1、Chapter 20Accounting ChangesCopyright 2014 Pearson Canada Inc.20 - 1LEARNING OBJECTIVESL.O. 20-1.Evaluate whether an accounting change is an error correction, a change in accounting policy, or a change in estimate.L.O. 20-2. Apply the prospective and retrospective treatments for accounting changes.L

2、.O. 20-3. Evaluate the effects of retrospective adjustments and record those effects in accounting recordsCopyright 2014 Pearson Canada Inc.20 - 2A: TYPES OF ACCOUNTING CHANGE L.O. 20-1Accounting changes occur regularlyThere are three types:1.Changes in accounting policy2.Corrections or errors from

3、prior periods3. Changes in accounting estimatesCopyright 2014 Pearson Canada Inc.20 - 3 TYPES OF ACCOUNTING CHANGE(Continued)The three types of accounting changes differ significantly based on: i. whether choice or fact triggered the change ii.If a matter of fact, whether information was known or sh

4、ould have been knownCopyright 2014 Pearson Canada Inc.20 - 41. Changes in Accounting PolicyA change in accounting policy an accounting policy change made at the discretion of management; from one acceptable GAAP to another acceptable GAAP.For example, a switch from FIFO to weightedaverage method of

5、inventory costingAccounting policy changes are infrequent now; restricted by GAAPCopyright 2014 Pearson Canada Inc.20 - 5Changes in Accounting Policy (continued)IFRS (IAS 8) permits accounting policy changes when: a.New IFRS requirements are introduced, or b. the voluntary change will enhance therel

6、iability and relevance of presented financial information. Exhibit 20-1 presents examples. Copyright 2014 Pearson Canada Inc.20 - 6Examples of Changes in Accounting Policy Copyright 2014 Pearson Canada Inc.20 - 72. Corrections of Errors from Prior PeriodsA correction of an error - an accounting chan

7、ge made necessary by the discovery of an incorrect amount given the information available at the time the amount was reported Whenever errors are found, they must be correctedCopyright 2014 Pearson Canada Inc.20 - 8Corrections of Errors from Prior Periods (Continued)Errors:Could be simple arithmetic

8、 errors such as:- Calculation of bad debtsOmission of residual value in calculating depreciationCould 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 -920-A.3 Changes in A

9、ccounting EstimatesChange in estimate: An accounting change made necessary by the arrival of new information.Accrual accounting inherently requires future forecastsForecasts entail uncertaintyArrival of new (better) information necessitate changes in estimatesFor example, estimated useful lives of P

10、PE, may change with actual use. Copyright 2014 Pearson Canada Inc.20 -10Changes in Accounting Estimates (continued)Examples of items requiring estimates:Total costs on long-term contractsAllowance for Doubtful accountsMineral reserves Impairment of intangible assetsDeferred taxes when tax rates chan

11、geWarranty liabilitiesSee Exhibit 20-3Copyright 2014 Pearson Canada Inc.20 -114. SummaryTwo characteristics distinguish accounting changes 1.Change by choice or new information? 2. Change by new information or information known or should have been known in prior period?A change by choice is a change

12、 in accounting policyA change by all new information is a change in estimateA change by old information is a correction of errorCopyright 2014 Pearson Canada Inc.20 -12Copyright 2014 Pearson Canada Inc.20 -13B. TREATMENTS FOR ACCOUNTING CHANGES (L.O. 20-2)Accounting changes are generally reported in

13、 two ways:1. Prospectively (looking forward)2. Retrospectively (looking backwards)Copyright 2014 Pearson Canada Inc.20 -141. Prospective Adjustment The prospective adjustment - applies an accounting change only to the current and future periods without any changes to past financial statements.All ch

14、anges in estimates are accounted for prospectivelyNew information that triggered change in estimate not available in prior periodsCopyright 2014 Pearson Canada Inc.20 -15Prospective Adjustments (continued)Do not adjust amounts in prior periods statementsInclude effect of change in statements of curr

15、ent yearInclude effect of change in statements of future periods if applicable.See Exhibit 20-5 for some examples of changes in estimates and prospective adjustmentsCopyright 2014 Pearson Canada Inc.20 -162. Retrospective Adjustment A retrospective adjustment applies an accounting change to all peri

16、ods affected in the past, present, and future.Used for correction of errors and changes in accounting policyErrors are corrected for prior periods if comparative reports are presentedAdjustments permit comparability/consistencyCopyright 2014 Pearson Canada Inc.20 -17Retrospective Adjustment (continu

17、ed)Adjust opening balances of current year to reflect changes, assuming they were in effect from earliest prior year connected to changes.IAS 1 requires presentation of three comparative balance sheets in the year of change in accounting policySee Exhibit 20-7 Copyright 2014 Pearson Canada Inc.20 -1

18、8Types of Changes and TreatmentCopyright 2014 Pearson Canada Inc.20 -19Retrospective Adjustment (continued)Changes Not Requiring Retrospective TreatmentWhere retrospective treatment is impractical, change in accounting policy is treated as a first time adoption Thus, change from cost model to revalu

19、ation model for PPE and intangibles treated as a first revaluationRevaluation to cost model? Treat retrospectively. Copyright 2014 Pearson Canada Inc.20 -20C: CHANGES IN ACCOUNTING STANDARDSTreatment of standard changes depends on the particular standardTreatment could be retrospective, prospective,

20、 or modification of the two.Required treatment normally specified in transitional provisionsDefault treatment is retrospective adjustmentCopyright 2014 Pearson Canada Inc.20 -21D: IMPLEMENTING RETROSPECTIVE ADJUSTMENTSProspective method is pervasive and easier to implement as illustrated for:Changes

21、 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 2014 Pearson Canada Inc.20 -22D: IMPLEMENTING RETROSPECTIVE ADJUSTMENTS (continued)Retrospective method complicated by need

22、to make changes to past financial statementsHow far back? As far back as necessary so that the next set of financial statements will be presented correctly.Also distinguish between changes in presentation and changes in the accounting recordsCopyright 2014 Pearson Canada Inc.20 -231. Retrospective A

23、djustments Involving Only PresentationInvolves presentation of balance sheet items only.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 2014 Pearson Canada

24、Inc.20 -242. Retrospective Adjustments Affecting only Temporary AccountsInvolve income statement items onlyRevenue and expense misclassified; such as, “interest expense” included in “salary expense” If temporary accounts closed or error found in subsequent period, correct presentation in next set of

25、 comparative financials See Exhibit 20-9Copyright 2014 Pearson Canada Inc.20 -253. Retrospective Adjustments Affecting Both Permanent and Temporary AccountsBoth income statement and balance sheet accounts involved, e.g. accrued revenue not recorded.Due to links between permanent and temporary accoun

26、ts, most adjustments affect both.Copyright 2014 Pearson Canada Inc.20 -26Retrospective Adjustments Affecting Both Permanent and Temporary Accounts (continued)Temporary accounts closed to retained earnings (RE) and AOCI at year-end. Thus, retroactive adjustments on temporary accounts of prior-periods

27、 recorded through RE and AOCI.Two types of accruals to deal with; those that: i. reverse in subsequent period ii. reverse over a longer period of timeCopyright 2014 Pearson Canada Inc.20 -27a. Retrospective Adjustments for Accruals that Reverse in the Immediate Subsequent Period Occur in one period,

28、 correct in the next (also called counter-balancing errors). Include: - Failure to record unearned revenues/or to accrue revenues - Failure to record prepayments/or to accrue expenses - Overstating/understating ending inventoriesCopyright 2014 Pearson Canada Inc.20 -28Adjustments for accruals that r

29、everse in the next period (continued)Since accrual and reversal occur in consecutive periods, adjustments needed only if second (reversal) year overlaps with current fiscal year or comparative years presented.No adjustments necessary if accrual and reversal occur before the beginning of the earliest

30、 comparative year.See Exhibit 20-10Copyright 2014 Pearson Canada Inc.20 -29Adjustments for accruals that reverse in the next period (continued)If adjustments are necessary:Develop a clear picture of what is in the accounts now (before adjustments)Develop a clear picture of what should be in the acco

31、unts now (after adjustments)Debit and credit accounts to bring (1) to (2)Remember that closed nominal accounts of prior years cannot be used; use RE insteadCopyright 2014 Pearson Canada Inc.20 -30Adjustments for Accruals that reverse in the next period (continued)If reversal occurs in the comparativ

32、e year, adjustments cannot be made using journal entries, temporary accounts were closed.The changes can be made separately during financial statement preparation.Copyright 2014 Pearson Canada Inc.20 -31Adjustments for Accruals that reverse in the next period (continued)If error occurs in prior year, and reversal in current year, adjustments can be made to nominal accounts of current year. Retained earnings acc