Roundtree
Manufacturing Corp. is preparing its year-end financial statements following
IFRS and is considering the accounting for the following items:
1.
The vice president of sales had indicated that one product line has lost its
customer appeal and will be phased out over the next three years. Therefore, a
decision has been made to lower the estimated lives on related production
equipment from the remaining five years to three years.
2.
The Hightone Building was converted from a sales office to offices for the
Accounting Department at the beginning of this year. Therefore, the expense
related to this building will now appear as an administrative expense rather
than a selling expense on the current year’s income statement.
3.
Estimating the lives of new products in the Leisure Products Division has
become very difficult because of the highly competitive conditions in this
market. Therefore, the practice of deferring and amortizing preproduction costs
has been abandoned in favour of expensing such costs as they are incurred.
Explain
whether each of the above items is a change in principle, a change in estimate,
or an error.
1. The change to a three-year remaining life for
the purpose of computing depreciation on production equipment is a change in estimate
due to a change in conditions.
2. This is an expense classification change
arising from a change in the use of the
building for a different purpose. Thus, it is not a change in principle, a
change in estimate, or the correction of an error.
3. The change to expensing preproduction costs
(writing the costs off in one year as opposed to several years) is a change in
estimate due to a change in conditions. The change in estimate is to the value
used in the base in the allocation.
