Rydell
Manufacturing Ltd. is preparing its year-end financial statements. Rydell is a
private enterprise. The controller, Theo Kimbria, is confronted with several
decisions about statement presentation for the following items.
1.
The company has decided to change its depreciation method for the machinery to
units of production rather than the straight-line method.
2.
Trying to meet the criteria for capitalization of the development costs has
become very difficult because of the highly competitive conditions in this
market. Therefore, the practice of deferring and amortizing development costs
has been abandoned in favour of expensing these costs as they are incurred.
3.
The company has decided to change from using the corridor approach for
accounting for actuarial gains and losses to recording these directly to OCI in
each reporting period (or directly to net income if the company follows accounting
standards for private enterprises, or ASPE).
4.
When the year-end physical inventory adjustment was made for the current year,
the controller discovered that the prior year’s physical inventory sheets for
an entire section of warehouse had been mislaid and left out of last year’s
count.
5.
The method of accounting that is used for financial reporting purposes for
certain receivables has been approved for tax purposes during the current tax
year by the CRA. This change for tax purposes will cause both current taxes payable
and future tax liabilities to change substantially.
6.
Management has decided to switch from the FIFO inventory valuation method to the
average cost inventory valuation method for all inventories.
Instructions
For
each of the six changes that Rydell Manufacturing Ltd. made in the current
year, advise Theo on whether the change is a change in accounting policy, a
change in estimate, the correction of an error, or none of these. Explain if
the accounting treatment would be different under ASPE or IFRS. Provide a short
explanation for your choice. Determine if retrospective or prospective
application would be required in each case and what information would be
required in any note disclosure. If the information that is provided is
insufficient for you to determine the nature of the change, identify what additional
information you need and how this might affect your response.
1. The
change to a units-of-production method from straight-line is a change in an
estimate under IFRS, but a change in accounting policy under ASPE. As a change in estimate, the policy is
applied prospectively, but the company would require disclosure on the impact
on the current and future earnings. As a
change in an accounting policy, the change would be retrospectively applied
with disclosure on the impact on prior periods (if practicable to determine)
and the current period.
2. The
change to expensing development costs is a change in estimate due to a change
in conditions in the case of IFRS. In
this case, the conditions have changed and the future estimated benefit for
these costs is now questionable. This is
a prospective change.
However,
it could be a change in policy under ASPE, if the company will continue to
expense development costs, which is a choice that is allowed. If this is the case, then the change in
policy must be applied retrospectively.
However, the company does not need to provide justification as to
whether or not this is a more relevant treatment for reporting purposes.
3.
The change in the treatment of the actuarial gains and losses is an accounting
policy change that must be applied retrospectively. Under IFRS, the changes would be made in
prior periods and an opening balance sheet for the earliest comparative period
would be required. The company would have
to justify this new treatment by stating why it is more relevant than the corridor
approach. In addition, disclosure is
required on the impact on the assets and liabilities of the prior years and the
impact on earnings for the current year, as well as prior years. An opening balance sheet for the earliest
comparative period would be required.
Under
ASPE, this is a choice in measuring and reporting actuarial gains and losses,
and is also a change in accounting policy.
However, there is no need to justify this change in the notes. The change would be retrospectively applied,
and disclosure of the impact on the current and prior financial statements
would be noted. There is no requirement
for an opening balance sheet for the earliest comparative period.
4. This
oversight is a mistake that should be corrected. Such a correction is
considered a correction of an error of a prior period. Retrospective
application is required under both OFRS and ASPE, along with the nature of the
error and its impact on the current and prior periods. Again, under IFRS, an opening balance sheet
is required for the earliest comparative period presented.
5. This
change is not one of the three types mentioned. Neither the method of
accounting for certain receivables nor the method of accounting for income
taxes (inter-period allocation) was changed. The only change is for tax
reporting purposes.
6. In
this case, no reason is provided for the change. If the nature of the change is
to provide more relevant information, then this would be treated as a voluntary
change in accounting policy. The change would be applied retroactively to
restate comparative information as if the average cost method had been used for
all prior periods. However, if the reason for the change is due to changed
circumstances, for example the type and composition of inventory items has
materially changed, the change would be treated as the application of GAAP to a
new situation and would be accounted for on a prospective basis. The change may
also be due to a change in estimate in that the inventory flow pattern is
different from what was previously estimated. This situation would be treated
as a change in estimate and would be accounted for on a prospective basis. The
justification for the change will determine the appropriate accounting
treatment in this case. Similar
treatment would be required under IFRS and ASPE.
