中级财务会计英文ch14课件

AccountingChangesandErrorAnalysisChapter14IntermediateAccounting12thEditionKieso,Weygandt,andWarfield

PreparedbyCobyHarmon,UniversityofCalifornia,SantaBarbaraIdentifythetypesofaccountingchanges.Describetheaccountingforchangesinaccountingprinciples.Understandhowtoaccountforretrospectiveaccountingchanges.Understandhowtoaccountforimpracticablechanges.Describetheaccountingforchangesinestimates.Identifychangesinareportingentity.Describetheaccountingforcorrectionoferrors.Identifyeconomicmotivesforchangingaccountingmethods.Analyzetheeffectoferrors.LearningObjectivesWhyareaccountingchangesmade?

NewFASBpronouncementsChangingeconomicconditionsChanginginternalcircumstancesAccountingChanges

ReportingIssues&Approaches

Essentialissuesinreportingaccountingchanges:Whetheranaccountingchangeisallowed.Whethertorestateprioryears?financialstatements.Whethertorecognizetheeffectofthechangeinthecurrentyear’snetincomeorinthebeginningretainedearningsbalance.AccountingChanges

ReportingIssues&ApproachesAccountingChangesErrorcorrections

...Arenotclassifiedasaccountingchanges.Doaffecttheincomeofpriorperiodsandrequirespecialtreatment.AccountingChangesRelevanceConsistencyPublicConfidenceObjectivesofReportingAccountingChangesAccountingPrincipleChangesThefollowingarenotaccountingprinciplechanges:InitialadoptionofanaccountingprincipleAdoptinganaccountingprincipleforanewgroupofassetsorliabilitiesChangefrominappropriateaccountingprincipletoGAAPPlannedchangetostraight-linedepreciationChangeinaccountingprinciplethatcannotbedistinguishedfromachangeinaccountingestimateAccountingPrincipleChangesThreeapproachesforreportingchanges:Currently(cumulativeeffect).Retrospectively.Prospectively(inthefuture).FASBrequiresuseoftheretrospectiveapproach.ChangesinAccountingPrincipleAchangeinanaccountingprincipleisaccountedforbytheretrospectiveapplicationofthenewaccountingprinciple.Achangeinanaccountingestimateisaccountedforprospectively.Achangeinareportingentityisaccountedforbytheretrospectiveapplicationofthenewaccountingprinciple.Amaterialerrorisaccountedforbypriorperiodrestatement(adjustment).AccordingtotheprovisionsofFASBNo.154:BasicPrinciplesAcompanyaccountsforachangeinprinciplebytheretrospectiveapplicationofthenewaccountingprincipleasfollows:Thecompanycomputesthecumulativeeffectofthechangetothenewaccountingprincipleasofthebeginningofthefirstperiodpresented.Thatis,itcomputestheamountsthatwouldhavebeeninthefinancialstatementsifithadalwaysusedthenewprinciple.ContinuedRetrospectiveAdjustmentMethodThecompanyadjuststhecarryingvaluesofthoseassetsandliabilities(includingincometaxes)thatareaffectedbythechange.Thecompanymakesanoffsettingadjustmenttothebeginningbalanceofretainedearningstoreportthecumulativeeffectofthechange(netoftaxes)foreachperiodpresented.ContinuedRetrospectiveAdjustmentMethodThecompanyadjuststhefinancialstatementsofeachpriorperiodtoreflectthespecificeffectsofapplyingthenewaccountingprinciple.Thatis,eachitemineachfinancialstatementthatisaffectedbythechangeisrestatedtotheappropriateamountunderthenewaccountingprinciple.Thecompanyusesthenewaccountingprincipleinitscurrentfinancialstatements.ContinuedRetrospectiveAdjustmentMethodThecompany’sdisclosuresinclude(a)thenatureandreasonforthechangeinaccountingprinciple,includinganexplanationofwhythenewprincipleispreferable,(b)adescriptionoftheprior-periodinformationthathasbeenretrospectivelyadjusted,(c)theeffectofthechangeonincome,earningspershare,andanyotherfinancialstatementlineitemforthecurrentperiodandthepriorperiodsretrospectivelyadjusted,and(d)thecumulativeeffectofthechangeonretainedearnings(orotherappropriatecomponentofequity)atthebeginningoftheearliestperiodpresented.RetrospectiveAdjustmentMethodThefollowingaccountingprinciplechangesaresubjecttotheretroactiveapproach:ChangefromLIFOtoanotherinventorymethodChangeinthemethodofaccountingforlong-termconstructioncontractsChangetoorfromfull-costmethodinextractiveindustriesChangesinaccountingprinciplemadeinconjunctionwithaninitialpublicofferingofequitysecurities(exemptionavailableonlyonce)RetrospectiveAdjustmentMethodThefollowingaccountingprinciplechangesaresubjecttotheretroactiveapproach:Changefromretirement/replacementaccountingtodepreciationaccountingforrailroadtrackstructuresChangetoaprinciplerequiredbyanewpronouncementrecognizedasGAAPthatrequiresretroactiveapplicationChangetotheequitymethodofaccountingforinvestmentsincommonstock(sometimesclassifiedasachangeinreportingentity)RetrospectiveAdjustmentMethodExample(RetrospectiveChange)BuildmoreConstructionCompanyusedthecompletedcontractmethodtoaccountforlong-termconstructioncontractsforfinancialaccountingandtaxpurposesin2007,itsfirstyearofoperations.In2008,thecompanydecidedtochangetothepercentage-of-completionmethodforfinancialaccountingpurposes.Incomebeforelong-termcontractsandtaxesin2007and2008was$80,000and$100,000.Thetaxrateis40%andthecompanywillcontinuetousethecompletedcontractmethodfortaxpurposes.RetrospectiveChangeExampleExampleIncomefromLong-TermContractsRetrospectiveChangeExampleExample

ComparativeIncomeStatementsRetrospectiveChangeExampleExample

RetainedEarningsStatementRetrospectiveChangeExampleImpracticabilityChangesinAccountingPrincipleCompaniesshouldnotuseretrospectiveapplicationifoneofthefollowingconditionsexists:Companycannotdeterminetheeffectsoftheretrospectiveapplication.Retrospectiveapplicationrequiresassumptionsaboutmanagement’sintentinapriorperiod.Retrospectiveapplicationrequiressignificantestimatesthatthecompanycannotdevelop.Ifanyoftheaboveconditionsexists,thecompanyprospectivelyappliesthenewaccountingprinciple.Nocumulativeadjustmentismade.Prioryears’resultsremainunchanged.Newestimatesareappliedprospectively.SummaryoftheApproachforChangesinAccountingEstimatesProspectiveApproachChangesinAccountingEstimateThefollowingitemsrequireestimates.Uncollectiblereceivables.Inventoryobsolescence.Usefullivesandsalvagevaluesofassets.Periodsbenefitedbydeferredcosts.Liabilitiesforwarrantycostsandincometaxes.Recoverablemineralreserves.Changeindepreciationmethods.Companiesreportprospectivelychangesinaccountingestimates.ArcadiaHS,purchasedequipmentfor$510,000whichwasestimatedtohaveausefullifeof10yearswithasalvagevalueof$10,000attheendofthattime.Depreciationhasbeenrecordedfor7yearsonastraight-linebasis.In2005(year8),itisdeterminedthatthetotalestimatedlifeshouldbe15yearswithasalvagevalueof$5,000attheendofthattime.Required:Whatisthejournalentrytocorrecttheprioryears’depreciation?Calculatethedepreciationexpensefor2005.NoEntryRequiredChangeinEstimateExampleEquipment$510,000FixedAssets:Accumulateddepreciation

350,000

Netbookvalue(NBV)$160,000BalanceSheet

(Dec.31,2004)ChangeinEstimateExampleAfter7yearsEquipmentcost $510,000Salvagevalue -10,000Depreciablebase 500,000Usefullife(original) 10yearsAnnualdepreciation $50,000x7years=$350,000

First,establishNBVatdateofchangeinestimate.ChangeinEstimateExampleAfter7yearsNetbookvalue $160,000Salvagevalue(new) 5,000Depreciablebase 155,000Usefulliferemaining 8yearsAnnualdepreciation $19,375Second,calculatedepreciationexpensefor2005.Depreciationexpense 19,375 Accumulateddepreciation 19,375Journalentryfor2005ReportingaChangeinEntityExamplesofachangeinreportingentityare:Presentingconsolidatedstatementsinplaceofstatementsofindividualcompanies.Changingspecificsubsidiariesthatconstitutethegroupofcompaniesforwhichtheentitypresentsconsolidatedfinancialstatements.Changingthecompaniesincludedincombinedfinancialstatements.Changingthecost,equity,orconsolidationmethodofaccountingforsubsidiariesandinvestments.Reportedbychangingthefinancialstatementsofallpriorperiodspresented.Nocumulativeadjustmentismade.Prioryears’resultsarerestated.SummaryoftheApproachforChangesinReportingEntityReportingaChangeinEntityNewprinciplemustbepreferable.Natureofchangeandjustificationdisclosedinnotes.

JustificationsImprovedmatchingEnhancedassetvaluationNewinformationChangingconditionsCompliancewithnewreportingstandardsJustificationforAccountingChangesIwonderwhycompaniesmakeaccountingchanges?Itseemslikealotoftroubletome!ReportingaCorrectionofanErrorAccountingerrorsincludethefollowingtypes:Achangefromanaccountingprinciplethatisnotgenerallyacceptedtoanaccountingprinciplethatisacceptable.Mathematicalmistakes.Changesinestimatesthatoccurbecauseacompanydidnotpreparetheestimatesingoodfaith.Failuretoaccrueordefercertainexpensesorrevenues.Misuseoffacts.Incorrectclassificationofacostasanexpenseinsteadofanasset,andviceversa.ReportingaCorrectionofanErrorAllmaterialerrorsmustbecorrected.Recordcorrectionsoferrors

frompriorperiodsasanadjustmenttothebeginningbalanceofretainedearningsinthecurrentperiod.Suchcorrectionsarecalledpriorperiodadjustments.Forcomparativestatements,acompanyshouldrestatethepriorstatementsaffected,tocorrectfortheerror.Thecompanycomputesthecumulativeeffectoftheerrorcorrectiononpriorperiodfinancialstatements.Thatis,itcomputestheamountsthatwouldhavebeeninthefinancialstatementsifithadnotmadetheerror.ContinuedAcompanyaccountsforachangeinaccountingprinciplebypriorperiodrestatementasfollows:PriorPeriodRestatementThecompanyadjuststhecarryingvaluesofthoseassetsandliabilities(includingincometaxes)thatareaffectedbytheerror.Thecompanymakesanoffsettingentrytothebeginningbalanceofretainedearningstoreportthecumulativeeffectoftheerrorcorrection(netoftaxes)foreachperiodpresented.ContinuedPriorPeriodRestatementThecompanyadjuststhefinancialstatementsofeachpriorperiodtoreflectthespecificeffectsofcorrectingtheerror.Thecompany’sdisclosuresinclude(a)thatitspreviouslyissuedfinancialstatementshavebeenrestated,alongwithadescriptionofthenatureoftheerror,ContinuedPriorPeriodRestatement(b)theeffectofthecorrectionofeachfinancialstatementlineitem,andanypershareamountsaffectedforeachpriorperiodpresented,and (c)thecumulativeeffectofthechangeonretainedearnings(orotherappropriatecomponentofequity)atthebeginningoftheearliestperiodpresented.PriorPeriodRestatementBeforeissuingthereportfortheyearendedDecember31,2007,youdiscovera$62,500errorthatcausedthe2006inventorytobeoverstated(overstatedinventorycausedCOGStobelowerandthusnetincometobehigherin2006).WouldthisdiscoveryhaveanyimpactonthereportingoftheStatementofRetainedEarningsfor2007?Assumea20%taxrate.RetainedEarningsStatementRetainedEarningsStatementI.Errorsoccurredanddiscoveredinthesameaccountingperiod.II.Errorsoccurredinpreviousperiod.A.Errorsdidnotaffectpriorperiodnetincome.B.Errorsdidaffectpriorperiodnetincome. 1.Counterbalancingerrors 2.NoncounterbalancingerrorsAccountingErrors

ClassificationsCorrectedbyreversingtheincorrectentryandthenrecordingthecorrectentry(orbymakinganentrytocorrecttheaccountbalances)

ErrorsOccurredandDiscoveredinSamePeriodInvolvesincorrectclassificationofaccounts.Requirescorrectionofpreviouslyissuedstatements(retroactiveapproach).Isnot

classifiedasapriorperiodadjustmentsinceitdoesnotaffectpriorincome.Disclosenatureoferror.

PreviousPeriodErrorsNotAffectingNetIncomeCounterbalancingerrorsdiscoveredaftertwoormoreyearsdonotrequire

acorrectingentry.Counterbalancingerrorsdiscoveredinthesecondyearofthecyclerequireacorrectingentry.--Treatedasapriorperiodadjustment(netoftax)tobeginningRetainedEarningsbalance.

CounterbalancingErrorsAffectingPriorNetIncomeTheseerrorsdonotautomaticallycorrectthemselvesaftertwoyears.Correctionofanoncounterbalancingerrorusuallyrequiresapriorperiodadjustment(retroactiveapproach).

NoncounterbalancingErrorsAffectingPriorNetIncomeE22-19(ErrorAnalysis;CorrectingEntries)ApartialtrialbalanceofJulieHartsackCorporationisasfollowsonDecember31,2008.ErrorAnalysisExampleInstructions(a)Assumingthatthebookshavenotbeenclosed,whataretheadjustingentriesnecessaryatDecember31,2008?ErrorAnalysisExample1.

AphysicalcountofsuppliesonhandonDecember31,2008,totaled$1,100.

2.

AccruedsalariesandwagesonDecember31,2008,amountedto$4,400.

Assumingthatthebookshavenotbeenclosed,whataretheadjustingentriesnecessaryatDecember31,2008?ErrorAnalysisExample3.

Accruedinterestoninvestmentsamountsto$4,350onDecember31,2008.4.

Theunexpiredportionsoftheinsurancepoliciestotaled$65,000asofDecember31,2008.

Assumingthatthebookshavenotbeenclosed,whataretheadjustingentriesnecessaryatDecember31,2008?ErrorAnalysisExampleAssumingthatthebookshavenotbeenclosed,whataretheadjustingentriesnecessaryatDecember31,2008?5.

$28,000wasreceivedonJanuary1,2008fortherentofabuildingforboth2008and2009.Theentireamountwascreditedtorentalincome.

6.

Depreciationfortheyearwaserroneouslyrecordedas$5,000ratherthanthecorrectfigureof$50,000.E22-19(ErrorAnalysis;CorrectingEntries)A