Kế toán, kiểm toán - Chương 22: Accounting changes and error analysis

PREVIEW OF CHAPTERIntermediate AccountingIFRS 2nd EditionKieso, Weygandt, and Warfield 22Describe 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.After studying this chapter, you should be able to:Accounting Changes and Error Analysis22LEARNING OBJECTIVESIdentify 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.Types of Accounting Changes:Change in Accounting Policy.Changes in Accounting Estimate.Errors are not considered an accounting change.Accounting Alternatives: Diminish the comparability of financial information.Obscure useful historical trend data.ACCOUNTING CHANGESLO 1Describe 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.After studying this chapter, you should be able to:Accounting Changes and Error Analysis22LEARNING OBJECTIVESIdentify 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.Average-cost to LIFO.Cost-recovery to percentage-of-completion method.Change from one accepted accounting policy to another. Examples include:CHANGES IN ACCOUNTING POLICYAdoption 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.LO 2Three approaches for reporting changes: Currently.Retrospectively.Prospectively (in the future).IASB requires use of the retrospective approach.Rationale - Users can then better compare results from one period to the next.LO 2CHANGES IN ACCOUNTING POLICYDescribe 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.After studying this chapter, you should be able to:Accounting Changes and Error Analysis22LEARNING OBJECTIVESIdentify 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.Retrospective Accounting Change ApproachCompany reporting the changeAdjusts its financial statements for each prior period presented to the same basis as the new accounting policy.Adjusts the carrying amounts of assets and liabilities as of the beginning of the first year presented. Also makes an offsetting adjustment to the opening balance of retained earnings or other appropriate component of equity or net assets as of the beginning of the first year presented. LO 3CHANGES IN ACCOUNTING POLICYIllustration: Denson Company has accounted for its income from long-term construction contracts using the cost-recovery method. In 2015, 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 cost-recovery method and plans to continue doing so in the future. (Assume a 40 percent enacted tax rate.)Retrospective Accounting Change: Long-Term ContractsLO 3CHANGES IN ACCOUNTING POLICYLO 3CHANGES IN ACCOUNTING POLICYILLUSTRATION 22-1Comparative Income Statements for Cost-Recovery versusPercentage-of-Completion MethodsData for Retrospective Change ExampleILLUSTRATION 22-2Construction in Process 220,000 Deferred Tax Liability 88,000 Retained Earnings 132,000Journal entry beginning of 2015LO 3CHANGES IN ACCOUNTING POLICYReporting a Change in PolicyMajor disclosure requirements are as follows.Nature of the change in accounting principle.Reasons why applying the new accounting policy provides reliable and more relevant information;For the current period and each prior period presented, to the extent practicable, the amount of the adjustment:For each financial statement line item affected; and Basic and diluted earnings per share.The amount of the adjustment relating to periods before those presented, to the extent practicable.LO 3CHANGES IN ACCOUNTING POLICYLO 3ILLUSTRATION 22-3Comparative Information Related to AccountingChange (Percentage-of-completion)Retained Earnings AdjustmentRetained earnings balance is €1,360,000 at the beginning of 2016.Before ChangeLO 3CHANGES IN ACCOUNTING POLICYILLUSTRATION 22-4LO 3Retained Earnings AdjustmentCHANGES IN ACCOUNTING POLICYAfter ChangeILLUSTRATION 22-5Illustration: Cherokee Construction Company changed from the cost-recovery to the percentage-of-completion method of accounting for long-term construction contracts during 2015. For tax purposes, the company employs the cost-recovery method and will continue this approach in the future. (Hint: Adjust all tax consequences through the Deferred Tax Liability account.) The appropriate information related to this change is as follows.LO 3CHANGES IN ACCOUNTING POLICYInstructions: (assume a tax rate of 35%)(a) What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?(b) What is the amount of net income and retained earnings that would be reported in 2015? Assume beginning retained earnings for 2014 to be $100,000.LO 3CHANGES IN ACCOUNTING POLICYPre-Tax Income from Long-Term ContractsLO 3Journal entry (recorded in 2015)Construction in Process 170,000 Deferred Tax Liability 59,500 Retained Earnings 110,500CHANGES IN ACCOUNTING POLICYIncome StatementStatement of Retained EarningsComparative StatementsLO 3CHANGES IN ACCOUNTING POLICYDirect Effects - IASB takes the position that companies should retrospectively apply the direct effects of a change in accounting policy. 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 ChangesLO 3CHANGES IN ACCOUNTING POLICYDescribe 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.After studying this chapter, you should be able to:Accounting Changes and Error Analysis22LEARNING OBJECTIVESIdentify 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.ImpracticabilityCompanies 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.If any of the above conditions exists, the company prospectively applies the new accounting principle.LO 4CHANGES IN ACCOUNTING POLICYDescribe 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.After studying this chapter, you should be able to:Accounting Changes and Error Analysis22LEARNING OBJECTIVESIdentify 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.CHANGES IN ACCOUNTING ESTIMATEExamples of EstimatesBad debts.Inventory obsolescence.Useful lives and residual values of assets.Periods benefited by deferred costs.Liabilities for warranty costs and income taxes.Recoverable mineral reserves.Change in depreciation estimates.Fair value of financial assets or financial liabilities.LO 5Prospective 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.IASB views changes in estimates as normal recurring corrections and adjustments and prohibits retrospective treatment.LO 5CHANGES IN ACCOUNTING ESTIMATEIllustration: Arcadia HS 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 2015 (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 2015.No Entry RequiredLO 5CHANGES IN ACCOUNTING ESTIMATEEquipment$510,000Property, Plant, and Equipment:Accumulated depreciation 350,000 Book value (BV)$160,000Statement of financial position (Dec. 31, 2014)After 7 yearsEquipment cost $510,000Residual value - 10,000Depreciable base 500,000Useful life (original) 10 yearsAnnual depreciation $ 50,000x 7 years = $350,000 First, establish book value at date of change in estimate.LO 5CHANGES IN ESTIMATEBook value $160,000Residual value (if any) 5,000Depreciable base 155,000Useful life 8 yearsAnnual depreciation $ 19,375Second, calculate depreciation expense for 2015.Depreciation expense 19,375 Accumulated depreciation 19,375Journal entry for 2015LO 5CHANGES IN ACCOUNTING ESTIMATEDisclosuresA company should disclose the nature and amount of a change in an accounting estimate that has an effect in the current period or is expected to have an effect in future periods (unless it is impracticable to estimate that effect).Companies 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.LO 5CHANGES IN ACCOUNTING ESTIMATEDescribe 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.After studying this chapter, you should be able to:Accounting Changes and Error Analysis22LEARNING OBJECTIVESIdentify 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.ACCOUNTING ERRORSTypes 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.LO 6Accounting CategoryType of RestatementExpense recognitionRecording expenses in the incorrect period or for an incorrect amount.Revenue recognitionInstances in which revenue was improperly recognized, questionable revenues were recognized, or any other number of related errors that led to misreported revenue.MisclassificationInclude restatements due to misclassification of short- or long-term accounts or those that impact cash flows from operations.Equity—otherImproper accounting for EPS, restricted stock, warrants, and other equity instruments.Reserves/ContingenciesErrors involving accounts receivables’ bad debts, inventory reserves, income tax allowances, and loss contingencies.Long-lived assetsAsset impairments of property, plant, and equipment; goodwill; or other related items.LO 6ILLUSTRATION 22-16Accounting-Error TypesACCOUNTING ERRORSAccounting CategoryLO 6Type of RestatementTaxesErrors involving correction of tax provision, improper treatment of tax liabilities, and other tax-related items.Equity—other comprehensive incomeImproper accounting for comprehensive income equity transactions including foreign currency items, revaluations of plant assets, unrealized gains and losses on certain investments in debt, equity securities, and derivatives.InventoryInventory costing valuations, quantity issues, and cost of sales adjustments.Equity—share optionsImproper accounting for employee share options.OtherAny restatement not covered by the listed categories, including those related to improper accounting for acquisitions or mergers.ILLUSTRATION 22-16Accounting-Error TypesSource: T. Baldwin and D. Yoo, “Restatements—Traversing Shaky Ground,” Trend Alert, Glass Lewis & Co. (June 2, 2005), p. 8.; and “2012 Financial Restatements,” Audit Analytics (March 2013).ACCOUNTING 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 6ACCOUNTING ERRORSIllustration: In 2016 the bookkeeper for Selectro Company discovered an error. In 2015 the company failed to record £20,000 of 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 6Example of Error CorrectionSelectro’s income statement for 2015 with and without the error.LO 6Example of Error CorrectionWhat are the entries that Selectro should have made and did make for recording depreciation expense and income taxes?ILLUSTRATION 22-17Example of Error CorrectionILLUSTRATION 22-17ILLUSTRATION 22-18LO 6LO 6Example of Error CorrectionILLUSTRATION 22-18Retained Earnings 12,000Correcting Entry in 2016ILLUSTRATION 22-18LO 6Example of Error CorrectionPrepare the proper correcting entry in 2016, that should be made by Selectro.Retained Earnings 12,000 Correcting Entry in 2016ReversalLO 6Example of Error CorrectionDeferred Tax Liability 8,000ILLUSTRATION 22-18Prepare the proper correcting entry in 2016, that should be made by Selectro.Retained Earnings 12,000Correcting Entry in 2016LO 6Example of Error Correction Accumulated Depreciation—Buildings 20,000Deferred Tax Liability 8,000ILLUSTRATION 22-18Prepare the proper correcting entry in 2016, that should be made by Selectro.Illustration: Selectro Company has a beginning retained earnings balance at January 1, 2016, of £350,000. The company reports net income of £400,000 in 2016.LO 6Example of Error CorrectionSingle-Period StatementsILLUSTRATION 22-19Reporting an Error—Single-Period FinancialStatementComparative 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 6Example of Error CorrectionBefore issuing the report for the year ended December 31, 2014, you discover a $62,500 error that caused the 2013 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2013). Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2014? Assume a 20% tax rate. LO 6ACCOUNTING ERRORSLO 6ACCOUNTING ERRORSILLUSTRATION 22-21LO 6Summary of Accounting Changes and Correction of ErrorsACCOUNTING ERRORSLO 6Summary of Changes and ErrorsILLUSTRATION 22-21Describe 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.After studying this chapter, you should be able to:Accounting Changes and Error Analysis22LEARNING OBJECTIVESIdentify 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.Why companies may prefer certain accounting methods. Some reasons are:Political costs.Capital Structure.Bonus Payments.Smooth Earnings.Motivations for Changes of Accounting MethodLO 7ACCOUNTING ERRORSDescribe 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.After studying this chapter, you should be able to:Accounting Changes and Error Analysis22LEARNING OBJECTIVESIdentify 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.ERROR ANALYSISCompanies 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.LO 8Statement of financial position errors affect only the presentation of an asset, liability, or equity account.Current year error - reclassify item to its proper position.Prior year error - restate the statement of financial position of the prior year for comparative purposes.LO 8Statement of Financial Position ErrorsERROR ANALYSISImproper 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.LO 8Income Statement ErrorsERROR ANALYSISCounterbalanceing errors will be offset or corrected over two periods.1. If company has closed the books in the current year: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.For comparative purposes, restatement is necessary even if a correcting journal entry is not required.LO 8Statement of Financial Position and Income Statement ErrorsERROR ANALYSISCounterbalanceing errors will be offset or corrected over two periods.2. If company has not closed the books in the current year: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 8Statement of Financial Position and Income Statement ErrorsERROR ANALYSISNot offset in the next accounting period.Companies must make correcting entries, even if they have closed the books.LO 8Non-Counterbalancing ErrorsStatement of financial position and Income Statement ErrorsERROR ANALYSISE22-19 (Error Analysis; Correcting Entries): A partial trial balance of Dickinson Corporation is as follows on December 31, 2015.Instructions: (a) Assuming that the books have not been closed, what are the adjusting entries necessary at December 31, 2015? LO 8ERROR ANALYSIS1. A physical count of supplies on hand on December 31, 2015, totaled R1,100.2. Accrued salaries and wages on December 31, 2015, amounted to R4,400.(a) Assuming that the books have not been closed, what are the adjusting entries necessary at December 31, 2015?LO 8Supplies Expense (R2,500 – R1,100) 1,400 Supplies on Hand 1,400Salary and Wages Expense 2,900 Accrued Salaries and Wages 2,900ERROR ANALYSIS3. Accrued interest on investments amounts to R4,350 on December 31, 2015.4. The unexpired portions of the insurance policies totaled R65,000 as of December 31, 2015. (a) Assuming that the books have not been closed, what are the adjusting entries necessary at December 31, 2015?LO 8Interest Revenue (R5,100 – R4,350) 750 Interest Receivable 750Insurance Expense 25,000 Prepaid Insurance 25,000ERROR ANALYSIS5. R24,000 was received on January 1, 2015, for the rent of a building for both 2015 and 2016. The entire amount was credited to rental income.6. Depreciation for the year was erroneously recorded as R5,000 rather than the correct figure of R50,000.(a) Assuming that the books have not been closed, what are the adjusting entries necessary at December 31, 2015?LO 8Rental Income (R24,000 ÷ 2) 12,000 Unearned Rent 12,000Depreciation Expense 45,000 Accumulated Depreciation 45,000ERROR ANALYSISE22-19 (Error Analysis; Correcting Entries): A partial trial balance of Dickinson Corporation is as follows on December 31, 2015.Instructions: (b) Assuming that the books have been closed, what are the adjusting entries necessary at December 31, 2015?LO 8ERROR ANALYSIS(b) Assuming that the books have been closed, what are the adjusting entries necessary at December 31, 2015?1. A physical count of supplies on hand on December 31, 2015, totaled R1,100.2. Accrued salaries and wages on December 31, 2015, amounted to R4,400.LO 8Retained Earnings 1,400 Supplies 1,400Retained Earnings 2,900 Accrued Salaries and Wages 2,900ERROR ANALYSIS3. Accrued interest on investments amounts to R4,350 on December 31, 2015.4. The unexpired portions of the insurance policies totaled R65,000 as of December 31, 2015.(b) Assuming that the books have been closed, what are the adjusting entries necessary at December 31, 2015?LO 8Retained Earnings (R5,100 – R4,350) 750 Interest Receivable 750Retained Earnings 25,000 Prepaid Insurance 25,000ERROR ANALYSIS5. R24,000 was received on January 1, 2015 for the rent of a building for both 2015 and 2016. The entire amount was credited to rental income.6. Depreciation for the year was erroneously recorded as R5,000 rather than the correct figure of R50,000.(b) Assuming that the books have been closed, what are the adjusting entries necessary at December 31, 2015?LO 8Retained Earnings 12,000 Unearned Rent 12,000Retained Earnings 45,000 Accumulated Depreciation 45,000ERROR ANALYSISACCOUNTING CHANGES AND ERRORSThe FASB has issued guidance on changes in accounting policies, changes in estimates, and corrections of errors, which essentially converges U.S. GAAP to IAS 8.GLOBAL ACCOUNTING INSIGHTSRelevant FactsFollowing are the key similarities and differences between U.S. GAAP and IFRS related to accounting for accounting changes.SimilaritiesThe accounting for changes in estimates is similar between U.S. GAAP and IFRS. Under U.S. 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.GLOBAL ACCOUNTING INSIGHTSRelevant FactsDifferencesOne area in which U.S. GAAP and IFRS differ is the reporting of error corrections in previously issued financial statements. While both sets of standards require restatement, U.S. GAAP is an absolute standard—there is no exception to this rule. Under U.S. GAAP, the impracticality exception applies only to changes in accounting principle. Under IFRS, this exception applies both to changes in accounting principles and to the correction of errors. U.S. GAAP has detailed guidance on the accounting and reporting of indirect effects. As indicated in the chapter, IFRS (IAS 8) does not specifically address the accounting and reporting for indirect effects of changes in accounting principles.GLOBAL ACCOUNTING INSIGHTSOn the HorizonFor the most part, U.S. GAAP and IFRS are similar in the area of accounting changes and reporting the effects of errors. Thus, there is no active project in this area. A related development involves the presentation of comparative data. U.S. GAAP requires comparative information for a three-year period. Under IFRS, when a company prepares financial statements on a new basis, two years of comparative data are reported. Use of the shorter comparative data period must be addressed before U.S. companies can adopt IFRS.GLOBAL ACCOUNTING INSIGHTSCopyright © 2015 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. 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