ACCT 302 Chapter 20

Accounting Changes

Types of Accounting Changes

• Definition of accounting changes: changes in an entity's reporting principles or estimates.

• Categories of accounting changes:
    - Retrospective changes: require the restatement of prior periods.
    - Prospective changes: applied only to the current period and future periods without restating prior periods.

Equity Accounting Changes

• Retirement of Shares
    - Description: Reclassifying treasury stock and common stock.
      - Treasury stock is removed and common stock credited.
    - Example breakdown:
      - Common Stock: $1 par value, 200,000,000 shares issued.
      - Retained Earnings accounted for removing shares retired.
    - Treasury stock will be credited for retired stock in accounting entries.

• Identifying the Type of Change
    - Requires retrospective reporting using the treasury method to report reacquired shares.
    - Financial statements typically reflect two years of balance sheet data, three years of income statement data, and retrospective adjustments for restated prior periods.

Change in Inventory Methods

• Example: Play Foods
    - Previous method: FIFO for inventory accounting.
    - Change initiated in 2024 to LIFO.
    - Impact: Net income for 2024 reported as $80,000,000 using LIFO.
    - Change in cost of goods sold computed for 2023 affected by LIFO, with a $6,000,000 increase.
    - Lack of records from 2021-2022 exempt them from restating those years, applying the exception criteria:
      - Change is prospective due to absence of records.
      - Exceptions discussed: change in depreciation methods treated as prospective.
      - New accounting principles and retrospective methodology only required under specific conditions.

• Journal Entries for Inventory Change
    - Adjusting retained earnings by debiting retained earnings and crediting inventory for the change in accounting principles.
    - Note: No restatement for years without documentation.

Change in Accounting Estimates

• Definition: Adjustments to financial statements reflecting changes in outcomes or estimates.

• Common examples include:
    - Accounts receivable estimates (allowance for doubtful accounts).
    - Depreciation estimates for long-term asset life and salvage value.

• Characteristics:
    - Changes are always prospective; prior years are not restated.
    - Adjustments impact income through the income statement rather than prior balance sheets.

Revenue Recognition from Royalties

• Example: Boiler Engineering Group royalties.
    - Royalty accrual estimated at $31,000 at year-end.
    - Adjustments are made in the year estimates are refined.
    - Showcase how accrued revenue is recorded prospectively, without retrospective adjustment for prior periods.

Legal Settlement Liability Adjustments

• Case Study: Northern Timber litigation.
    - Initial liability estimated at $1,000,000 but settled at $600,000.
    - Journal entries reflect liability adjustments and recognition of gains based on settlement differences.
    - Discusses the volatility of earnings perception on market reaction due to such gains or losses.

Deferred Tax Liabilities and Accounting Changes

• Process to handle accounting period changes and tax law adjustments.
    - Changes in tax rates and their impact on deferred tax calculations:
      - Calculation example: changed from a previous tax rate to a new lower rate resulting in adjustments to tax liabilities.
    - No need for revisions of past financial statements unless disclosures are materially substantial.

Change in Reporting Entity

• Criteria for reclassifying investments:
    - Movement between passive, equity, and consolidated control calculations depending on ownership percentages.
    - Equity method versus total consolidation principles depending on the level of influence.

Errors in Financial Statements

• Overview of handling errors and misstatement impacts:
    - Errors classified as material result in prior period adjustments.
    - Corrective actions depend on the timing of the discovery with varying implications:
      - Errors discovered post-closing require retrospective adjustments.
      - Corrections for misclassifications affect ratios and comparative reporting.

• Description of adjustments made in reporting retained earnings due to errors discovered in previous financial periods.
    - Both positive and negative impacts noted depending if the correction increases or decreases retained earnings.

Concluding Remarks on Accounting Changes

• Summary of retrospective vs. prospective changes:
    - Retrospective illustrated through significant changes in accounting principles or corrections of errors.
    - Prospective applied to estimates and future revenue recognition without historical adjustments.

This document serves as a comprehensive study guide based on the provided transcript, articulating key concepts, examples, calculations, and insights into accounting changes without summarization or omission of details.