inc.20
-10Change
in
estimate:
An
accounting
change
madenecessary
by
the
arrival
of
new
informatioAccrual
accounting
inherently
requires
future
forecForecasts
entail
uncertaintyArrival
of
new
(better)
information
necessitatechanges
in
estimates
For
example,
estimated
useful
lives
of
PPE,
maychange
with
actual
use.Lo/Fisher,
Intermediate
Accounting
Vol.2Changes
in
Accounting
Estimates(continued)Copyright
©
2014Pearson
Canada
Inc.20
-11Examples
of
items
requiring
estimates:Total
costs
on
long-term
contractsAllowance
for
Doubtful
accountsMineral
reservesImpairment
of
intangible
assetsDeferred
taxes
when
tax
rates
changeWarranty
liabilitiesSee
Exhibit
20-3Lo/Fisher,
Intermediate
Accounting
Vol.24.
SummaryCopyright
©
2014Pearson
Canada
Inc.20
-12Two
characteristics
distinguish
accounting
changesChange
by
choice
or
new
information?Change
by
new
information
or
informationknown
or
should
have
been
known
in
prior
period?A
change
by
choice
is
a
change
in
accounting
policyA
change
by
all
new
information
is
a
change
in
estimateA
change
by
old
information
is
a
correction
of
errorLo/Fisher,
Intermediate
Accounting
Vol.2Copyright
©
2014Pearson
Canada
Inc.20
-13Lo/Fisher,
Intermediate
Accounting
Vol.2B.
TREATMENTS
FORACCOUNTING
CHANGES
(L.O.
20-2)
Accounting
changes
are
generally
reported
intwo
ways:Prospectively
(looking
forward)Retrospectively
(looking
backwards)Copyright
©
2014Pearson
Canada
Inc.20
-14Lo/Fisher,
Intermediate
Accounting
Vol.21.
Prospective
AdjustmentCopyright
©
2014Pearson
Canada
Inc.20
-15The
prospective
adjustment
-
applies
anaccounting
change
only
to
the
current
and
futureperiods
without
any
changes
to
past
financialstatements.
All
changes
in
estimates
are
accounted
forprospectively
New
information
that
triggered
change
inestimate
not
available
in
prior
periodsLo/Fisher,
Intermediate
Accounting
Vol.2Prospective
Adjustments
(continued)Copyright
©
2014Pearson
Canada
Inc.20
-16
Do
not
adjust
amounts
in
prior
periods’statements
Include
effect
of
change
in
statements
ofcurrent
year
Include
effect
of
change
in
statements
offuture
periods
if
applicable.
See
Exhibit
20-5
for
some
examples
ofchanges
in
estimates
and
prospectiveadjustmentsLo/Fisher,
Intermediate
Accounting
Vol.22.
Retrospective
AdjustmentCopyright
©
2014Pearson
Canada
Inc.20
-17A
retrospective
adjustment
–
applies
anaccounting
change
to
all
periods
affected
in
thepast,
present,
and
future.
Used
for
correction
of
errors
and
changes
inaccounting
policy
Errors
are
corrected
for
prior
periods
ifcomparative
reports
are
presentedAdjustments
permit
comparability/consistencyLo/Fisher,
Intermediate
Accounting
Vol.2Retrospective
Adjustment
(continued)Copyright
©
2014Pearson
Canada
Inc.20
-18
Adjust
opening
balances
of
current
year
toreflect
changes,
assuming
they
were
in
effectfrom
earliest
prior
year
connected
to
changes.
IAS
1
requires
presentation
of
threecomparative
balance
sheets
in
the
year
ofchange
in
accounting
policySee
Exhibit
20-7Lo/Fisher,
Intermediate
Accounting
Vol.2Types
of
Changes
and
TreatmentCopyright
©
2014Pearson
Canada
Inc.20
-19Lo/Fisher,
Intermediate
Accounting
Vol.2Retrospective
Adjustment
(continued)Changes
Not
Requiring
Retrospective
Treatment
Where
retrospective
treatment
is
impractical,change
in
accounting
policy
is
treated
as
a
firsttime
adoption
Thus,
change
from
costmodelto
revaluationmodel
for
PPE
and
intangibles
treated
as
a
firstrevaluationRevaluation
to
cost
model?
Treat
retrospectivelyCopyright
©
2014Pearson
Canada
Inc.20
-20Lo/Fisher,
Intermediate
Accounting
Vol.2C:
CHANGES
IN
ACCOUNTING
STANDARDS
Treatment
of
standard
changes
depends
on
theparticular
standard
Treatment
could
be
retrospective,
prospective,or
modification
of
the
two.
Required
treatment
normally
specified
intransitional
provisionsDefault
treatment
is
retrospective
adjustmentCopyright
©
2014Pearson
Canada
Inc.20
-21Lo/Fisher,
Intermediate
Accounting
Vol.2D:
IMPLEMENTING
RETROSPECTIVEADJUSTMENTS
Prospective
method
is
pervasive
and
easier
toimplement
as
illustrated
for:
Changes
in
the
estimated
cost
of
long-term
contracts
(Ch.
4)Changes
in
estimates
for
bad
debts
(Ch.
5)Changes
in
estimated
useful
lives
(Ch.
8)Changes
in
tax
rates
(Ch.
16)Copyright
©
2014Pearson
Canada
Inc.20
-22Lo/Fisher,
Intermediate
Accounting
Vol.2D:
IMPLEMENTING
RETROSPECTIVEADJUSTMENTS
(continued)Copyright
©
2014Pearson
Canada
Inc.20
-23
Retrospective
method
complicated
by
need
tomakechanges
to
past
financial
statementsHow
far
back?As
far
back
as
necessary
so
that
the
next
set
offinancial
statements
will
be
presented
correctly.
Also
distinguish
between
changes
inpresentation
and
changes
in
theaccountingrecordsLo/Fisher,
Intermediate
Accounting
Vol.21.
Retrospective
Adjustments
Involving
OnlyPresentation
Involves
presentation
of
balance
sheet
itemsonly.
Items
misclassified
but
totals
fine,
such
as,classifying
current
liabilities
as
long-term.Correct
presentation
in
next
set
of
financials.No
journal
entries
required.See
Exhibit
20-8Copyright
©
2014Pearson
Canada
Inc.20
-24Lo/Fisher,
Intermediate
Accounting
Vol.22.
Retrospective
Adjustments
Affecting
onlyTemporary
AccountsInvolveincome
statement
items
only
Revenue
and
expense
misclassified;
such
as,“interest
expense”
included
in
“salary
expen
If
temporary
accounts
closed
or
error
found
insubsequent
period,
correct
presentation
in
nextset
of
comparative
financialsSee
Exhibit
20-9Copyright
©
2014Pearson
Canada
Inc.20
-25Lo/Fisher,
Intermediate
Accounting
Vol.23.
Retrospective
Adjustments
Affecting
BothPermanent
and
Temporary
Accounts
Both
income
statement
and
balance
sheetaccounts
involved,
e.g.
accrued
revenue
notrecorded.
Due
to
links
between
permanent
and
temporaryaccounts,
most
adjustments
affect
both.Copyright
©
2014Pearson
Canada
Inc.20
-26Lo/Fisher,
Intermediate
Accounting
Vol.2Retrospective
Adjustments
Affecting
BothPermanent
and
Temporary
Accounts
(continued)
Temporary
accounts
closed
to
retained
earnings(RE)
and
AOCI
at
year-end.
Thus,
retroactive
adjustments
on
temporaryaccounts
of
prior-periods
recorded
through
REand
AOCI.Two
types
of
accruals
to
deal
with;
those
that:reverse
in
subsequent
periodreverse
over
a
longer
period
of
timeCopyright
©
2014Pearson
Canada
Inc.20
-27Lo/Fisher,
Intermediate
Accounting
Vol.2a.
Retrospective
Adjustments
for
Accruals
thatReverse
in
the
Immediate
Subsequent
PeriodCopyright
©
2014Pearson
Canada
Inc.20
-28
Occur
in
one
period,
correct
in
the
next
(alsocalled
counter-balancing
errors).Include:
Failure
to
record
unearned
revenues/or
toaccrue
revenues
Failure
to
record
prepayments/or
to
accrueexpensesOverstating/understating
ending
inventoriesLo/Fisher,
Intermediate
Accounting
Vol.2Adjustments
for
accruals
that
reverse
in
the
nextperiod
(continued)
Since
accrual
and
reversal
occur
in
consecutiveperiods,
adjustments
needed
only
if
second(reversal)
year
overlaps
with
current
fiscal
yeaor
comparative
years
presented.
No
adjustments
necessary
if
accrual
and
reversaloccur
before
the
beginning
of
the
earliestcomparative
year..See
Exhibit
20-10Copyright
©
2014Pearson
Canada
Inc.20
-29Lo/Fisher,
Intermediate
Accounting
Vol.2Adjustments
for
accruals
that
reverse
in
the
nextCopyright
©
2014Pearson
Canada
Inc.20
-30period
(continued)If
adjustments
are
necessary:
Develop
a
clear
picture
of
what
is
in
theaccounts
now
(before
adjustments)
Develop
a
clear
picture
of
what
should
bein
the
accounts
now
(after
adjustments)Debit
and
credit
accounts
to
bring
(1)
to
(2
Remember
that
closed
nominal
accounts
ofprior
years
cannot
be
used;
use
RE
insteadLo/Fisher,
Intermediate
Accounting
Vol.2Adjustments
for
Accruals
that
reverse
in
the
nextperiod
(continued)
If
reversal
occurs
in
the
comparative
year,adjustments
cannot
be
made
using
journalentries,
temporary
accounts
wereclosed.
The
changes
can
be
made
separately
duringfinancial
statement
preparation.Copyright
©
2014Pearson
Canada
Inc.20
-31Lo/Fisher,
Intermediate
Accounting
Vol.2Adjustments
for
Accruals
that
reverse
in
the
nextCopyright
©
2014Pearson
Canada
Inc.20
-32period
(continued)
If
error
occurs
in
prior
year,
and
reversa
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