Intermediate accounting 15e kieso warfield chapter 22

INTERMEDIATE

Intermediat
ACCOUNTING
Intermediat
e
e
Accounting
Accounting
F I F T E E N T H

22-1

E D I T I O N

Prepared by
Coby Harmon
Prepared by
Prepared by
University of California,
Barbara
CobySanta
Harmon
Harmon
Westmont
College SantaCoby
University
of California,
Barbara
University of California, Santa Barbara
Westmont College

kieso
weygandt
warfield
team for success


PREVIEW OF CHAPTER 22

Intermediate Accounting
15th Edition
Kieso Weygandt Warfield
22-2


22

Accounting Changes
and Error Analysis

LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.

Identify the types of accounting changes.

5.

2.

Describe the accounting for changes in
accounting principles.

Describe the accounting for changes in
estimates.

6.

Identify changes in a reporting entity.

3.

Understand how to account for
retrospective accounting changes.

7.

Describe the accounting for correction of
errors.

4.

Understand how to account for
impracticable changes.

8.

Identify economic motives for changing
accounting methods.

9.

Analyze the effect of errors.

22-3


Accounting Changes
Accounting Alternatives:


Diminish the comparability of financial information.



Obscure useful historical trend data.

Types of Accounting Changes:
1. Change in Accounting Policy.
2. Changes in Accounting Estimate.
3. Change in Reporting Entity.
Errors are not considered an accounting change.
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LO 1


22

Accounting Changes

and Error Analysis

LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.

Identify the types of accounting changes.

5.

2.

Describe the accounting for changes in
accounting principles.

Describe the accounting for changes in
estimates.

6.

Identify changes in a reporting entity.

3.

Understand how to account for
retrospective accounting changes.

7.

Describe the accounting for correction of

errors.

4.

Understand how to account for
impracticable changes.

8.

Identify economic motives for changing
accounting methods.

9.

Analyze the effect of errors.

22-5


Changes in Accounting Principle
Change from one accepted accounting policy to another.
Examples include:


Average cost to LIFO.



Completed-contract to percentage-of-completion method.

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.

22-6

LO 2


Changes in Accounting Principle
Three approaches for reporting changes:
1) Currently.
2) Retrospectively.
3) Prospectively (in the future).

FASB requires use of the retrospective approach.

Rationale - Users can then better compare results from one period to
the next.

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LO 2


22-8

LO 2

22

Accounting Changes
and Error Analysis

LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.

Identify the types of accounting changes.

5.

2.

Describe the accounting for changes in
accounting principles.

Describe the accounting for changes in
estimates.

6.

Identify changes in a reporting entity.

3.

Understand how to account for
retrospective accounting changes.

7.

Describe the accounting for correction of
errors.

4.

Understand how to account for
impracticable changes.

8.

Identify economic motives for changing
accounting methods.

9.

Analyze the effect of errors.

22-9


Changes in Accounting Principle
Retrospective Accounting Change Approach
Company reporting the change
1) Adjusts its financial statements for each prior period
presented to the same basis as the new accounting
principle.
2) Adjusts the carrying amounts of assets and liabilities as
of the beginning of the first year presented, plus the

opening balance of retained earnings.

22-10

LO 3


Changes in Accounting Principle
Retrospective Accounting Change: Long-Term
Contracts
Illustration: Denson Company has accounted for its income from
long-term construction contracts using the completed-contract
method. In 2014, the company changed to the percentage-ofcompletion method. Management believes this approach provides
a more appropriate measure of the income earned. For tax
purposes, the company uses the completed-contract method and
plans to continue doing so in the future. (Assume a 40 percent
enacted tax rate.)

22-11

LO 3


Changes in Accounting Principle
Illustration 22-1

22-12

LO 3

Changes in Accounting Principle
Data for Retrospective Change
Illustration 22-2

Journal entry
beginning of
2014

Construction in Process

220,000

Deferred Tax Liability
88,000
Retained Earnings

22-13

132,000

LO 3


22-14

LO 3


Changes in Accounting Principle

Reporting a Change in Principle
Major disclosure requirements are as follows.

22-15

1.

Nature of the change in accounting principle.

2.

The method of applying the change, and:
a.

A description of the prior period information that has been
retrospectively adjusted, if any.

b.

The effect of the change on income from continuing operations,
net income (or other appropriate captions of changes in net
assets or performance indicators), any other affected line item.

c.

The cumulative effect of the change on retained earnings or other
components of equity or net assets in the balance sheet as of the
beginning of the earliest period presented.
LO 3

Changes in Accounting Principle
Reporting a Change in policy

22-16

Illustration 22-3

LO 3


Changes in Accounting Principle
Retained Earnings Adjustment
Retained earnings balance is $1,360,000 at the beginning of 2012.
Illustration 22-4

Before Change

22-17

LO 3


Changes in Accounting Principle
Retained Earnings Adjustment

Illustration 22-5

22-18

After Change

LO 3


Changes in Accounting Principle
E22-1 (Change in Principle—Long-Term Contracts): Pam Erickson
Construction Company changed from the completed-contract to the
percentage-of-completion method of accounting for long-term
construction contracts during 2015. For tax purposes, the company
employs the completed-contract method and will continue this
approach in the future. (Hint: Adjust all tax consequences through the
Deferred Tax Liability account.)

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LO 3


Changes in Accounting Principle
E22-1 (Change in Principle—Long-Term Contracts):

Instructions: (assume a tax rate of 35%)
(b)
What entry(ies) are necessary to adjust the accounting
records for the change in accounting principle?
(a)
What is the amount of net income and retained earnings that
would be reported in 2015? Assume beginning retained earnings for
2013 to be $100,000.

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LO 3


Changes in Accounting Principle
E22-1: Pre-Tax Income from Long-Term Contracts

Journal entry for 2014
Construction in Process

190,000

Deferred Tax Liability
66,500

22-21

Retained Earnings
123,500

LO 3


Changes in Accounting Principle
E22-1: Comparative Statements

Income
Statement

Statement
of Retained
Earnings

22-22

LO 3


Changes in Accounting Principle
Direct and Indirect Effects of Changes

22-23



Direct Effects - FASB takes the position that
companies should retrospectively apply the direct
effects of a change in accounting principle.



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.

LO 3

22

Accounting Changes
and Error Analysis

LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.

Identify the types of accounting changes.

5.

2.

Describe the accounting for changes in
accounting principles.

Describe the accounting for changes in
estimates.

6.

Identify changes in a reporting entity.

3.

Understand how to account for
retrospective accounting changes.

7.

Describe the accounting for correction of
errors.

4.

Understand how to account for
impracticable changes.

8.

Identify economic motives for changing
accounting methods.

9.

Analyze the effect of errors.

22-24


Changes in Accounting Principle
Impracticability
Companies should not use retrospective application if one of the
following conditions exists:
1.

Company cannot determine the effects of the retrospective
application.

2.

Retrospective application requires assumptions about
management’s intent in a prior period.

3.

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.
22-25

LO 4