Sophia Townsend
Case 6-4 Accounting Changes
It is important in accounting theory to be able to distinguish the types of accounting changes.
Required:
a.If a public company desires to change from the sum-of-year’s-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 a company desires to change depreciation methods, this act is considered as a change
in an accounting principle. “This principle requires restating the affected balance sheet
account to reflect the balance as if the new accounting principle has been used form the
beginning; offsetting debits and credits on the income statement”(Cosmin & Dumitru,
2006). GAAP requires that changes in an accounting principle be done retrospectively.
Companies do not report growth in the year of the depreciation change. “Retrospectively
recast prior years’ financial statements when the company reports the statements
again”(Spiceland, Sepe & Tomassini,2007). Whenever a company has difficulty with the
period-specific effects, there is an alternative. “FASB ASC 250 requires that the new
accounting principle must be applied to the balances of the appropriate asset and
liabilities as of the beginning of the earliest period for which retrospective application is
practicable…”(Schroeder, Clark & Cathey, 2014).
This type of accounting change is known as a change in accounting estimates. This form
of change does not require an adjustment to previous financial statements. “These
changes are accounted for in the period of the change, or if more than one period is
affected, in both the period of change in the future” (Schroeder, et al, 2014). There are 2
disclosures described for the financial statements or notes.
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.
b.
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Biblical Perspective
Each one of the questions is relevant to accounting changes. Managers have to consider what is
best for their company. The managers have to choose which reporting method will work for the
company during that particular time frame. As a Christian, we have a God that never changes.
The Bible says in Hebrews 13:8, “Jesus Christ is the same yesterday and today and forever.”
People change their minds every second of the day. Managers have to comply with FASB or
SEC. Christians have to comply with God.
This form of accounting change is known as a change in a reporting entity. “Reporting
entities prepare GPFRs. GPFRs include financial statements, which present information
about such matters as the financial position, performance and cash flows of the entity, and
financial and non-financial information that enhances, complements and supplements the
financial statements”(Reporting Entity, 2013). FASB addresses the question pertaining to
consolidated income statements. “When a reporting entity becomes the primary
beneficiary of a collateralized financing entity, the financial assets and financial liabilities
of the collateralized financing entity will be measured using the more observable of the
fair value of the financial assets and the fair value of the financial liabilities”(2014).
An entity shall disclose the nature and amount of a change in an accounting estimate that
has an effect in the current period or is expected to have an effect in future periods, except
for the disclosure of the effect on future periods when it is impracticable to estimate that
effect.
If the amount of the effect in future periods is not disclosed because estimating it is
impracticable, an entity shall disclose that fact.
Changing specific subsidiaries comprising the group of companies for which
consolidated financial statements are presented is an example of what type of
accounting change? What effect does it have on the consolidated income
statements?
c.
Resources:
CHAPTER 4: REPORTING ENTITY. (2013). New York: International Federation of
Accountants: IFAC. Retrieved from
http://search.proquest.com/docview/1347809117?accountid=12085Pa
Cosmin, L. I., & Dumitru, A. P. (2006). Cumulative effect of a change in accounting principle:
Remove it from the income statement. Romanian Economic and Business Review, 1(3),
88-92. Retrieved from http://search.proquest.com/docview/1118293285?
accountid=12085 Moeinaddin, M., & Abadi, F. S. R. (2013).
FASB GUIDANCE ADDRESSES CONSOLIDATED COLLATERALIZED FINANCING
ENTITIES. (2014). Bank Auditing and Accounting Report, 47(11), 2-3. Retrieved from
http://search.proquest.com/docview/1626183357?accountid=12085
IAS 8: Accounting policies, changes in accounting estimates and errors. (2004). International
Accounting Standards.IAS, , 697-730. Retrieved from
http://search.proquest.com/docview/192338345?accountid=12085
Schroeder, R.G., Clark, M.W., & Cathey, J.M. (2014). Financial accounting theory and analysis:
Text and cases (11th ed.). John Wiley & Sons.
Spiceland, D. J., Sepe, J. & Tomassini, L. (2007). Intermediate accounting (5th ed.). McGraw-
Hill
