Chapter 20
Accounting Changes
and Error Corrections
PART A: Accounting Changes
Illustration: Types of Accounting Changes
LO20-1
LO20-1
Illustration: Correction of Errors
LO20-1
Reporting Accounting Changes and Error
Corrections
Two approaches to report accounting changes and error corrections:
Retrospective
approach
Prospective
approach
• Financial statements issued in
previous years are revised
• Statements are made to appear
as if the newly adopted
accounting method had been
applied all along or that the
error had never occurred
• Then, a journal entry is created
to adjust all account balances
affected
• Effects of a change are reflected
in the financial statements of
only the current and future
years
LO20-1
Change in Accounting Principle
• Change from one generally accepted accounting principle to
another
Though accounting choices
once made should be
consistently followed from
year to year
Changing circumstances might
make a new method more
appropriate
Examples:
• A switch by hundreds of companies from FIFO to LIFO in the
mid-1970s, for example—was a result of heightened inflation
• Changes within a specific industry or
• Changes that might be mandated when the FASB codifies a
new accounting standard
LO20-1
Decision Makers’ Perspective—Motivation for
Accounting Choices
• Effect of choices on management compensation, on
existing debt agreements, and on union negotiations
each can affect management’s selection of
accounting methods
• Financial analysts must be aware that different
accounting methods used by different firms and by
the same firm in different years complicate
comparisons
• Investors and creditors must consider not only the
effect on comparability but also possible hidden
motivations for making the changes
LO20-1
Decision Makers’ Perspective—Motivation for
Accounting Choices (continued)
Managers tend to prefer to report earnings that follow a
regular, smooth trend from year to year.
Desire to do this is not always in the direction of higher
income
The Retrospective Approach: Most Changes
in Accounting Principle
LO20-2
• Most voluntary changes in accounting principles are
reported retrospectively
Illustration: Change in Accounting Principle
Air Parts Corporation used the LIFO inventory costing method. At the
beginning of 2016, Air Parts decided to change to the FIFO method. Income
components for 2016 and prior years were as follows ($ in millions):
Cost of goods sold (LIFO)
Cost of goods sold (FIFO)
Difference
2016
$430
370
$ 60
2015
$420
365
$ 55
2014
$405
360
$ 45
Previous Years
$2,000
1,700
$ 300
Revenues
Operating expenses
$950
230
$900
210
$875
205
$4,500
1,000
Air Parts has paid dividends of $40 million each year beginning in 2009. Its
income tax rate is 40%. Retained earnings on January 1, 2014, was $700
million; inventory was $500 million.
LO20-2
1. Revise Comparative Financial Statements
Income statements
($ in millions)
2016
Revenues
$950
Cost of goods sold (FIFO) (370)
Operating expenses
(230)
Income before tax
$350
Income tax expense (40%) (140)
Net income
$210
2015
2014
$900
(365)
(210)
$325
(130)
$195
$875
(360)
(205)
$310
(124)
$186
• Air Parts makes the statements appear as if the newly
adopted accounting method (FIFO) had been applied
all along
LO20-2
Illustration: Effects of Switch to FIFO
2016
$430
370
$ 60
Cost of goods sold (LIFO)
Cost of goods sold (FIFO)
Differences
Cumulative differences:
Cost of goods sold
$460
Income taxes (40%)
180
Net income and retained earnings $276
2015
$420
365
$ 55
2014
$405
360
$ 45
Previous Years
$2,000
1,700
$ 300
$400
160
$240
$345
138
$207
$ 300
120
$ 180
Comparative balance sheets, then, will report 2014 inventory $345 million
higher than it was reported in last year’s statements. Likewise, 2015
inventory will be increased by $400 million. Inventory for 2016, being
reported for the first time, is $460 million higher than it would have been if
the switch from LIFO had not occurred.
LO20-2
Comparative Statements of Shareholders’ Equity
($ in millions)
Additional
Total
Common Paid-In Retained Shareholders’
Stock
Capital Earnings
Equity
Jan. 1, 2014
Net income (revised to FIFO)
Dividends
Dec. 31, 2014
Net income (revised to FIFO)
Dividends
Dec. 31, 2015
Net income (using FIFO)
Dividends
Dec. 31, 2016
$880
186
(40)
$1,026
195
(40)
$1,181
210
(40)
$1,351
LO20-2
2. Adjust Accounts for the Change
($ in millions)
2015
Cost of goods sold (LIFO) $420
Cost of goods sold (FIFO) 365
Difference
$ 55
Cumulative Cumulative
Difference Difference
2014
pre-2014 pre-2016
$405 $1,000
360
700
$400
$ 45 $ 300
Journal entry to record the change in principle: January 1, 2016
Journal Entry
Inventory
Retained earnings
Income tax payable ($400 × 40%)
Debit
Credit
400
Additional net income if FIFO had been used
Additional inventory if FIFO had been used
240
160
LO20-2
3. Disclosure Notes
• Must be provided in the first set of financial
statements after the change to justify the
application of the new method
• Note disclosure must:
• Explain why the change was needed as well as its
effects on items not reported on the face of the
primary statements
• Point out that comparative information has been
revised
• Report any per share amounts affected for the
current period and all prior periods presented
LO20-2
Disclosure of a Change in Inventory Method—
Abercrombie & Fitch
Concept Check √
Big Merchandisers changed from the FIFO method of
costing inventories to the weighted average method
during 2016. When reported in the 2016 comparative
financial statements, the 2015 inventory amount will be:
a. Increased.
b. Decreased.
c. Increased or decreased, depending on how prices
changed during 2016.
d. Unaffected.
It will be restated to the balance it
would have if the average method
had been used all along.
LO20-3
The Prospective Approach: When Retrospective
Application is Impracticable
• Sometimes a lack of information makes it impracticable to
report a change retrospectively so the new method is
simply applied prospectively
Illustration: Disclosure of a Change to LIFO—Books A
Million, Inc.
LO20-3
The Prospective Approach: When Retrospective
Application is Impracticable (continued)
Impracticable to determine
some period-specific effects
Impracticable to determine
the cumulative effect of prior
years
Change is
applied retrospectively
Change is
applied prospectively
Beginning in the earliest year
practicable
Concept Check √
A change in accounting principle that usually should not be
reported by revising the financial statements of prior periods is a
change from the:
a.
The weighted-average method to the FIFO method.
b.
The weighted-average method to the LIFO method.
c.
FIFO method to the weighted-average method.
d.
LIFO method to the weighted-average method.
Changes to LIFO are handled prospectively.
LO20-3
The Prospective Approach: When Mandated by
Authoritative Accounting Literature
• If a new accounting standards update specifically
requires prospective accounting, that requirement is
followed
Example:
For a change from the equity method to another
method of accounting for long-term investments,
GAAP requires the prospective application of the new
method
The Prospective Approach: Changing
Depreciation, Amortization, and Depletion
Methods
LO20-3
• Considered to be a change in accounting estimate
that is achieved by a change in accounting principle
• Accounted for prospectively—precisely the way we
account for changes in estimates
LO20-4
Change in Accounting Estimate
• Revision of an estimate because of new information
or new experience
• Accounted prospectively
• Disclosure note should describe the effect of a
change in estimate on income from continuing
operations, net income, and related per share
amounts for the current period
LO20-4
Change in Estimate—Owens-Corning
Fiberglass Corporation
LO20-4
Illustration: Change in Accounting Estimate
Universal Semiconductors estimates warranty expense as 2% of
sales. After a review during 2016, Universal determined that 3%
of sales is a more realistic estimate of its payment experience.
Sales in 2016 are $300 million. The effective tax rate is 40%.
• No account balances are adjusted.
• The cumulative effect of the estimate change is not reported
in current income.
• Rather, in 2016 and later years, the adjusting entry to record
warranty expense simply will reflect the new percentage.
• In 2016, the entry would be:
Journal Entry
Warranty expense (3% × $300 million)
Warranty liability
Debit
9
Credit
9
LO20-4
Change in Accounting Estimate (continued)
Universal Semiconductors estimates warranty expense as 2% of
sales. After a review during 2016, Universal determined that 3%
of sales is a more realistic estimate of its payment experience.
Sales in 2016 are $300 million. The effective income tax rate is
40%.
• The after-tax effect of the change in estimate is $1.8 million,
calculated as follows:
[$300 million × (3% − 2%) = $3 million, less 40% of $3 million]
• Assuming 100 million outstanding shares of common stock,
the effect is described in a disclosure note to the financial
statements as follows:
LO20-4
Illustration: Change in Depreciation Methods
Universal Semiconductors switched from the SYD depreciation
method to straight-line depreciation in 2016. The change
affects its precision equipment purchased at the beginning of
2014 at a cost of $63 million. The machinery has an expected
useful life of five years and an estimated residual value of $3
million.
Sum-of-the-Years’-Digits Depreciation:
2014 depreciation
$20 ($60 × 5⁄15)
16 ($60 × 4⁄15)
2015 depreciation
Accumulated depreciation
$36
LO20-4
Illustration: Change in Depreciation Methods
(continued)
Universal Semiconductors switched from the SYD depreciation
method to straight-line depreciation in 2016. The change
affects its precision equipment purchased at the beginning of
2014 at a cost of $63 million. The machinery has an expected
useful life of five years and an estimated residual value of $3
million.
($ in millions)
Calculation of Straight-Line Depreciation:
Asset’s cost
$63
(36)
Accumulated depreciation to date
Undepreciated cost, Jan. 1, 2016
$27
Estimated residual value
(3)
To be depreciated over remaining 3 years
$24
3 years
Annual straight-line depreciation 2016–2018
$8
LO20-4
Change in Depreciation Methods (continued)
Universal Semiconductors switched from the SYD depreciation
method to straight-line depreciation in 2016. The change
affects its precision equipment purchased at the beginning of
2014 at a cost of $63 million. The machinery has an expected
useful life of five years and an estimated residual value of $3
million.
Annual straight-line depreciation 2016–2018
$8
Adjusting entry (2016, 2017, and 2018 depreciation):
($ millions)
Journal Entry
Depreciation expense
Accumulated depreciation
Debit
8
Credit
8
LO20-4
Change in Depreciation Method for Newly
Acquired Assets—Rohm and Haas Company
Concept Check √
Which of the following is not a change in accounting
principle usually accounted for by restrospectively
revising prior financial statements?
a.
Change from SYD to DDB.
b.
Change from FIFO to the average method.
c.
Change from the average method to FIFO.
d.
Change from LIFO to FIFO.
Changes in depreciation methods are
treated as changes in estimates and
accounted for prospectively.
Concept Check √
The prospective approach usually is required for:
a.
A change in reporting entity.
b.
A change in estimate.
c.
A change in accounting principle.
d.
A correction of an error.
With a change in estimate, the
current amounts are used to apply
the new estimate this year and future
years. The new estimate is not
applied to previous periods.
Concept Check √
Lamont Communications has amortized a patent on a straight-line
basis since it was acquired in 2013 at a cost of $50 million. During
2016 management decided that the benefits from the patent
would be received over a total period of 8 years rather than the
20-year legal life being used to amortize the cost. Lamont’s 2016
financial statements should include:
a.
A patent balance of $50 million.
b.
Patent amortization expense of $2.5 million.
c.
Patent amortization expense of $5 million.
d.
A patent balance of $34 million.
Accumulated amortization at the end of 2013 is $16 million,
comprised of 3 year’s amortization at $2.5 million per year
($50 / 20 years) plus one year’s amortization at $8.5 million
[($50 – $7.5) / (8 – 3) years]. $50 M – 16M = $34M.
LO20-5
Change in Reporting Entity
• Change from reporting as one type of entity to
another type of 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 or combined statements
are prepared
• changes in accounting rules
• Reported by recasting all previous periods’ financial
statements as if the new reporting entity existed in
those periods
• A disclosure note should describe the nature of the
change and the reason it occurred
LO20-5
Change in Reporting Entity—Hartford Life
Insurance
LO20-5
Error Correction
• Caused by a transaction being recorded incorrectly
or not recorded at all
• Previous years’ financial statements are
retrospectively restated
Illustration: Approaches to Reporting Accounting Changes and
Error Corrections
LO20-5
Accounting Changes and Errors: A Summary
*Changes in depreciation, amortization, and depletion methods are considered changes in estimates.
+When retrospective application is impracticable such as most changes to LIFO and certain mandated changes.
±In the statement of shareholders’ equity or statement of retained earnings.
LO20-6
Correction of Accounting Errors: Prior Period
Adjustments
• An addition to or reduction in the beginning retained
earnings balance in a statement of shareholders’ equity
Steps to Correct an Error
LO20-6
Correction of Accounting Errors: Prior Period
Adjustments (continued)
STATEMENTS OF RETAINED EARNINGS
For the Years Ended December 31, 2015 and 2014
Balance at beginning of year
Net income
Less: Dividends
Balance at end of year
2015
2014
$600,000 $450,000
400,000
350,000
(200,000) (200,000)
$800,000 $600,000
LO20-6
Correction of Accounting Errors: Prior Period
Adjustments (continued)
STATEMENTS OF RETAINED EARNINGS
For the Years Ended December 31, 2016 and 2015
Balance at beginning of year
Prior period adjustment
Corrected balance
Net income
Less: Dividends
Balance at end of year
2016
$ 780,000
2015
$600,000
(20,000)
$580,000
500,000
400,000
(200,000) (200,000)
$1,080,000 $780,000
LO20-6
Error Correction Illustrated
• Learn the process needed to analyze whatever
errors encounter
It is significantly more complicated to deal with an error if:
It affected net
income in the
reporting period in
which it occurred
It is not discovered
until a later period
LO20-6
Illustration: Error Discovered in the Same
Reporting Period That It Occurred
G. H. Little, Inc. paid $3 million for replacement computers and
recorded the expenditure as maintenance expense. The error
was discovered a week later.
($ millions)
Journal Entry
To Reverse Erroneous Entry
Cash
Maintenance expense
Debit
3
Credit
3
($ millions)
Journal Entry
To Record Correct Entry
Equipment
Cash
Debit
Credit
3
3
LO20-6
Error Correction; Barnes & Noble
Concept Check √
Which of the following is not true regarding the correction of an
error?
a. A journal entry is made to correct any account balances that
are incorrect as a result of the error.
b. Prior years' financial statements are restated to reflect the
correction of the error (if the error affected those statements).
c. The correction is reported prospectively; previous financial
statements are not revised.
d. A disclosure note should describe the nature of the error and
the impact of its correction on net income, income before
extraordinary items, and earnings per share.
The effect of an error is reported as an adjustment to
beginning-of-period retained earnings and prior years'
financial statements are restated.
LO20-6
Illustration: Error Affecting Previous Financial
Statements, but Not Net Income
MDS Transportation incorrectly recorded a $2 million note
receivable as accounts receivable. The error was discovered a
year later.
($ millions)
Journal Entry
To Correct Incorrect Accounts
Note receivable
Accounts receivable
Debit
Credit
2
2
Step 1
Step 2
When reported for comparative purposes in the current year’s
annual report, last year’s balance sheet would be restated to
report the note as it should have been reported last year.
LO20-6
Error Affecting Previous Financial Statements,
but Not Net Income
MDS Transportation incorrectly recorded a $2 million note
receivable as accounts receivable. The error was discovered a
year later.
Step 3
Since last year’s net income was not affected by the error, the
balance in retained earnings was not incorrect. So no prior
period adjustment to that account is necessary.
Step 4
A disclosure note would describe the nature of the error, but
there would be no impact on net income, income from
continuing operations, and earnings per share to report.
LO20-6
Error Affecting a Prior Year’s Net Income
• Most errors affect net income
• When they do, they affect the balance sheet as well
• Both statements must be retrospectively restated
• The statement of cash flows sometimes is affected,
too
• Incorrect account balances must be corrected
• Income taxes often are affected by income errors
• Amended tax returns are prepared:
• Either to pay additional taxes; or
• To claim a tax refund for taxes overpaid
Illustration: Error Affecting Net Income—
Recording an Asset as an Expense
LO20-6
In 2016, internal auditors discovered that Seidman Distribution, Inc.,
had debited an expense account for the $7 million cost of sorting
equipment purchased at the beginning of 2014. The equipment’s
useful life was expected to be five years with no residual value.
Straight-line depreciation is used by Seidman.
Depreciation understated by $2.8 M.
Analysis:
($ in millions)
Correct
(Should have been recorded)
2014 Equipment
7.0
Cash
7.0
2014 Expense
1.4
Accum. deprec.
1.4
2015 Expense
1.4
Accum. deprec.
1.4
Total expenses were overstated by $7M –
2.8M = $4.2M; so net income (& RE)
was overstated by $4.2M
Incorrect
(As recorded)
2014 Expense
7.0
Cash
7.0
Depreciation entry omitted
Depreciation entry omitted
LO20-6
Error Affecting Net Income—
Recording an Asset as an Expense (continued)
In 2016, internal auditors discovered that Seidman Distribution, Inc.,
had debited an expense account for the $7 million cost of sorting
equipment purchased at the beginning of 2014. The equipment’s
useful life was expected to be five years with no residual value. Step 1
Straight-line depreciation is used by Seidman.
($ millions)
Journal Entry
To Correct Incorrect Accounts
Equipment
Accumulated depreciation
Retained earnings
Debit
Credit
7.0
2.8
4.2
Step 2: The 2014 and 2015 financial statements that were incorrect as a result of
the error are retrospectively restated to report the equipment acquired and to
reflect the correct amount of depreciation expense and accumulated depreciation,
assuming both statements are reported again for comparative purposes in the 2016
annual report.
Error Affecting Net Income—
Recording an Asset as an Expense (continued)
LO20-6
In 2016, internal auditors discovered that Seidman Distribution, Inc.,
had debited an expense account for the $7 million cost of sorting
equipment purchased at the beginning of 2014. The equipment’s
useful life was expected to be five years with no residual value.
Straight-line depreciation is used by Seidman.
Step 3
$7 million − 2.8 million
2016 beginning
Prior period
2016: retained earnings
$4.2 million
adjustment
balance
2015 beginning
Prior period
$5.6 million
2015: retained earnings
adjustment
balance
$7 million − 1.4 million
2014: No adjustment would be necessary for that period because
the error didn’t occur until after the beginning of 2014.
LO20-6
Error Affecting Net Income— Recording an Asset
as an Expense (continued)
In 2016, internal auditors discovered that Seidman Distribution, Inc.,
had debited an expense account for the $7 million cost of sorting
equipment purchased at the beginning of 2014. The equipment’s
useful life was expected to be five years with no residual value.
Straight-line depreciation is used by Seidman.
Step 4
Also, a disclosure note accompanying Seidman’s 2016 financial
statements should describe the nature of the error and the impact
of its correction on each year’s net income (understated by $5.6
million in 2014 and overstated by $1.4 million in 2015), income from
continuing operations (same as net income), and earnings per
share.
LO20-6
Error Affecting Net Income— Recording an Asset
as an Expense (continued)
The effect of most
errors is different
Depending on when the
error is discovered
If the error in our
illustration is not
discovered until 2019 or
after
No correcting entry at all
would be needed
• Most errors eventually self-correct
• Even errors that eventually correct themselves cause
financial statements to be misstated in the meantime.
Concept Check √
In 2016, it was discovered that Hines 55 had debited expense for
the full cost of an asset purchased on January 1, 2013. The cost
was $24 million with no expected residual value. Its useful life was
5 years and straight-line depreciation is used by the company. The
correcting entry assuming the error was discovered in 2016 before
the adjusting and closing entries includes:
a.
A credit to accumulated depreciation of $14.4 million.
b.
A debit to accumulated depreciation of $9.6 million
c.
A debit to retained earnings of $9.6 million.
d.
A credit to an asset of $24 million.
Accumulated depreciation would be credited for three year’s depreciation
(2010 to 2012) at $4.8 million per year. Depreciation for 2013 will be
accounted for normally. In addition, an asset account would be debited for
$24 million and retained earnings would be credited for $9.6 million.
Illustration: Error Affecting Net Income—Inventory
Misstated
LO20-6
Illustration: Error Affecting Net Income—Inventory
Misstated (continued)
LO20-6
In early 2016, Overseas Wholesale Supply discovered that $1 million of
inventory had been inadvertently excluded from its 2014 ending inventory
count.
Journal Entry
If Error Is Discovered in 2015 (before closing):
Inventory
Retained earnings
If Error Is Discovered in 2016 or Later:
No correcting entry needed
Step 1
($ millions)
Debit Credit
1
1
Error Affecting Net Income—Inventory Misstated
LO20-6
(continued)
In early 2016, Overseas Wholesale Supply discovered that $1 million of
inventory had been inadvertently excluded from its 2014 ending inventory
count.
Step 2
If the error discovered in
2015
2014 financial statements are
retrospectively restated
To reflect the correct inventory
amounts, cost of goods sold, and
retained earnings
If the error discovered in
2016
2015 financial statements are
retrospectively restated
To reflect the correct inventory
amounts, cost of goods sold, and
retained earnings
Error Affecting Net Income—Inventory Misstated
LO20-6
(continued)
In early 2016, Overseas Wholesale Supply discovered that $1 million of
inventory had been inadvertently excluded from its 2014 ending inventory
count.
Step 3
2015 beginning
retained earnings
balance
Prior period
adjustment
Overseas’ statements
of shareholders’
equity
Step 4
Disclosure note in Overseas’ annual report
Describing
Nature of the error and the impact of its correction on each year’s
net income (understated by $1 million in 2014, overstated by $1
million in 2015), income from continuing operations (same as net
income), and earnings per share.
Illustration: Error Affecting Net Income—Failure to
Record Sales Revenue
LO20-6
In 2016, General Paper Company discovered that $3,000 of
merchandise (credit) sales the last week of 2015 were not recorded
until the first week of 2016. The merchandise sold was appropriately
excluded from 2015 ending inventory.
Analysis:
($ in 000s)
Correct
(Should have been recorded)
2015 Accounts receivable
Sales revenue
2016 No entry
Incorrect
(As recorded)
3
No entry
3
Accounts receivable 3
Sales revenue
3
Error Affecting Net Income—Failure to Record Sales
Revenue (continued)
LO20-6
In 2016, General Paper Company discovered that $3,000 of
merchandise (credit) sales the last week of 2015 were not recorded
until the first week of 2016. The merchandise sold was appropriately
excluded from 2015 ending inventory.
Step 1
($ in 000s)
Journal Entry
To Correct Incorrect Accounts
Sales revenue
Retained earnings
Debit
Credit
3
3
Step 2
The 2015 financial statements that were incorrect as a result of the
error are retroactively restated to reflect the correct amount of sales
revenue and accounts receivable when those statements are reported
again for comparative purposes in the 2016 annual report.
Error Affecting Net Income—Failure to Record Sales
Revenue (continued)
LO20-6
In 2016, General Paper Company discovered that $3,000 of
merchandise (credit) sales the last week of 2015 were not recorded
until the first week of 2016. The merchandise sold was appropriately
excluded from 2015 ending inventory.
Step 3
Because retained earnings is one of the accounts incorrect as a result
of the error, the correction to that account is reported as a prior
period adjustment to the 2015 beginning retained earnings balance
in General Paper’s comparative statements of shareholders’ equity.
Step 4
Also, a disclosure note in General Paper’s 2016 annual report should
describe the nature of the error and the impact of its correction on
each year’s net income ($3,000 in 2015), income from continuing
operations ($3,000 in 2015), and earnings per share.
LO20-6
Error Correction; Benihana, Inc.
Concept Check √
Global Products overstated its inventory by $30 million at
the end of 2016. The discovery of this error during 2017,
before adjusting or closing entries, would require:
a.
A debit to inventory of $30million.
b.
A prospective adjustment in the 2017 income
statement.
c.
An increase in retained earnings.
d.
None of the above.
Retained earnings would be debited for $30 million,
and inventory would be credited for $30 million.
LO20-7
International Financial Reporting Standards
Company moves for the first time from U.S. GAAP to IFRS
IFRS No. 1: “First-time Adoption of International Financial
Reporting Standards.”
The basic requirement:
• Full retrospective application of IFRS for the
company’s first IFRS financial statements
• First IFRS financial statements must include:
• At least three balance sheets
• Two of each of the other financial statements
LO20-7
International Financial Reporting Standards (continued)
• First-time application of IFRS entails:
• Recording some assets and liabilities not permitted under
U.S. GAAP
• Not recording (derecognizing) some assets and liabilities
• Reclassifying items that are classified differently under
the two sets of standards
• Providing disclosures (in notes to the financial
statements) required under IFRS
• Providing extensive disclosures to explain how the
transition to IFRS affected the company’s financial
position, financial performance, and cash flows
• Providing explanations of material adjustments to the
balance sheet, income statement, and cash flow statement
• Reconciliations of equity and total comprehensive income
reported under previous GAAP to equity under IFRS
LO20-7
International Financial Reporting Standards (continued)
• There are several optional exemptions and five
mandatory exceptions to the requirement for
retrospective application
Designed to allow companies to avoid excessive costs or
difficulties expected for retrospective application of certain
standards
• Optional exemptions relate to:
• Business combinations
• Fair value or revaluation as deemed cost for property,
plant and equipment and other assets
• Employee benefits
• Cumulative translation differences
• Compound financial instruments
• Assets and liabilities of subsidiaries
LO20-7
International Financial Reporting Standards (continued)
• Associates and joint ventures
• Designation of previously recognized financial
instruments
• Share-based payment transactions
• Insurance contracts
• Decommissioning liabilities
• Arrangements containing leases
• Fair value measurement of no-active market financial
instruments at initial recognition
• Service concession arrangements
• Borrowing cost
Concept Check √
Which of the following statements is true regarding correcting
errors in previously issued financial statements prepared in
accordance with International Financial Reporting Standards?
a. The error can be reported in the current period if it’s not
considered practicable to report it prospectively.
b. b. The error can be reported prospectively if it’s not
considered practicable to report it retrospectively.
c. The error can be reported in the current period if it’s not
considered practicable to report it retrospectively.
d. Retrospective application is required with no exception.
IFRS allows the error to be reported in the current period,
GAAP requires a retrospective approach.
LO20-7
International Financial Reporting Standards (continued)
U.S. GAAP
IFRS
Accounting Changes and Error Corrections.
When correcting errors in
previously issued financial
statements, it is considered
practicable to report
retrospectively.
When correcting errors in
previously issued financial
statements, IFRS ( IAS No. 8
17 ) permits the effect of
the error to be reported in
the current period.
LO20-7
International Financial Reporting Standards (continued)
• Five exceptions cover areas in which retrospective
application of IFRS is considered inappropriate and
relate to:
• Derecognition of financial assets and financial liabilities
(mandatory)
• Hedge accounting (mandatory)
• Noncontrolling interests (mandatory)
• Full-cost oil and gas assets (optional)
• Determining whether an arrangement contains a lease
(mandatory)
• Almost all adjustments arising from the first-time
application of IFRS are against opening retained earnings
of the first period that is presented on an IFRS basis
End of Chapter 20