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Joined: 11/4/2004
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    Posted: 02/12/2007 at 10:42

Kieso CHAPTER 22



1)     Types of Accounting Changes


a)     Change in Accounting Principle

b)     Change in Accounting Estimate

c)      Change in Reporting Entity

d)     Errors in Financial Statements

i)        also necess te changes in accounting,

ii)      but this category is not classified as one of the categories of accounting change.


2)     Changes in Accounting Principle

a)     Is defined as a change from one generally accepted accounting principle to another.

b)     Examples

i)        A change from average cost to LIFO

ii)      A change from S-Y-D depreciation to straight line

c)      A change in accounting principle is not considered to result from

i)        the adoption of a new principle in recognition of events that have occurred for the first time

ii)      or that were previously immaterial

d)     If the accounting principle previously followed was not acceptable, or if the principle was applied incorrectly, a change to a generally accepted accounting principle

i)        is considered a correction of an error

ii)      and is not considered to be a change in accounting principle.

e)     Changes in Accounting Principle are classified into three categories:

i)        Cumulative-effect type accounting changes

ii)      Retroactive-effect type accounting changes and

iii)    Changes to the LIFO method of inventory.

f)        Cumulative-Effect Type Accounting Change

i)        The general requirement established by the profession was that the current, or “catch-up,” method should be used to account for changes in accounting principles.

(1)   The cumulative effect of the adjustment should be reported in the income statement between the captions “extraordinary items” and  “net income.”

(2)   Financial statements for prior periods included for comparative purposes should not be restated.

(3)   Income before extraordinary items and net income, computed on a pro-forma basis, should be shown on the face of the income statement for all periods.

(a)   The term “pro-forma” means “as if.”

(b)   See illustration 23-5 on page 1259.

ii)      The journal entry to recognize the cumulative effect of the change

(1)   May be made at any time during the year, but

(2)   Is effective as of the beginning of the year.

g)     Retroactive-Effect Type Accounting Change

i)        In certain circumstances, the accounting change is recognized by recasting the statements of prior years on a basis consistent with the newly adopted principle.

(1)   Any part of the cumulative effect attributable to years prior to hose presented is treated as an adjustment of beginning retained earnings of the earliest year presented.

ii)      Five situations require the restatement of all prior period financial statements.

(1)   A change from LIFO to another method

(2)   A change in the method of  accounting for long-term construction contracts

(3)   A change to or from the “full-cost” method of accounting in the extractive industries

(4)   Issuance of financial statements by a company for the first time 

(a)   To 0btrain addition al equity cap l

(b)   To effect a business combination, or

(c)   To register securities

(5)   A professional pronouncement recommends that a change in accounting principle be treated retroactively.

iii)    In the case of a change TO LIFO,

(a)   The base-year inventory for all subsequent LIFO calculations is the opening inventory in the year the method is adopted

(b)   There is no restatement of prior year’s income because it is too impractical.

(c)   Disclosure is limited to showing the effect of the change on the results of operations in the period of the change.

3)     Changes in Accounting Estimate

a)     Many estimates impact the values that appear in the financial statements, for example

i)        Uncollectable receivables

ii)      Inventory obsolescence

iii)    Useful lives and salvage values of assets

iv)    Periods benefited by deferred costs

v)      Liabilities for warranty costs and income taxes and

vi)    Recoverable mineral reserves

b)     Estimating requires the use of judgement.

c)      Estimates will change as

i)        New events occur

ii)      More experience is acquired, or

iii)    Additional information is obtained.

d)     Changes in estimates must be handled prospectively.

i)        Opening balances are not adjusted

ii)      No attempt is made to “catch-up” for prior periods

iii)    No change is made in previously reported results

iv)    Prior period financial statement are not restated

v)      Pro-formas for prior periods are not prepared

e)     The effect of all changes in estimate are accounted for in

i)        The period of the change

ii)      And in future periods, if they too are impacted

4)     Reporting a Change in Entity

a)     An accounting change that results in financial statements that are actually the statements of a different entity should be reported by restating the financial statements of all periods presented.

b)     Examples of a change in reporting entity are:

i)        Presenting consolidated statements in place of statements of individual corporations

ii)      Changing specific subsidiaries that constitute the group of companies for which consolidated financial statements are presented

iii)    Changing the companies included in combined financial statements

iv)    Accounting for pooling of interest

v)      A change in the cost, equity or consolidation method of accounting for subsidiaries and investments.

5)     Reporting a Correction of an Error

a)     Examples of errors include:

i)        A change from an accounting principle that is not generally accepted to one that is

ii)      Mathematical mistakes

iii)    Changes in estimates that occur because the original estimate was not prepared in good faith

iv)    An oversight

v)      A misuse of facts

vi)    The incorrect classification of a cost as an expense instead of an asset, and vice versa.

b)     As soon as they are discovered, errors must be corrected by proper entries in the accounts and reported in the financial statements.

c)      The profession requires that corrections of errors be treated as prior period adjustments.

d)     If comparative statements are presented, the prior statements affected should be restated to correct of the error.

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