Kế toán, kiểm toán - Chapter 21: Accounting changes and error analysis

CHAPTER 21:ACCOUNTING CHANGES AND ERROR ANALYSIS2CHAPTER 21: Accounting Changes and Error AnalysisAfter studying this chapter, you should be able to:Identify and differentiate among the types of accounting changes.Identify and explain alternative methods of accounting for accounting changes.Identify the accounting standards for each type of accounting change under IFRS and APSE.Apply the retrospective application method of accounting for a change in accounting policy and identify the disclosure requirements.Apply retrospective restatement for the correction of an accounting error and identify the disclosure requirements.Apply the prospective application method for an accounting change and identify the disclosure requirements for a change in an accounting estimate.Identify economic motives for changing accounting methods and interpret financial statements where there have been retrospective changes to previously reported results.Identify the differences between IFRS and APSE related to accounting changes.Correct the effects of errors and prepare restated financial statements.3Types of Accounting ChangesChange in Accounting PolicyChange in the choice of “specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements”Change in Accounting EstimateAdjustment based on a change in circumstances on which a previous estimate was based or as the result of new information, more experience or subsequent developments4Types of Accounting Changes (Cont’d)Correction of an error in prior period financial statementsOmissions from or mistakes in financial statements of prior periods caused by the misuse or failure to use reliable information that existed at the time financial statements were preparedThey may be intentional or an oversight 5Changes in Accounting PoliciesUnder IFRS, change in an accounting policy is permitted only when the change:Is required by a primary source of GAAP, orResults in portraying reliable and more relevant information about effects of transactions, events or conditions (voluntary)6Changes in Accounting Policies (Cont’d)Under ASPE, there is a third type of policy change permitted without having to meet the reliable but more relevant test:3. Between or among allowed ASPE accounting options for:Investments in subsidiaries, and investments with significant influence or joint controlsDevelopment phase expenditures on internally generated intangible assetsDefined benefit plansIncome taxesMeasuring equity component of compound financial instruments7Changes in Accounting PoliciesDoes not result from adoption of a:Different policy necessitated by events or transactions clearly different in substance from those previously occurringNew policy that recognizes events that have occurred for the first time or that were previously immaterial8Changes in Accounting PoliciesExamples of situations that are not changes in accounting policy:Adopting interest capitalization during construction of own long-term assets, when company had not previously been involved in self-construction Deferral of development expenditures when previously these expenses were expensed as they were immaterial9Changes in Accounting EstimatesFuture conditions and events and their effects cannot be known with certainty; therefore estimation requires exercise of judgmentUse of reasonable estimates is essential to the accounting process and does not undermine the reliability of financial statements10Changes in Accounting EstimatesExamples of items requiring estimates include:Uncollectible receivablesInventory obsolescenceFair value of financial assets/liabilitiesUseful lives and residual values of depreciable assetsLiabilities for warranty costs11Changes in Accounting EstimatesDifferentiating a change in policy and a change in estimate can be difficultFor example, is a change in depreciation method a change in policy or a change in estimate?At first glance, a change in depreciation method appears to be a change in accounting policyHowever, it is a change in estimate if it is a change in estimate of the pattern in which company benefits from the assetWhere it is not clear, treat the change as a change in estimate12Retrospective TreatmentAlso known as retroactive applicationRequires calculating the cumulative effect of the change on the financial statements at the beginning of the period as if the new method or estimate had always been usedAn adjustment is made to the financial statements equal to this cumulative effectResults in restating all affected prior years’ financial statements on a basis consistent with the newly adopted policy (i.e., as if the new accounting policy had always been used)13Current TreatmentNew accounting method or estimate’s cumulative effect on the financial statements at the beginning of the period is calculatedAn adjustment is reported in current year’s income statementPrior years’ financial statements are not restated14Prospective TreatmentPreviously reported results remain; no change is madeOpening balances are not adjusted and no attempt is made to correct or change past periodsNew policy or estimate is adopted for current and future periods only and applied to balances existing at the date of the change15Accounting StandardsType of Accounting ChangeAccounting Method AppliedChange in Accounting Policy – Adoption of primary source of GAAPApply method approved in transitional provisions section of the primary source; if none, then use retrospective application (if impractical, apply prospectively)Change in Accounting Policy – VoluntaryApply retrospectively to the extent practicableChange in accounting estimateApply prospectivelyCorrection of an errorApply retrospectively16Retrospective-with-RestatementRequirements of this method include:Retroactive application of the new method, including income tax effects using an accounting entryPrior-period financial statements included for comparative purposes are restatedDescription of the change and effect on current and prior period financial statements disclosed so that statements remain comparable 17Retrospective-with-Restatement - ExampleGiven: Voluntary change to capitalizing all avoidable interest costs on self-constructed assetsCumulative effects at January 1, 2017:Capitalizing interest: $20,000 + $200,000 = $220,000 Income tax effect: $6,000 + $60,000 = $66,00018Retrospective-with-Restatement - ExampleJanuary 1, 2017: To record retroactive changeBuildings 220,000 Deferred Tax Liability 66,000 Retained Earnings 154,00019Retrospective-with-Restatement - Example20Retrospective-with-Restatement - Example21Retrospective with Partial RestatementRetroactively restating prior years’ financial statements requires information that may be impractical to obtain on a cost-benefit basisSome standards allow for a partial retrospective applicationThe change in policy is applied at the beginning of the earliest period for which restatement is possible 22Retrospective with Partial Restatement - ExampleAssume that it was impractical for Denson Ltd. to determine the effects of the change in policy on specific years any further back than 2016. The journal entry to record the change in policy is the same as the one made for full restatement:To record change January 1, 2017: Buildings 220,000 Deferred Tax Liability 66,000 Retained Earnings 154,000However, years prior to 2016 are not restated23Retrospective with Partial RestatementAny comparative financial statements prior to 2016 are not restatedWithout restatement, this leaves the comparative financial statements as originally reported and The change’s cumulative effect prior to Jan. 1, 2016 is presented as an adjustment to Jan. 1, 2016 Retained Earnings24Disclosures – Changes in Accounting PolicyFor changes in policy resulting from initial application of a primary source of GAAP or from a voluntary change, the following must be disclosed:For first-time application of IFRS or primary source, its title, nature of change and that made in accordance with transitional provisions, and what provisions are (including those that affect future periods)The nature of any voluntary change in accounting policy, and why the new policy results in reliable and more relevant information (under ASPE, some voluntary changes are exempt from this requirement)The amount of the adjustment for each financial statement line item that is affected for current and prior periodsThe reasons it was not practicable for restatement of particular periods, with a description of how the change was applied and from what date25Disclosures – Changes in Accounting PolicyIFRS also requires disclosures for new primary sources of GAAP that are not yet effective and have not been applied:Disclose the fact that new primary source has been issued, andAny reasonably reliable information useful in assessing possible impact on financial statement in the period in which it will be first applied26Correction of an ErrorUnder ASPE, full retrospective adjustment is requiredUnder IFRS, partial retrospective adjustment is allowed if full retrospective restatement is impracticableErrors can be counterbalancing (that self-correct over two periods) or non-counterbalancing (errors that are not offset in the next accounting period). Appendix 21A provides a comprehensive illustration of both of these types of errors27Disclosures – Correction of an ErrorWhere a change is the result of an accounting error, companies must disclose that an error occurred in a prior period(s) and disclose, in the year of the correction:The nature of the error;The amount of the correction to each line item on the financial statements presented for comparative purposes;The amount of the correction made at the beginning of the earliest prior period presented28Disclosures – Error CorrectionIFRS requires additional disclosures: Where partial retrospective restatement is made on grounds of impracticability, additional information relating to impracticability and adjustment is requiredEffect of correction on basic and diluted EPS for each period presented29Prospective ApplicationEffects of changes in estimates are handled prospectivelyNo changes are made to previously reported resultsChanges in estimates are viewed as normal recurring corrections and adjustmentsEffect of a change in estimate is accounted for by including it in net income or comprehensive income as appropriate in:The period of change if the change affects that period onlyThe period of change and future periods if the change affects both30Disclosure – Change in EstimateMinimum disclosures are as follows:The nature of the change in estimateThe amount of the change in estimate affecting the current period IFRS also requires disclosure of the nature and amount of any change expected to impact future periodsIf it is not practicable to estimate effect, this fact is disclosed31Motivations for ChangePolitical costs – larger firms, larger profits, may become political targets; select policies to reduce profitsCapital structure – debt/equity structure will impact accounting policies due to debt covenantsBonus payments – when bonuses attached to income, managers may select methods that maximize incomeSmooth earnings – gradual increase (decrease) in income to shift attention32Interpreting Accounting ChangesAccounting changes often make it difficult to develop trend dataUsers of the financial statements should look at accounting changes closely when they occur and adjust trend data as appropriate33Looking AheadThe IASB plans to issue an Exposure Draft in 2016 with proposed amendments to IAS 8. The Exposure Draft will deal with the distinction between accounting policies and estimates and the impact of this distinction on financial reporting34