Changes in Accounting Estimates
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Questions and Answers

Do changes in accounting estimates result in adjustments to retained earnings?

No

When are changes in accounting estimates typically made?

At the end of the financial period

What type of impact do changes in accounting estimates have?

Current and prospective impact

How do changes in accounting estimates affect future financial periods?

<p>Prospective impact</p> Signup and view all the answers

Why is there no adjustment to retained earnings when accounting estimates change?

<p>Because these estimates only affect current and future periods</p> Signup and view all the answers

Why might management consider the FIFO method to more accurately reflect the usage and flow of inventories in an economic cycle?

<p>The FIFO method assumes that the oldest inventory items are used first, which can more closely match the actual physical flow of many types of inventory.</p> Signup and view all the answers

In what year did the company decide to change its inventory valuation method to FIFO?

<p>2013</p> Signup and view all the answers

What accounting method was the company using before switching to FIFO?

<p>Weighted-average cost method</p> Signup and view all the answers

How can changing the inventory valuation method to FIFO potentially affect the financial statements?

<p>It can affect the cost of goods sold, net income, and the value of ending inventory on the balance sheet.</p> Signup and view all the answers

Is it justified to change the accounting policy if it provides a more accurate reflection of inventory usage? Why?

<p>Yes, because accounting policies should accurately reflect the economic reality and the true financial position of the company.</p> Signup and view all the answers

What two primary characteristics must be considered when selecting an accounting policy?

<p>Relevance to the economic decision-making needs of users and reliability of the financial statements.</p> Signup and view all the answers

What does it mean for financial statements to represent the economic substance of transactions?

<p>It means that the financial statements should reflect the reality of transactions, other events, and conditions, rather than just their legal form.</p> Signup and view all the answers

Why is neutrality important in financial statements?

<p>Neutrality ensures that the financial statements are free from bias.</p> Signup and view all the answers

What does prudence mean in the context of financial statements?

<p>Prudence means exercising caution in judgments and estimates to ensure that assets and income are not overstated and liabilities and expenses are not understated.</p> Signup and view all the answers

Why must financial statements be complete in all material aspects?

<p>To ensure that all relevant information is presented, allowing stakeholders to make well-informed economic decisions.</p> Signup and view all the answers

Under what conditions can an entity change an accounting policy to provide more reliable and relevant information?

<p>The change must result in the financial statements providing reliable and more relevant information about the effects of transactions, other events, or conditions on the entity's financial position, financial performance, or cash flows.</p> Signup and view all the answers

Is an accounting policy change allowed if it is required by new legislation?

<p>Yes, an accounting policy change is allowed if it is necessitated by legislation.</p> Signup and view all the answers

Can an entity change its accounting policy simply because a type of transaction newly occurs in its business?

<p>No, changes in accounting policies do not include applying a policy to a type of transaction or event that did not occur previously.</p> Signup and view all the answers

What is not considered a change in accounting policy?

<p>Applying an accounting policy to a kind of transaction or event that did not occur previously or was immaterial is not considered a change in accounting policy.</p> Signup and view all the answers

What are the three main conditions under which an entity is permitted to change its accounting policy?

<p>The change is required by a standard or interpretation, necessitated by legislation, or results in more reliable and relevant financial statements.</p> Signup and view all the answers

How is a change in accounting policy required by a new IASB standard accounted for?

<p>As required by the new pronouncement.</p> Signup and view all the answers

What should an entity do if a new IASB pronouncement lacks specific transition provisions?

<p>Apply the change in accounting policy retrospectively.</p> Signup and view all the answers

Which two IAS standards are exceptions to the retrospective application of a change in accounting policy?

<p>IAS 16 and IAS 38.</p> Signup and view all the answers

What adjustment is required when a change in accounting policy is applied retrospectively?

<p>Adjustment of retained earnings.</p> Signup and view all the answers

What does 'retrospective application' of an accounting policy change entail?

<p>Changing current and previous years' figures.</p> Signup and view all the answers

What must an entity disclose when there is a change in an accounting estimate affecting the current period?

<p>The nature and amount of the change.</p> Signup and view all the answers

Why is it important for an entity to disclose the nature and amount of a change in an accounting estimate expected to affect future periods?

<p>To inform stakeholders about potential future impacts on the financial statements.</p> Signup and view all the answers

What should an entity do if it is impracticable to estimate the effect of an accounting estimate change on future periods?

<p>Disclose that it is impracticable to estimate the effect.</p> Signup and view all the answers

Can an entity avoid disclosing the effect of a change in accounting estimates on future periods? If so, under what condition?

<p>Yes, if estimating the effect is impracticable.</p> Signup and view all the answers

How does disclosing changes in accounting estimates impact financial statement users?

<p>It provides them with critical information to understand and predict financial performance.</p> Signup and view all the answers

How should a change in an accounting estimate be recognized if it affects both the current period and future periods?

<p>Prospectively by including it in profit or loss in the period of the change and future periods.</p> Signup and view all the answers

Name two examples of changes in accounting estimates.

<p>Depreciation method and method for provision for bad debt.</p> Signup and view all the answers

What action is required if a change in an accounting estimate results in a change in the carrying amount of an asset?

<p>The carrying amount of the related asset should be adjusted in the period of the change.</p> Signup and view all the answers

Define how changes in an accounting estimate are treated if they only affect the current period.

<p>They are included in profit or loss for the current period only.</p> Signup and view all the answers

What happens to an item of equity if it is affected by a change in an accounting estimate?

<p>The equity item should be adjusted in the period of the change.</p> Signup and view all the answers

What should an entity do when selecting and applying its accounting policies for similar transactions?

<p>An entity should select and apply its accounting policies consistently for similar transactions, other events, and conditions.</p> Signup and view all the answers

Under what condition can different accounting policies be applied to different items?

<p>Different accounting policies can be applied to different items if a Standard or an Interpretation specifically requires or permits categorization of items.</p> Signup and view all the answers

If a categorization is permitted by a Standard or an Interpretation, what must the entity do in terms of accounting policies?

<p>The entity must select and apply an appropriate accounting policy consistently to each category.</p> Signup and view all the answers

Describe the importance of consistent application of accounting policies.

<p>Consistent application of accounting policies is important for ensuring comparability and reliability of financial information across different reporting periods.</p> Signup and view all the answers

How should an entity approach accounting policies if no specific categorization is required by a Standard or Interpretation?

<p>The entity should apply the same accounting policies consistently for similar transactions, events, and conditions.</p> Signup and view all the answers

What should be disclosed about the standard or interpretation causing a change in accounting policy?

<p>The title of the standard or interpretation.</p> Signup and view all the answers

How should the nature of the change in accounting policy be described?

<p>A detailed description of the change.</p> Signup and view all the answers

What information must be provided concerning transitional provisions when an accounting policy change occurs?

<p>A description of the transitional provisions, including effects on future periods.</p> Signup and view all the answers

What should be disclosed if retrospective application of an accounting policy change is impracticable?

<p>An explanation and description of how the change was applied.</p> Signup and view all the answers

What adjustment figures must be disclosed for the current and prior periods when an accounting policy changes?

<p>The amount of the adjustment for each period, to the extent practicable.</p> Signup and view all the answers

What constitutes prior period errors according to the key definitions?

<p>Omissions from and misstatements in financial statements for one or more prior periods due to the failure to use or misuse of reliable information.</p> Signup and view all the answers

How is a change in accounting estimate defined?

<p>An adjustment of the carrying amount of an asset or liability, or related expense, resulting from reassessing the expected future benefits and obligations.</p> Signup and view all the answers

What are accounting policies?

<p>The specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.</p> Signup and view all the answers

Why might prior period errors occur?

<p>Due to mathematical mistakes, mistakes in applying accounting policies, oversights, misinterpretations of facts, or fraud.</p> Signup and view all the answers

What is the outcome of a change in accounting estimate?

<p>It results in an adjustment of the carrying amount of an asset or liability, or a related expense.</p> Signup and view all the answers

Study Notes

Changes in Accounting Estimates

  • No adjustment of retained earnings is required, as changes have a current and prospective impact in future periods.

Changes of Accounting Policies

  • An entity can change an accounting policy only if:
    • required by a standard or interpretation
    • necessitated by legislation
    • provides more reliable and relevant information about financial position, performance, or cash flows
  • Changes do not include applying an accounting policy to new transactions or events that did not occur previously or were immaterial.

Accounting Policies

  • When selecting an accounting policy, consider its appropriateness in producing information that is:
    • relevant to economic decision-making needs of users
    • reliable, neutral, prudent, and complete in all material aspects

Accounting Treatment

  • If a change in accounting policy is required by a new IASB standard or interpretation:
    • apply retrospectively, changing current and previous years' figures (except for IAS 16 and IAS 38)
    • requires adjustment of retained earnings

Disclosures Relating to Changes in Accounting Estimates

  • Disclose:
    • the nature and amount of a change in an accounting estimate that has an effect in the current period or future periods
    • if the amount of the effect in future periods is not disclosed because estimating it is impracticable

Changes in Accounting Estimates

  • A change in an accounting estimate is recognized prospectively by including it in profit or loss:
    • in the period of the change, if it affects that period only
    • in the period of the change and future periods, if it affects both
  • Examples: depreciation method, provision for bad debt, determining net realisable value of inventory

Disclosures Relating to Changes in Accounting Policies

  • Disclose:
    • the title of the standard or interpretation causing the change
    • the nature of the change in accounting policy
    • transitional provisions, including those that might have an effect on future periods
    • the amount of the adjustment for the current period and each prior period presented, to the extent practicable

Consistency of Accounting Policies

  • An entity shall select and apply its accounting policies consistently for similar transactions, other events, and conditions, unless a Standard or an Interpretation specifically requires or permits categorization.

Key Definitions

  • Accounting policies are the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.
  • A change in accounting estimate is an adjustment of the carrying amount of an asset or liability, or related expense, resulting from reassessing the expected future benefits and obligations associated with that asset or liability.
  • Prior period errors are omissions from and misstatements in an entity's financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information.

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Description

This quiz covers changes in accounting estimates, which are adjustments made at the end of a financial period that affect current and future periods. It does not involve adjustments to retained earnings. Test your understanding of these changes and their impact on financial reporting.

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