Ch 21. Changes in Policies and Estimates, and Errors

School: Humber College - Course: ACCT 251 - Subject: Accounting

Ch 21. Changes in Accounting Policies and Estimates, and Errors Why do changes occur? 1.The accounting profession may mandate new accounting methods/standards—standards change from time to time 2.Changing economic conditions may cause a company to revise its methods of accounting 3.Changes in technology and in operations may require a company to revise estimates of the depreciation patterns, service lives, or residual values of depreciable assets 4.Corrections are needed when accounting errors are discovered IFRS and ASPE have established reporting frameworks that cover three types of accounting changes 1.Change in Accounting Policy:changes in the choice of "specific principles, bases, rules and practices applied by an entity in preparing and presenting the financial statements" Examples: Initial adoption of a new accounting standard or change in inventory cost flow formula (as long as this results in reliable and more relevant information) 2.Change in Accounting Estimate: adjustment to the carrying amount of an asset or liability or the amount of an asset's periodic consumption. From assessment of the present status of or the expected future benefits and obligations associated with an asset or liability Example: Change in estimate of the service life of an asset, Change in the estimate of the net realizable value of accounts receivable 3.Prior Period Error:Omissions from or mistakes in the financial statements of one or more prior periods caused by the misuse of, or failure to use, reliable information that existed and was available when the statements were completed. Can be intentional or oversight Example: Failure to recognize depreciation on a group of capital assets 1.Change in Accounting Policy: Initial Choice of Accounting Policies Based on GAAP (ASPE)Based on GAAP (IFRS) Primary sourceSections 1400 to 3870, includingAppendices; Accounting Guidelines,including AppendicesRhe international financial reporting standards (IFRS) and guidance that is an integral part of the specific standard Whenprimarysourcesdon'taddress the issuePolicies that are consistent with theprimary sources of GAAP and aredeveloped by exercising professionaljudgement and applying concepts setout in Section 1000, FinancialStatement ConceptsJudgement—considering the Conceptual Framework for the Preparation and Presentation of Financial Statements. Ensures method chosen results in consistency with treatment required by primary sources GAAP Requirements for Changes: What conditions must exist for an entity to be allowed to change its policy?One of two conditions is required IFRS 1.The change is required by a primary source of GAAP

2.A voluntary change results in presenting reliable and more relevant information about the effects of the transactions, events, or conditions on the entity's financial position, financial performance, or cash flows 3.ASPE permits a third type of accounting policy change to be made without having to meet the "reliable and more relevant" test in the second situation above. It allows the following voluntary changes in policy to be made: Between or among alternative ASPE methods of accounting and reporting