Nguyên lý kế toán - Chapter 20: Accounting changes and error corrections

Chapter 20Accounting Changesand Error CorrectionsAccounting ChangesCorrection of an ErrorError Corrections and Most Changes in PrincipleRetrospectiveTwoReporting ApproachesProspective Revise prior years’ statements (that arepresented for comparative purposes) to reflectthe impact of the change.The balance in each account affected is revised to appear as if the newly adopted accounting method had been applied all along or that the error had never occurred.Adjust the beginning balance of retained earnings for the earliest period reported.Changes in Estimates andSome Changes in PrincipleRetrospectiveTwoReporting ApproachesProspective The change is implemented in the current period, and its effects are reflected in thefinancial statements of the current andfuture years only.Prior years’ statements are not revised.Account balances are not revised.Motivation for Accounting ChoicesChanging ConditionsNew AccountingStandard IssuedEffect on CompensationEffect on Debt AgreementsEffect on Union NegotiationsMotivations for ChangeEffect on Income TaxesDisclosure NotesIn the first set of financial statements after thechange is made, a disclosure note is needed toProvidejustification for the change.Point out thatcomparativeinformation hasbeen revised.Report any pershare amountsaffected for thecurrent and allprior periods.Prospective Approach The prospective approach is used for changes in principle when:It is impracticable to determine some period-specific effects.It is impracticable to determine the cumulative effect of prior years.The change is mandated by authoritative pronouncements.Most changes in principle are reportedby the retrospective approach, but:Prospective Approach: Change in Accounting EstimateA change in depreciation methodis considered to be a change in accounting estimate that is achieved by a change in accounting principle. It is accounted for prospectively as a change in accounting estimate.Change in Reporting EntityA change in reporting entity occurs as a result of presenting consolidated financial statements in place of statements of individual companies, or changing specific companies that constitute the group for which consolidated statements are  prepared.Change in Reporting EntitySummary of the Retrospective Approachfor Changes in Reporting EntityRecast all previous periods’ financial statements as if the new reporting entity existed in those periods.In the first financial statements after the change: A disclosure note should describe the nature of and the reason for the change.The effect of the change on revenue, net income, income before extraordinary items, and related per share amounts should be shown for all periods presented.Error CorrectionExamples include:Use of inappropriate principleMistakes in applying GAAPArithmetic mistakesFraud or gross negligence in reportingFor all years presented, financial statements are retrospectively restated to reflect the error correction.Correction of Accounting ErrorsFour-step processPrepare a journal entry to correct any balances.Retrospectively restate prior years’ financial statements that were incorrect.Report correction as a prior period adjustment if retained earnings is one of the incorrect accounts affected.Include a disclosure note.Counterbalancing error discovered in the second year.Noncounterbalancing error discovered in any year.Use the retrospective approachPrior Period Adjustment RequiredPrior Period AdjustmentsErrors Occurred and Discoveredin the Same PeriodCorrected by reversing the incorrect entry and then recording the correct entry (or by making an entry to correct the account balances)Errors Not AffectingPrior Years’ Net IncomeInvolves incorrect classification of accounts.Requires correction of previously issued statements (retrospective approach).Is not classified as a prior period adjustment since it does not affect prior income.Disclose nature of error.Error Affecting Prior Year’s Net IncomeRequires correction of previously issued statements (retrospective approach).All incorrect account balances must be corrected.Is classified as a prior period adjustment since it does affect prior income.Disclose nature of error.Reporting Accounting Changes and Error CorrectionsSummary of AccountingChanges and ErrorsEnd of Chapter 20