Case 6-4 2
Abstract
For this case, the discussion of accounting changes will be brought to the table. Among the
series of questions, we will be discussing the various changes from using one method of accounting to
another and the outcomes that come from these changes. These outcomes will include how public
views these changes, how will these changes will affect the income statement, and the specific
subsidiaries that affect the financial statements.
Case 6-4 3
If a public company desires to change from the sum-of-the-years-digits depreciation method to
the straight line method for its fixed assets, what type of accounting change will this be? How
would it be treated? Discuss the permissibility of this change.
If the public decides to change from one method of accounting to another, they would use an
accounting principle called Change in an Accounting Principle (CAP). According to the textbook, “the
company presented its previously issued financial statements as they were before the changes occurred,
with the cumulative prior effects of the change shown as a component of net income for the period in
which the change occurred.” (Schroeder, Clark, and Cathey, 2009) Basically, by presenting the new the
results from the new method and revisiting the results from prior statements. We will see how the new
method will have cumulative change on the income statement. However, the new method must be
applied in the earliest period of the new statements for it to be applicable. If the change were to occur
half way through a financial period, wouldn’t be permissible under FASB ASC 250.
If a public company obtained additional information about the service lives of some of its fixed
assets that showed that the service lives previously used should be shortened, what type of
accounting change would this be? Include in your discussion how the change should be reported
in the income statement of the year of the change and what disclosures should be made in the
financial statements or notes.
The type of accounting change that would be applied when the services lives, previously used,
are shortened would be called Change in Accounting Estimates (CAE). According to Li and Luo,
“Accounting estimates ensure the relevance and reliability of financial reports, and they have a direct
impact on firms' reported financial performance.” (Li and Luo, 2023) So, when a change occurs in the
current services used during the quarter period, the change in accounting estimates must be disclosed in
the financial statements. Even the nature of the change and the amount that comes with it must be
disclosed in the financial statements, because the smallest change in one period could be significantly
Case 6-4 4
bigger in another period of the year. Now, if the effect of the change is impracticable, the company
should disclosed the fact to help understand various changes.
Changing specific subsidiaries comprising the group of companies for which consolidated
financial statements are presented in an example of what type of accounting change? What effect
does it have on the consolidated income statements?
The accounting change that is applicable in this scenario is called Change in a Reporting Entity
(CRE). Companies are required to prepare a General Purpose Financial Reporting (GPFR), which are
“the quality assessment contemplates the empirical estimation of the financial reports’ conformity with
qualitative characteristics.” (Ambarchian and Ambarchian, 2021) These reports helps compliments and
supplements the financial performance of a company in order to properly understand a company’s
current financial status. Now, according to the FASB NO. 160, “It requires consolidated net income to
be reported at amounts that include the amounts attributable to both the parent and the non-controlling
interest.” (FASB, 2024) They continue by stating that “it also requires disclosure, on the face of the
consolidated statement of income, of the amounts of consolidated net income attributable to the parent
and to the non-controlling interest.” (FASB, 2024) Basically, the fair value of both financial assets and
liabilities of a company will be measured.
Biblical Statement
The Bible verse that is applicable for this case would be Ecclesiastes 3:1, which states “for
everything there is a season, and a time for every matter under heaven.” (ESV) Change is going to
occur whether we are prepared for it or not. One could say that change is a constant in the flow of time
and nothing on Earth remains the same. That is why we must remember the importance of change and
the reasons for it. Otherwise, we will forget and repeat the mistakes we seek to avoid. The same can be
applied in the various accounting changes. If we don’t disclose the reasons why the various accounting
Case 6-4 5
changes need to be applied, then we run the risk of losing money and could be financially in debt to an
extent that recovery is very hard.
References
Ambarchian, V., & Ambarchian, M. (2021, January 1). Assessing the quality of IPSAS-based financial
reports of the supranational organizations – DOAJ. Фінансово-кредитна діяльність:
проблеми теорії та практики. https://doaj.org/article/52120d5c4c294093a8edaffad89e85a6
Li, V., & Luo, Y. (2023, September 22). Changes in accounting estimates during the COVID-19
pandemic in the USA. Asian Review of Accounting.
https://www.emerald.com/insight/content/doi/10.1108/ARA-10-2022-0243/full/html#sec004
Schroeder, R. G., Schroeder, R. G., Clark, M., & Cathey, J. M. (2009). Accounting theory and analysis:
Text and cases. John Wiley & Sons.
Standards Board, F. A. (2024b). Summary of statement no. 160 - FASB. Financial Accounting Standards
Board. https://fasb.org/page/PageContent?pageId=/reference-library/superseded-standards/
summary-of-statement-no-160.html&bcpath=tff
Ecclesiastes 3:1. Ecclesiastes 3:1 ESV - - Bible Gateway. (n.d.).
https://www.biblegateway.com/passage/?search=Ecclesiastes%2B3%3A1&version=ESV
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