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22-1
Jakarta, 19 Agustus 2011Jakarta, 19 Agustus 2011
PERUBAHAN KEBIJAKAN AKUNTANSIPERUBAHAN KEBIJAKAN AKUNTANSIDAN KOREKSI KESALAHANDAN KOREKSI KESALAHAN
I
22-2
1. Identify the two types of accounting changes.
2. Describe the accounting for changes in accounting policies.
3. Understand how to account for retrospective accounting changes.
4. Understand how to account for impracticable changes.
5. Describe the accounting for changes in estimates.
6. Describe the accounting for correction of errors.
7. Identify economic motives for changing accounting policies.
8. Analyze the effect of errors.
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives
22-3
Changes in accounting
policy
Changes in accounting
estimate
Correction of errors
Summary
Motivations for change of
policy
Accounting Changes Error Analysis
Statement of financial
position errors
Income statement errors
Statement of financial
position and income
statement effects
Comprehensive example
Preparation of statements
with error corrections
Accounting Changes and Error AnalysisAccounting Changes and Error AnalysisAccounting Changes and Error AnalysisAccounting Changes and Error Analysis
22-4
Types of Accounting Changes:
1. Change in Accounting Policy.
2. Changes in Accounting Estimate.
Errors are not considered an accounting change.
LO 1 Identify the two types of accounting changes.
Accounting Alternatives:
Diminish the comparability of financial information.
Obscure useful historical trend data.
Accounting ChangesAccounting ChangesAccounting ChangesAccounting Changes
22-5
Average cost to LIFO.
Completed-contract to percentage-of-completion.
Change from one accepted accounting policy to another.
Examples include:
Changes in Accounting PolicyChanges in Accounting PolicyChanges in Accounting PolicyChanges in Accounting Policy
LO 2 Describe the accounting for changes in accounting policies.
Adoption of a new policy in recognition of events that have occurred for
the first time or that were previously immaterial is not an accounting
change.
22-6
Three approaches for reporting changes:
1) Currently.
2) Retrospectively.
3) Prospectively (in the future).
IASB requires use of the retrospective approach.
Rationale - Users can then better compare results from one period to
the next.
LO 2 Describe the accounting for changes in accounting policies.
Changes in Accounting PolicyChanges in Accounting PolicyChanges in Accounting PolicyChanges in Accounting Policy
22-7
Retrospective Accounting Change Approach
LO 3 Understand how to account for retrospective accounting changes.
IFRS permits a change in policy if:
1) It is required by IFRS; or
2) It results in the financial statements providing more
reliable and relevant information.
Changes in Accounting PolicyChanges in Accounting PolicyChanges in Accounting PolicyChanges in Accounting Policy
22-8
Retrospective Accounting Change Approach
LO 3 Understand how to account for retrospective accounting changes.
Company reporting the change
1) Adjusts its financial statements for each prior period
presented to the same basis as the new accounting
policy.
2) Adjusts the carrying amounts of assets and liabilities as
of the beginning of the first year presented, plus the
opening balance of retained earnings.
Changes in Accounting PolicyChanges in Accounting PolicyChanges in Accounting PolicyChanges in Accounting Policy
22-9
Illustration: Denson Company has accounted for its income from
long-term construction contracts using the cost-recovery (zero-
profit) method. In 2011, the company changed to the percentage-
of-completion method. Management believes this approach
provides a more appropriate measure of the income earned. For
tax purposes, the company uses the cost-recovery method and
plans to continue doing so in the future. (Assume a 40 percent
enacted tax rate.)
LO 3 Understand how to account for retrospective accounting changes.
Retrospective Accounting Change: Long-Term Contracts
Changes in Accounting PolicyChanges in Accounting PolicyChanges in Accounting PolicyChanges in Accounting Policy
22-10
Illustration 22-1
LO 3 Understand how to account for retrospective accounting changes.
Changes in Accounting PolicyChanges in Accounting PolicyChanges in Accounting PolicyChanges in Accounting Policy
22-11
Data for Retrospective ChangeIllustration 22-2
Construction in Process 220,000
Deferred Tax Liability 88,000
Retained Earnings 132,000
LO 3 Understand how to account for retrospective accounting changes.
Journal entry beginning of
2010
Changes in Accounting PolicyChanges in Accounting PolicyChanges in Accounting PolicyChanges in Accounting Policy
22-12
Reporting a Change in policy
LO 3 Understand how to account for retrospective accounting changes.
Major disclosure requirements are as follows.
1. Nature of the change in accounting policy;
2. Reasons why applying the new accounting policy provides reliable
and more relevant information;
3. For the current period and each prior period presented, to the extent
practicable, the amount of the adjustment:
1. For each financial statement line item affected; and
2. Basic and diluted earnings per share.
4. Amount of the adjustment relating to periods before those
presented, to the extent practicable.
Changes in Accounting PolicyChanges in Accounting PolicyChanges in Accounting PolicyChanges in Accounting Policy
22-13 LO 3
Illustration 22-3Reporting a Change in policy
Changes in Accounting PolicyChanges in Accounting PolicyChanges in Accounting PolicyChanges in Accounting Policy
22-14
Retained Earnings Adjustment
LO 3 Understand how to account for retrospective accounting changes.
Illustration 22-4
Retained earnings balance is €1,360,000 at the beginning of 2009.
Before Change
Changes in Accounting PolicyChanges in Accounting PolicyChanges in Accounting PolicyChanges in Accounting Policy
22-15 LO 3 Understand how to account for retrospective accounting changes.
Illustration 22-5After Change
Retained Earnings Adjustment
Changes in Accounting PolicyChanges in Accounting PolicyChanges in Accounting PolicyChanges in Accounting Policy
22-16
E22-1 (Change in policy—Long-Term Contracts): Cherokee
Construction Company changed from the cost-recovery to the
percentage-of-completion method of accounting for long-term
construction contracts during 2010. For tax purposes, the
company employs the cost-recovery method and will continue this
approach in the future. (Hint: Adjust all tax consequences through
the Deferred Tax Liability account.)
LO 3 Understand how to account for retrospective accounting changes.
Changes in Accounting PolicyChanges in Accounting PolicyChanges in Accounting PolicyChanges in Accounting Policy
22-17
E22-1 (Change in policy—Long-Term Contracts):
LO 3 Understand how to account for retrospective accounting changes.
Instructions: (assume a tax rate of 35%)
(b) What entry(ies) are necessary to adjust the accounting records for
the change in accounting policy?
(a) What is the amount of net income and retained earnings that would
be reported in 2010? Assume beginning retained earnings for 2009 to
be $100,000.
Changes in Accounting PolicyChanges in Accounting PolicyChanges in Accounting PolicyChanges in Accounting Policy
22-18
Journal entry
2010 Construction in progress 170,000
Deferred tax liability 59,500
Retained earnings 110,500
E22-1: Pre-Tax Income from Long-Term Contracts
LO 3 Understand how to account for retrospective accounting changes.
35%Percentage- Cost- Tax Net of
Date of-Completion Recovery Difference Effect Tax
2009 780,000$ 610,000$ 170,000 59,500 110,500$
2010 700,000 480,000 220,000 77,000 143,000
Changes in Accounting PolicyChanges in Accounting PolicyChanges in Accounting PolicyChanges in Accounting Policy
22-19
Restated Previous2010 2009 2009
Pre-tax income 700,000$ 780,000$ 610,000$
Income tax (35%) 245,000 273,000 213,500
Net income 455,000$ 507,000$ 396,500$
Beg. Retained earnings 496,500$ 100,000$ 100,000$
Accounting change 110,500
Beg. R/Es restated 607,000$ 100,000 100,000
Net income 455,000 507,000 396,500
End. Retained earnings 1,062,000$ 607,000$ 496,500$
E22-1: Comparative Statements
LO 3 Understand how to account for retrospective accounting changes.
Income Statement
Statement of Retained
Earnings
Changes in Accounting PolicyChanges in Accounting PolicyChanges in Accounting PolicyChanges in Accounting Policy
22-20 LO 3 Understand how to account for retrospective accounting changes.
Direct Effects - IASB takes the position that companies
should retrospectively apply the direct effects of a
change in accounting policy.
Indirect Effect is any change to current or future cash
flows of a company that result from making a change in
accounting policy that is applied retrospectively.
Direct and Indirect Effects of Changes
Changes in Accounting PolicyChanges in Accounting PolicyChanges in Accounting PolicyChanges in Accounting Policy
22-21
Impracticability
LO 4 Understand how to account for impracticable changes.
Companies should not use retrospective application if one of the
following conditions exists:
1. Company cannot determine the effects of the retrospective
application.
2. Retrospective application requires assumptions about
management’s intent in a prior period.
3. Retrospective application requires significant estimates
that the company cannot develop.
Changes in Accounting PolicyChanges in Accounting PolicyChanges in Accounting PolicyChanges in Accounting Policy
22-22
Changes in Accounting EstimateChanges in Accounting EstimateChanges in Accounting EstimateChanges in Accounting Estimate
LO 5 Describe the accounting for changes in estimates.
Examples of Estimates
1. Bad debts.
2. Inventory obsolescence.
3. Useful lives and residual values of assets.
4. Periods benefited by deferred costs.
5. Liabilities for warranty costs and income taxes.
6. Recoverable mineral reserves.
7. Change in depreciation methods.
8. Fair value of financial assets or financial liabilities.
22-23
Changes in Accounting EstimateChanges in Accounting EstimateChanges in Accounting EstimateChanges in Accounting Estimate
LO 5 Describe the accounting for changes in estimates.
Prospective Reporting
Changes in accounting estimates are reported prospectively.
Account for changes in estimates in
1. the period of change if the change affects that period only,
or
2. the period of change and future periods if the change
affects both.
IASB views changes in estimates as normal recurring corrections
and adjustments and prohibits retrospective treatment.
22-24
Illustration: Arcadia High School purchased equipment for
$510,000 which was estimated to have a useful life of 10 years
with a salvage value of $10,000 at the end of that time.
Depreciation has been recorded for 7 years on a straight-line
basis. In 2010 (year 8), it is determined that the total estimated life
should be 15 years with a salvage value of $5,000 at the end of
that time.
Required:
What is the journal entry to correct
prior years’ depreciation expense?
Calculate depreciation expense for 2010.
No Entry No Entry RequiredRequired
Change in Estimate ExampleChange in Estimate ExampleChange in Estimate ExampleChange in Estimate Example
LO 5 Describe the accounting for changes in estimates.
22-25
Equipment $510,000
Fixed Assets:
Accumulated depreciation 350,000
Net book value (NBV) $160,000
Balance Sheet (Dec. 31, 2009)
Change in Estimate ExampleChange in Estimate ExampleChange in Estimate ExampleChange in Estimate Example After 7 years
Equipment cost $510,000
Salvage value - 10,000
Depreciable base 500,000
Useful life (original) 10 years
Annual depreciation $ 50,000 x 7 years = $350,000
First, establish NBV at date of change in
estimate.
First, establish NBV at date of change in
estimate.
LO 5 Describe the accounting for changes in estimates.
22-26
Net book value $160,000
Salvage value (if any) 5,000
Depreciable base 155,000
Useful life 8 years
Annual depreciation $ 19,375
Change in Estimate ExampleChange in Estimate ExampleChange in Estimate ExampleChange in Estimate Example
Second, calculate Second, calculate depreciation expense depreciation expense
for 2010.for 2010.
Second, calculate Second, calculate depreciation expense depreciation expense
for 2010.for 2010.
Depreciation expense 19,375
Accumulated depreciation 19,375
Journal entry for 2010
LO 5 Describe the accounting for changes in estimates.
22-27
Changes in Accounting EstimateChanges in Accounting EstimateChanges in Accounting EstimateChanges in Accounting Estimate
LO 5 Describe the accounting for changes in estimates.
Disclosures
Companies should 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.
Companies need not disclose changes in accounting estimate
made as part of normal operations, such as bad debt allowances
or inventory obsolescence, unless such changes are material.
22-28
Correction of ErrorsCorrection of ErrorsCorrection of ErrorsCorrection of Errors
LO 6 Describe the accounting for correction of errors.
Types of Accounting Errors:
1. A change from an accounting policy that is not generally
accepted to an accounting policy that is acceptable.
2. Mathematical mistakes.
3. Changes in estimates that occur because a company did
not prepare the estimates in good faith.
4. Failure to accrue or defer certain expenses or revenues.
5. Misuse of facts.
6. Incorrect classification of a cost as an expense instead of
an asset, and vice versa.
22-29
Correction of ErrorsCorrection of ErrorsCorrection of ErrorsCorrection of Errors
All material errors must be corrected.
Record corrections of errors from prior periods as an
adjustment to the beginning balance of retained earnings
in the current period.
Such corrections are called prior period adjustments.
For comparative statements, a company should restate
the prior statements affected, to correct for the error.
LO 6 Describe the accounting for correction of errors.
22-30
Correction of ErrorsCorrection of ErrorsCorrection of ErrorsCorrection of Errors
Illustration: In 2012 the bookkeeper for Selectro Company
discovered an error:
In 2011 the company failed to record £20,000of depreciation
expense on a newly constructed building. This building is the only
depreciable asset Selectro owns. The company correctly
included the depreciation expense in its tax return and correctly
reported its income taxes payable.
LO 6 Describe the accounting for correction of errors.
22-31
Correction of ErrorsCorrection of ErrorsCorrection of ErrorsCorrection of Errors
Illustration: Selectro’s income statement for 2011 with and
without the error.Illustration 22-17
Show the entries that Selectro should have made and did make for
recording depreciation expense and income taxes.
LO 6 Describe the accounting for correction of errors.
22-32
Correction of ErrorsCorrection of ErrorsCorrection of ErrorsCorrection of Errors
Illustration: Show the entries that Selectro should have made and
did make for recording depreciation expense and income taxes.
Illustration 22-18
Correcting Entry in
2012
LO 6 Describe the accounting for correction of errors.
22-33
Correction of ErrorsCorrection of ErrorsCorrection of ErrorsCorrection of Errors
Illustration: Show the entries that Selectro should have made and
did make for recording depreciation expense and income taxes.
Retained Earnings 12,000Correcting Entry in
2012
LO 6 Describe the accounting for correction of errors.
Illustration 22-18
22-34
Correction of ErrorsCorrection of ErrorsCorrection of ErrorsCorrection of Errors
Illustration: Show the entries that Selectro should have made and
did make for recording depreciation expense and income taxes.
Retained Earnings 12,000
Deferred Tax Liability 8,000
Correcting Entry in
2012
ReversalReversal
LO 6 Describe the accounting for correction of errors.
Illustration 22-18
22-35
Correction of ErrorsCorrection of ErrorsCorrection of ErrorsCorrection of Errors
Illustration: Show the entries that Selectro should have made and
did make for recording depreciation expense and income taxes.
Retained Earnings 12,000
Deferred Tax Liability 8,000
Accumulated Depreciation—Buildings 20,000
Correcting Entry in
2012
RecordRecord
LO 6 Describe the accounting for correction of errors.
Illustration 22-18
22-36
Correction of ErrorsCorrection of ErrorsCorrection of ErrorsCorrection of Errors
Illustration (Single-Period Statement): Assume that Selectro
Company has a beginning retained earnings balance at January 1,
2012, of $350,000. The company reports net income of $400,000 in
2012.Illustration 22-21
LO 6 Describe the accounting for correction of errors.
22-37
Correction of ErrorsCorrection of ErrorsCorrection of ErrorsCorrection of Errors
Comparative Statements
Company should
1. make adjustments to correct the amounts for all affected
accounts reported in the statements for all periods
reported.
2. restate the data to the correct basis for each year
presented.
3. show any catch-up adjustment as a prior period
adjustment to retained earnings for the earliest period it
reported.
LO 6 Describe the accounting for correction of errors.
22-38
Woods, Inc.Statement of Retained Earnings
For the Year Ended December 31, 2010
Balance, January 1 1,050,000$ Net income 360,000 Dividends (300,000) Balance, December 31 1,110,000$
Before issuing the report for the year ended December 31, 2010, you discover
a $62,500 error that caused the 2009 inventory to be overstated (overstated
inventory caused COGS to be lower and thus net income to be higher in
2009). Would this discovery have any impact on the reporting of the
Statement of Retained Earnings for 2010? Assume a 20% tax rate.
Correction of ErrorsCorrection of ErrorsCorrection of ErrorsCorrection of Errors
LO 6 Describe the accounting for correction of errors.
22-39
Woods, Inc.Statement of Retained Earnings
For the Year Ended December 31, 2010
Balance, January 1, as previously reported 1,050,000$
Prior period adjustment, net of tax (50,000)
Balance, January 1, as restated 1,000,000
Net income 360,000
Dividends (300,000)
Balance, December 31 1,060,000$
Correction of ErrorsCorrection of ErrorsCorrection of ErrorsCorrection of Errors
LO 6 Describe the accounting for correction of errors.
22-40
Summary of Accounting Changes and ErrorsSummary of Accounting Changes and ErrorsSummary of Accounting Changes and ErrorsSummary of Accounting Changes and Errors
Illustration 22-23
LO 6
22-41
Motivations for Change of Motivations for Change of Accounting MethodAccounting Method
Motivations for Change of Motivations for Change of Accounting MethodAccounting Method
LO 7 Identify economic motives for changing accounting policies.
Why companies may prefer certain accounting
methods. Some reasons are:
1. Political costs.
2. Capital Structure.
3. Bonus Payments.
4. Smooth Earnings.
22-42
Error AnalysisError AnalysisError AnalysisError Analysis
LO 8 Analyze the effect of errors.
Companies must answer three questions:
1. What type of error is involved?
2. What entries are needed to correct for the error?
3. After discovery of the error, how are financial statements to
be restated?
Companies treat errors as prior-period adjustments and report
them in the current year as adjustments to the beginning
balance of Retained Earnings.
22-43
Statement of financial position errors affect only the
presentation of an asset, liability, or stockholders’ equity
account.
Current year error - reclassify item to its proper position.
Prior year error - restate the statement of financial position
of the prior year for comparative purposes.
Statement of Financial Position ErrorsStatement of Financial Position ErrorsStatement of Financial Position ErrorsStatement of Financial Position Errors
LO 8 Analyze the effect of errors.
22-44
Improper classification of revenues or expenses.
Current year error - reclassify item to its proper position.
Prior year error - restate the income statement of the prior
year for comparative purposes.
Statement of Financial Position ErrorsStatement of Financial Position ErrorsStatement of Financial Position ErrorsStatement of Financial Position Errors
LO 8 Analyze the effect of errors.
22-45
Counterbalancing Errors
Will be offset or corrected over two periods.
If company has closed the books:
a. If the error is already counterbalanced, no entry is necessary.
b. If the error is not yet counterbalanced, make entry to adjust the present balance of retained earnings.
LO 8 Analyze the effect of errors.
For comparative purposes, restatement is necessary even if a correcting journal entry is not required.
Balance Sheet and Income Statement ErrorsBalance Sheet and Income Statement ErrorsBalance Sheet and Income Statement ErrorsBalance Sheet and Income Statement Errors
22-46
Will be offset or corrected over two periods.
If company has not closed the books:
a. If error already counterbalanced, make entry to correct the error in the current period and to adjust the beginning balance of Retained Earnings.
b. If error not yet counterbalanced, make entry to adjust the beginning balance of Retained Earnings.
LO 8 Analyze the effect of errors.
Balance Sheet and Income Statement ErrorsBalance Sheet and Income Statement ErrorsBalance Sheet and Income Statement ErrorsBalance Sheet and Income Statement Errors
Counterbalancing Errors
22-47
Non-Counterbalancing Errors
Not offset in the next accounting period.
Companies must make correcting entries, even if they have closed the books.
LO 8 Analyze the effect of errors.
Balance Sheet and Income Statement ErrorsBalance Sheet and Income Statement ErrorsBalance Sheet and Income Statement ErrorsBalance Sheet and Income Statement Errors
22-48
E22-19 (Error Analysis; Correcting Entries): A partial trial balance of
Dickinson Corporation is as follows on December 31, 2010.
Error Analysis ExampleError Analysis ExampleError Analysis ExampleError Analysis Example
Dr. Cr.
Supplies on hand 2,500$
Accured salaries and wages 1,500$
Interest receivable 5,100
Prepaid insurance 90,000
Unearned rent 0
Accured interest payable 15,000
LO 8 Analyze the effect of errors.
Instructions: (a) Assuming that the books have not been closed, what are
the adjusting entries necessary at December 31, 2010?
22-49
Salaries and wages expense 2,900
Accured salaries and wages 2,900
Supplies expense 1,400
Supplies on hand 1,400
Error Analysis ExampleError Analysis ExampleError Analysis ExampleError Analysis Example
LO 8 Analyze the effect of errors.
1. A physical count of supplies on hand on December 31, 2010, totaled
$1,100.
2. Accrued salaries and wages on December 31, 2010, amounted to
$4,400.
(a) Assuming that the books have not been closed, what are the
adjusting entries necessary at December 31, 2010?
22-50
Interest revenue 750
Interest receivable 750
Insurance expense 25,000
Prepaid insurance 25,000
Error Analysis ExampleError Analysis ExampleError Analysis ExampleError Analysis Example
LO 8 Analyze the effect of errors.
3. Accrued interest on investments amounts to $4,350 on December 31,
2010.
4. The unexpired portions of the insurance policies totaled $65,000 as
of December 31, 2010.
(a) Assuming that the books have not been closed, what are the
adjusting entries necessary at December 31, 2010?
22-51
Depreciation expense 45,000
Accumulated depreciation 45,000
Rental income 12,000
Unearned rent 12,000
Error Analysis ExampleError Analysis ExampleError Analysis ExampleError Analysis Example
LO 8 Analyze the effect of errors.
5. $24,000 was received on January 1, 2010 for the rent of a building for
both 2010 and 2011. The entire amount was credited to rental
income.
6. Depreciation for the year was erroneously recorded as $5,000 rather
than the correct figure of $50,000.
(a) Assuming that the books have not been closed, what are the
adjusting entries necessary at December 31, 2010?
22-52
E22-19 (Error Analysis; Correcting Entries) A partial trial balance of
Dickinson Corporation is as follows on December 31, 2010.
Error Analysis ExampleError Analysis ExampleError Analysis ExampleError Analysis Example
LO 8 Analyze the effect of errors.
Instructions: (b) Assuming that the books have been closed, what are
the adjusting entries necessary at December 31, 2010?
Dr. Cr.
Supplies on hand 2,500$
Accured salaries and wages 1,500$
Interest receivable 5,100
Prepaid insurance 90,000
Unearned rent 0
Accured interest payable 15,000
22-53
Retained earnings 2,900
Accured salaries and wages 2,900
Retained earnings 1,400
Supplies on hand 1,400
Error Analysis ExampleError Analysis ExampleError Analysis ExampleError Analysis Example
LO 8 Analyze the effect of errors.
(b) Assuming that the books have been closed, what are the adjusting
entries necessary at December 31, 2010?
1. A physical count of supplies on hand on December 31, 2010, totaled
$1,100.
2. Accrued salaries and wages on December 31, 2010, amounted to
$4,400.
22-54
Retained earnings 25,000
Prepaid insurance 25,000
Retained earnings 750
Interest receivable 750
Error Analysis ExampleError Analysis ExampleError Analysis ExampleError Analysis Example
LO 8 Analyze the effect of errors.
3. Accrued interest on investments amounts to $4,350 on December 31,
2010.
4. The unexpired portions of the insurance policies totaled $65,000 as
of December 31, 2010.
(b) Assuming that the books have been closed, what are the adjusting
entries necessary at December 31, 2010?
22-55
Retained earnings 45,000
Accumulated depreciation 45,000
Retained earnings 12,000
Unearned rent 12,000
Error Analysis ExampleError Analysis ExampleError Analysis ExampleError Analysis Example
LO 8 Analyze the effect of errors.
5. $24,000 was received on January 1, 2010 for the rent of a
building for both 2010 and 2011. The entire amount was credited
to rental income.
6. Depreciation for the year was erroneously recorded as $5,000
rather than the correct figure of $50,000.
(b) Assuming that the books have been closed, what are the
adjusting entries necessary at December 31, 2010?