Kế toán, kiểm toán - Accounting changes and error analysis

Prepared by Coby Harmon University of California, Santa BarbaraIntermediate AccountingIntermediate Accounting14th Edition22Accounting Changes and Error AnalysisKieso, Weygandt, and Warfield Identify the two types of accounting changes.Describe the accounting for changes in accounting policies.Understand how to account for retrospective accounting changes.Understand how to account for impracticable changes.Describe the accounting for changes in estimates.Describe the accounting for correction of errors.Identify economic motives for changing accounting policies.Analyze the effect of errors.Learning ObjectivesChanges in accounting policyChanges in accounting estimateChange in reporting entityCorrection of errorsSummaryMotivations for change of methodAccounting ChangesError AnalysisBalance sheet errorsIncome statement errorsBalance sheet and income statement effectsComprehensive examplePreparation of statements with error correctionsAccounting Changes and Error AnalysisTypes of Accounting Changes:Change in Accounting Policy.Changes in Accounting Estimate.Change in Reporting Entity.Errors are not considered an accounting change.LO 1 Identify the two types of accounting changes.Accounting Alternatives: Diminish the comparability of financial information.Obscure useful historical trend data.Accounting ChangesAverage cost to LIFO.Completed-contract to percentage-of-completion.Change from one accepted accounting policy to another. Examples include:Changes in Accounting PrincipleLO 2 Describe the accounting for changes in accounting policies.Adoption of a new policy in recognition of events that have occurred for the first time or that were previously immaterial is not an accounting change.Three approaches for reporting changes: Currently.Retrospectively.Prospectively (in the future).FASB requires use of the retrospective approach.Rationale - Users can then better compare results from one period to the next.LO 2 Describe the accounting for changes in accounting policies.Changes in Accounting PrincipleRetrospective Accounting Change ApproachLO 3 Understand how to account for retrospective accounting changes.Company reporting the changeAdjusts its financial statements for each prior period presented to the same basis as the new accounting principle.Adjusts the carrying amounts of assets and liabilities as of the beginning of the first year presented, plus the opening balance of retained earnings.Changes in Accounting PrincipleIllustration: Denson Company has accounted for its income from long-term construction contracts using the completed-contract method. In 2012, the company changed to the percentage-of-completion method. Management believes this approach provides a more appropriate measure of the income earned. For tax purposes, the company uses the completed-contract method and plans to continue doing so in the future. (Assume a 40 percent enacted tax rate.)LO 3 Understand how to account for retrospective accounting changes.Retrospective Accounting Change: Long-Term ContractsChanges in Accounting PrincipleIllustration 22-1LO 3 Understand how to account for retrospective accounting changes.Changes in Accounting PrincipleData for Retrospective ChangeIllustration 22-2Construction in Process 220,000 Deferred Tax Liability 88,000 Retained Earnings 132,000LO 3 Understand how to account for retrospective accounting changes.Journal entry beginning of 2012Changes in Accounting PrincipleReporting a Change in PrincipleLO 3 Understand how to account for retrospective accounting changes.Major disclosure requirements are as follows.Nature of the change in accounting policy;The method of applying the change, and:A description of the prior period information that has been retrospectively adjusted, if any.The effect of the change on income from continuing operations, net income (or other appropriate captions of changes in net assets or performance indicators), any other affected line item.The cumulative effect of the change on retained earnings or other components of equity or net assets in the balance sheet as of the beginning of the earliest period presented.Changes in Accounting PrincipleLO 3Illustration 22-3Reporting a Change in policyChanges in Accounting PrincipleRetained Earnings AdjustmentLO 3 Understand how to account for retrospective accounting changes.Illustration 22-4Retained earnings balance is $1,360,000 at the beginning of 2010.Before ChangeChanges in Accounting PrincipleLO 3 Understand how to account for retrospective accounting changes.Illustration 22-5After ChangeRetained Earnings AdjustmentChanges in Accounting PrincipleE22-1 (Change in Principle—Long-Term Contracts): Cherokee Construction Company changed from the completed-contract to the percentage-of-completion method of accounting for long-term construction contracts during 2012. For tax purposes, the company employs the completed-contract method and will continue this approach in the future. (Hint: Adjust all tax consequences through the Deferred Tax Liability account.)LO 3 Understand how to account for retrospective accounting changes.Changes in Accounting PrincipleE22-1 (Change in policy—Long-Term Contracts):LO 3 Understand how to account for retrospective accounting changes.Instructions: (assume a tax rate of 35%)(b) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?(a) What is the amount of net income and retained earnings that would be reported in 2012? Assume beginning retained earnings for 2011 to be $100,000.Changes in Accounting PrincipleLO 3 Understand how to account for retrospective accounting changes.Changes in Accounting PrincipleE22-1: Pre-Tax Income from Long-Term ContractsLO 3 Understand how to account for retrospective accounting changes.Income StatementStatement of Retained EarningsChanges in Accounting PrincipleE22-1: Comparative StatementsLO 3 Understand how to account for retrospective accounting changes.Direct Effects - FASB takes the position that companies should retrospectively apply the direct effects of a change in accounting principle. Indirect Effect is any change to current or future cash flows of a company that result from making a change in accounting principle that is applied retrospectively.Direct and Indirect Effects of ChangesChanges in Accounting PrincipleImpracticabilityLO 4 Understand how to account for impracticable changes.Companies should not use retrospective application if one of the following conditions exists:Company cannot determine the effects of the retrospective application.Retrospective application requires assumptions about management’s intent in a prior period.Retrospective application requires significant estimates that the company cannot develop.Changes in Accounting PrincipleIf any of the above conditions exists, the company prospectively applies the new accounting principle.Changes in Accounting EstimateLO 5 Describe the accounting for changes in estimates.Examples of EstimatesUncollectible receivables.Inventory obsolescence.Useful lives and salvage values of assets.Periods benefited by deferred costs.Liabilities for warranty costs and income taxes.Recoverable mineral reserves.Change in depreciation methods.Changes in Accounting EstimateLO 5 Describe the accounting for changes in estimates.Prospective ReportingChanges in accounting estimates are reported prospectively. Account for changes in estimates in the period of change if the change affects that period only, or the period of change and future periods if the change affects both.FASB views changes in estimates as normal recurring corrections and adjustments and prohibits retrospective treatment.Illustration: Arcadia High School purchased 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 2012 (year 8), it is determined that the total estimated life should be 15 years with a salvage value of $5,000 at the end of that time.Required:What is the journal entry to correct prior years’ depreciation expense?Calculate depreciation expense for 2012.No Entry RequiredChange in Estimate ExampleLO 5 Describe the accounting for changes in estimates.Equipment$510,000Fixed Assets:Accumulated depreciation 350,000 Net book value (NBV)$160,000Balance Sheet (Dec. 31, 2011)Change in Estimate ExampleAfter 7 yearsEquipment cost $510,000Salvage value - 10,000Depreciable base 500,000Useful life (original) 10 yearsAnnual depreciation $ 50,000x 7 years = $350,000 First, establish NBV at date of change in estimate.LO 5 Describe the accounting for changes in estimates.Net book value $160,000Salvage value (if any) 5,000Depreciable base 155,000Useful life 8 yearsAnnual depreciation $ 19,375Change in Estimate ExampleSecond, calculate depreciation expense for 2012.Depreciation expense 19,375 Accumulated depreciation 19,375Journal entry for 2012LO 5 Describe the accounting for changes in estimates.Changes in Accounting EstimateLO 5 Describe the accounting for changes in estimates.DisclosuresCompanies need not disclose changes in accounting estimate made as part of normal operations, such as bad debt allowances or inventory obsolescence, unless such changes are material.However, for a change in estimate that affects several periods (such as a change in the service lives of depreciable assets), companies should disclose the effect on income from continuing operations and related per-share amounts of the current period.Change in Reporting EntityLO 6 Identify changes in a reporting entity.Examples of a change in reporting entity are:Presenting consolidated statements in place of statements of individual companies.Changing specific subsidiaries that constitute the group of companies for which the entity presents consolidated financial statements.Changing the companies included in combined financial statements.Changing the cost, equity, or consolidation method of accounting for subsidiaries and investments.Reported by changing the financial statements of all prior periods presented.Correction of ErrorsLO 7 Describe the accounting for correction of errors.Types of Accounting Errors:A change from an accounting principle that is not generally accepted to an accounting policy that is acceptable. Mathematical mistakes.Changes in estimates that occur because a company did not prepare the estimates in good faith. Failure to accrue or defer certain expenses or revenues.Misuse of facts.Incorrect classification of a cost as an expense instead of an asset, and vice versa.Correction of ErrorsAll material errors must be corrected. Record corrections of errors from prior periods as an adjustment to the beginning balance of retained earnings 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.LO 7 Describe the accounting for correction of errors.Correction of ErrorsIllustration: In 2013 the bookkeeper for Selectro Company discovered an error: In 2012 the company failed to record $20,000of depreciation expense on a newly constructed building. This building is the only depreciable asset Selectro owns. The company correctly included the depreciation expense in its tax return and correctly reported its income taxes payable. LO 7 Describe the accounting for correction of errors.Correction of ErrorsIllustration: Selectro’s income statement for 2012 with and without the error.Illustration 22-19Show the entries that Selectro should have made and did make for recording depreciation expense and income taxes.LO 7 Describe the accounting for correction of errors.Correction of ErrorsIllustration: Show the entries that Selectro should have made and did make for recording depreciation expense and income taxes.Illustration 22-18Correcting Entry in 2013LO 7 Describe the accounting for correction of errors.Correction of ErrorsIllustration: Show the entries that Selectro should have made and did make for recording depreciation expense and income taxes.Retained Earnings 12,000Correcting Entry in 2013LO 7 Describe the accounting for correction of errors.Illustration 22-18Correction of ErrorsIllustration: Show the entries that Selectro should have made and did make for recording depreciation expense and income taxes.Retained Earnings 12,000Deferred Tax Liability 8,000 Correcting Entry in 2013ReversalLO 7 Describe the accounting for correction of errors.Illustration 22-18Correction of ErrorsIllustration: Show the entries that Selectro should have made and did make for recording depreciation expense and income taxes.Retained Earnings 12,000Deferred Tax Liability 8,000 Accumulated Depreciation—Buildings 20,000Correcting Entry in 2013RecordLO 7 Describe the accounting for correction of errors.Illustration 22-18Correction of ErrorsIllustration (Single-Period Statement): Assume that Selectro Company has a beginning retained earnings balance at January 1, 2013, of $350,000. The company reports net income of $400,000 in 2013.Illustration 22-21LO 7 Describe the accounting for correction of errors.Correction of ErrorsComparative StatementsCompany should make adjustments to correct the amounts for all affected accounts reported in the statements for all periods reported. restate the data to the correct basis for each year presented.show any catch-up adjustment as a prior period adjustment to retained earnings for the earliest period it reported. LO 7 Describe the accounting for correction of errors.Before issuing the report for the year ended December 31, 2012, you discover a $62,500 error that caused the 2011 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2011). Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2012? Assume a 20% tax rate. Correction of ErrorsLO 7 Describe the accounting for correction of errors.Correction of ErrorsLO 7 Describe the accounting for correction of errors.Summary of Accounting Changes and ErrorsIllustration 22-23LO 7Summary of Accounting Changes and ErrorsIllustration 22-23LO 7Motivations for Change of Accounting MethodLO 8 Identify economic motives for changing accounting policies.Why companies may prefer certain accounting methods. Some reasons are:Political costs.Capital Structure.Bonus Payments.Smooth Earnings.Error AnalysisLO 9 Analyze the effect of errors.Companies must answer three questions:What type of error is involved?What entries are needed to correct for the error?After discovery of the error, how are financial statements to be restated?Companies treat errors as prior-period adjustments and report them in the current year as adjustments to the beginning balance of Retained Earnings.Balance sheet errors affect only the presentation of an asset, liability, or stockholders’ equity account.Current year error - reclassify item to its proper position.Prior year error - restate the balance sheet of the prior year for comparative purposes.Balance Sheet ErrorsLO 9 Analyze the effect of errors.Improper classification of revenues or expenses.Current year error - reclassify item to its proper position.Prior year error - restate the income statement of the prior year for comparative purposes.Income Statement ErrorsLO 9 Analyze the effect of errors.Counterbalancing ErrorsWill be offset or corrected over two periods.If company has closed the books:If the error is already counterbalanced, no entry is necessary.If the error is not yet counterbalanced, make entry to adjust the present balance of retained earnings.LO 9 Analyze the effect of errors.For comparative purposes, restatement is necessary even if a correcting journal entry is not required.Balance Sheet and Income Statement ErrorsWill be offset or corrected over two periods.If company has not closed the books:If error already counterbalanced, make entry to correct the error in the current period and to adjust the beginning balance of Retained Earnings.If error not yet counterbalanced, make entry to adjust the beginning balance of Retained Earnings.LO 9 Analyze the effect of errors.Balance Sheet and Income Statement ErrorsCounterbalancing ErrorsNon-Counterbalancing ErrorsNot offset in the next accounting period.Companies must make correcting entries, even if they have closed the books.LO 9 Analyze the effect of errors.Balance Sheet and Income Statement ErrorsE22-19 (Error Analysis; Correcting Entries): A partial trial balance of Dickinson Corporation is as follows on December 31, 2012.Error Analysis ExampleLO 9 Analyze the effect of errors.Instructions: (a) Assuming that the books have not been closed, what are the adjusting entries necessary at December 31, 2012? Error Analysis ExampleLO 9 Analyze the effect of errors.1. A physical count of supplies on hand on December 31, 2012, totaled $1,100.2. Accrued salaries and wages on December 31, 2012, amounted to $4,400.(a) Assuming that the books have not been closed, what are the adjusting entries necessary at December 31, 2012?Error Analysis ExampleLO 9 Analyze the effect of errors.3. Accrued interest on investments amounts to $4,350 on December 31, 2012.4. The unexpired portions of the insurance policies totaled $65,000 as of December 31, 2012. (a) Assuming that the books have not been closed, what are the adjusting entries necessary at December 31, 2012?Error Analysis ExampleLO 9 Analyze the effect of errors.5. $24,000 was received on January 1, 2012 for the rent of a building for both 2012 and 2013. The entire amount was credited to rental income.6. Depreciation for the year was erroneously recorded as $5,000 rather than the correct figure of $50,000.(a) Assuming that the books have not been closed, what are the adjusting entries necessary at December 31, 2012?E22-19 (Error Analysis; Correcting Entries) A partial trial balance of Dickinson Corporation is as follows on December 31, 2012.Error Analysis ExampleLO 9 Analyze the effect of errors.Instructions: (b) Assuming that the books have been closed, what are the adjusting entries necessary at December 31, 2012?Error Analysis ExampleLO 9 Analyze the effect of errors.(b) Assuming that the books have been closed, what are the adjusting entries necessary at December 31, 2012?1. A physical count of supplies on hand on December 31, 2012, totaled $1,100.2. Accrued salaries and wages on December 31, 2012, amounted to $4,400.Error Analysis ExampleLO 9 Analyze the effect of errors.3. Accrued interest on investments amounts to $4,350 on December 31, 2012.4. The unexpired portions of the insurance policies totaled $65,000 as of December 31, 2012.(b) Assuming that the books have been closed, what are the adjusting entries necessary at December 31, 2012?Error Analysis ExampleLO 9 Analyze the effect of errors.5. $24,000 was received on January 1, 2012 for the rent of a building for both 2012 and 2013. The entire amount was credited to rental income.6. Depreciation for the year was erroneously recorded as $5,000 rather than the correct figure of $50,000.(b) Assuming that the books have been closed, what are the adjusting entries necessary at December 31, 2012?LO 10 Make the computations and prepare the entries necessary to record a change from or to the equity method of accounting.Change From The Equity MethodChange from the equity method to the fair-value method. Earnings or losses previously recognized under the equity method should remain as part of the carrying amount of the investment.The cost basis is the carrying amount of the investment at the date of the change. The investor applies the new method in its entirety. At the next reporting date, the investor should record the unrealized holding gain or loss to recognize the difference between the carrying amount and fair value.APPENDIX 22ACHANGING FROM OR TO THE EQUITY METHODAccounted for such dividends as a reduction of the investment carrying amount, rather than as revenue.Reason: Dividends in excess of earnings are viewed as a ________________ with this excess then accounted for as a reduction of the equity investment. liquidating dividendAPPENDIX 22ACHANGING FROM OR TO THE EQUITY METHODLO 10 Make the computations and prepare the entries necessary to record a change from or to the equity method of accounting.Dividends in Excess of EarningsIllustration: On January 1, 2011, Investor Company purchased 250,000 shares of Investee Company’s 1,000,000 shares of outstanding stock for $8,500,000. Investor correctly accounted for this investment using the equity method. After accounting for dividends received and investee net income, in 2011, Investor reported its investment in Investee Company at $8,780,000 at December 31, 2011. On January 2, 2012, Investee Company sold 1,500,000 additional shares of its own common stock to the public, thereby reducing Investor Company’s ownership from 25 percent to 10 percent.APPENDIX 22ACHANGING FROM OR TO THE EQUITY METHODLO 10 Make the computations and prepare the entries necessary to record a change from or to the equity method of accounting.Dividends in Excess of EarningsIllustration 22A-1APPENDIX 22ACHANGING FROM OR TO THE EQUITY METHODLO 10 Make the computations and prepare the entries necessary to record a change from or to the equity method of accounting.Dividends in Excess of EarningsIllustration 22A-2Impact on Investment Carrying AmountCash 400,000 Dividend Revenue 400,000Cash 210,000 Equity Investments (AFS) 60,000 Dividend Revenue 150,0002012 & 20132014APPENDIX 22ACHANGING FROM OR TO THE EQUITY METHODLO 10Change To The Equity MethodCompanies use retrospective application. The carrying amount of the investment, results of current and prior operations, and retained earnings of the investor are adjusted as if the equity method has been in effect during all of the previous periods.Companies also eliminate any balances in the Unrealized Holding Gain or Loss—Equity account and the Securities Fair Value Adjustment account. APPENDIX 22ACHANGING FROM OR TO THE EQUITY METHODLO 10 Make the computations and prepare the entries necessary to record a change from or to the equity method of accounting.RELEVANT FACTSOne area in which GAAP and IFRS differ is the reporting of error corrections in previously issued financial statements. While both sets of standards require restatement, GAAP is an absolute standard—that is, there is no exception to this rule.The accounting for changes in estimates is similar between GAAP and IFRS.Under GAAP and IFRS, if determining the effect of a change in accounting policy is considered impracticable, then a company should report the effect of the change in the period in which it believes it practicable to do so, which may be the current period.RELEVANT FACTSUnder IFRS, the impracticality exception applies both to changes in accounting principles and to the correction of errors. Under GAAP, this exception applies only to changes in accounting principle.IFRS (IAS 8) does not specifically address the accounting and reporting for indirect effects of changes in accounting principles. As indicated in the chapter, GAAP has detailed guidance on the accounting and reporting of indirect effects.Which of the following is false?GAAP and IFRS have the same absolute standard regarding the reporting of error corrections in previously issued financial statements.The accounting for changes in estimates is similar between GAAP and IFRS.Under IFRS, the impracticality exception applies both to changes in accounting principles and to the correction of errors.GAAP has detailed guidance on the accounting and reporting of indirect effects; IFRS does not.IFRS SELF-TEST QUESTIONWhich of the following is not classified as an accounting change by IFRS?Change in accounting policy.Change in accounting estimate.Errors in financial statements.None of the above.IFRS SELF-TEST QUESTIONIFRS requires companies to use which method for reporting changes in accounting policies?Cumulative effect approach.Retrospective approach.Prospective approach.Averaging approach.IFRS SELF-TEST QUESTIONCopyright © 2012 John Wiley & Sons, Inc. 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