ACCT 305 Lecture Notes - Lecture 22: Financial Statement, Retained Earnings, Accrued Interest

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14 Apr 2020

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Accounting alternatives: diminish the comparability of financial information, obscure useful historical trend data. Types of accounting changes: change in accounting policy, changes in accounting estimate, change in reporting entity. Changes in accounting principle: change from one accepted accounting policy to another, examples include, average cost to lifo, completed-contract to percentage-of-completion. *adoption of a new principle 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) *if any of the above conditions exists, the company prospectively applies the new accounting principle. Retained earnings balance is ,360,000 at the beginning of 2012. Examples of estimates: uncollectible receivables, inventory obsolescence, useful lives and salvage values of assets, periods benefitted by deferred costs, liabilities for warranty costs and income taxes, recoverable mineral reserves, change in depreciation methods.

Related Questions

ASC 250 âAccounting Changes and Error Correctionsâ

This case clarified the treatment of accounting changes afteracquisitions. As we have seen, FASBâs guidance comes through ASC805 âBusiness Combinations.â However, the guidance for other typesof accounting changes is in ASC 250 âAccounting Changes and ErrorCorrections.â This section will integrate accounting changes afteran acquisition with the accounting changes listed in ASC 250.

ASC 250 lists four types of accounting changes.

Change in Accounting Principle â for example, a newrevenue-recognition standard

Change in Accounting Estimate â for example, change inestimated useful life of a depreciable asset

Change in Reporting Entity

Correction of an Error in previously issued financialstatements â for example, last periodâs inventory and thereforeretained earnings were overstated

One particularly confusing element of ASC 250 is the categorycalled âchange in reporting entity.â To the unwary observer thissounds a lot like an acquisition, but that is actually not thecase. The reason that the distinction is critical is that ASC 250prescribes a retroactive accounting to âchange in reportingentity,â but as we just saw the accounting treatment foracquisitions is prospective, with only limited pro-formalretroactive disclosures.

The key accounting question for these four types of changes anderrors is whether the change is accounted forretrospectively orprospectively. In the former case, weadjust previous financial statements to reflect the newinformation. In the latter case, we make no adjustments to previousfinancial statements.

To help you become more familiar with these terms and therequirements of the codification, Work Schedule 6 lists the fourscenarios covered by ASC 250. As the schedule shows, three of thefour scenarios are treated retrospectively, including a âchange inreporting entity.â To gain a better understanding of whatretrospective and prospective means, please identify the paragraphnumber that prescribes the appropriate accounting treatment(retrospective or prospective) to the four scenarios. Although youare only asked to identify the paragraph number, it is suggestedthat you also identify the specific word(s) in the paragraph thatindicate retrospective or prospective treatment for each of thefour types of changes.

Work Schedule 6. ASC 250 âAccounting Changesand Error Correctionsâ.
For:	Accounting Treatment	Paragraph Number

Change in Accounting Principle	Retrospective
Indicate the paragraph number in the box above and copy andpaste the paragraph and highlight/underline the words indicatingretrospective application.


Change in Accounting Estimate	Prospective
Indicate the paragraph number in the box above and copy andpaste the paragraph and highlight/underline the words indicatingprospective application.


Change in Reporting Entity	Retrospective
Indicate the paragraph number in the box above and copy andpaste the paragraph and highlight/underline the words indicatingretrospective application.


Correction of an Error	Retrospective
Indicate the paragraph number in the box above and copy andpaste the paragraph and highlight/underline the words indicatingretrospective application.

As the schedule indicates, changes and corrections are accountedfor retrospectively, with the exception of a change in estimatewhich is accounted for prospectively. Our focus here is to clarifythat changes in accounting entity does not coveracquisitions. According the ASC 250-10-34-21, âChanges inAccounting entityâ consists of an accounting change that results ina âdifferent reporting entityâ. To the casual observer,acquisitions would seem to fit this category, with the requirementof retroactive restatement of all prior periods as if the acquiredcompany had always been a part of the acquirer. However, this isnot the case, as ASC 250-10-20 indicates (emphasis added):

A change in reportingentity is limited mainly to the following:

Presenting consolidated or combined financial statements inplace of financial statements of individual entities

Changing specific subsidiaries that make up the group ofentities for which consolidated financial statements arepresented

Changing the entities included in combined financialstatements.

Item (b) at first view seems to include acquisitions, however thecodification adds the following exclusionarystatement:

Neither a business combinationaccounted for by the acquisition method nor the consolidation of aVIE pursuant to topic 810 is a change in reporting entity.

To summarize, âchange in reporting entityâ, which are accounted forretroactively, relates to the decision to consolidate existingsubsidiaries (a topic that is sometimes covered in a senior-levelaccounting course). It does not relate to newly-acquiredsubsidiaries, which are accounted for prospectively with limitedretrospective disclosures. The main takeaway is that acquisitionsare not covered by âchange in reporting entityâ and receiveprospective accounting treatment with only limited retrospectivedisclosures.

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ACCT 305 Lecture Notes - Lecture 22: Financial Statement, Retained Earnings, Accrued Interest

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