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CPA08va
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Regular

Joined: 26 Apr 2008
Location: United States
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Posts: 116

Posted: 22 Aug 2009 at 11:14 \| IP Logged

Need somehelp clarifying the rules on this. It's my understanding that changes in acct principle are now handled retrospectively, i.e. prior period financial statements are updated to reflect the new principle.

1) Can someone help clarify how this is different from restating the financial statements (which is done for a change in entity).

2) Also, I thought that when retrospective application is not possible, then the cumulative effect of the change in accounting principle could be applied (says so in Wiley). However, Wiley 2009 MC#7 (module 7c) contradicts this theory.

3) Finally, Becker has certain exxceptions, e.g. change to LIFO that is handled as a change in estimate - is that still true - I did not see that in the Yaeger handouts.

Thanks

optimistCPA
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Joined: 03 Mar 2009
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Posts: 360

Posted: 22 Aug 2009 at 12:46 \| IP Logged

According to me,

1. Restating the F/S is same as retrospective application.
2. When retrospective application is not possible, change
is treated prospectively i.e like change in estimate.
3. Change to LIFO and change in dep. method are both
changes in accounting principles but cannot be restated and
thus are treated like change in estimate i.e.
prospectively.

Hope this helps and are correct. If not I am sure someone
will correct it.

__________________
BEC--80
REG--95
FAR--77
AUD--82

Zeratul
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Joined: 11 Jun 2009
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Posts: 987

Posted: 22 Aug 2009 at 13:26 \| IP Logged

optimistCPA wrote:

3. Change to LIFO and change in dep. method are both
changes in accounting principles but cannot be restated and
thus are treated like change in estimate i.e.
prospectively.

Hope this helps and are correct. If not I am sure someone
will correct it.

Change in depreciation method is considered to be (in Wiley's words) "a change in accounting estimate effected by a change in principle." The treatment of this category is to apply it prospectively (e.g. no cumulative effect and no restatement).
Change to LIFO, if I am not mistaken, is one of those accounting changes which tends to meet one of the three tests for forgoing the cumulative effect estimation/retrospective application (from Wiley):

1. After making every reasonable effort to apply the new principle to the previous period, the entity is unable to do so.
2. Retrospective application requires assumptions about management's intentions in a prior period that cannot be independently substantiated.
3. Retrospective application requires a significant estimates, and it is impossible to obtain objective information about the estimates.

Conversion to LIFO tends to fail the third test. Therefore conversion to LIFO is generally treated prospectively.

Hope that helps!

CPA08va
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Joined: 26 Apr 2008
Location: United States
Online Status: Offline
Posts: 116

Posted: 22 Aug 2009 at 13:59 \| IP Logged

Thanks Optimistcpa and zeratul. Can either of you help clarify my question #2 above. I don't understand why the answer is D = 0 for that question.

Zeratul
Major Contributor

Joined: 11 Jun 2009
Online Status: Offline
Posts: 987

Posted: 23 Aug 2009 at 16:52 \| IP Logged

CPA08VA, The question asks what amount should be reported as gain/loss on cumulative effect of the change in accounting principle. According to SFAS 154, the cumulative effect of the change of accounting principle is directly applied to the relevant assets/liabilities and offset to retained earnings. There is NO gain/loss recognition as a result of an accounting change.

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