Various types of accounting changes can affect the financial

Various types of accounting changes can affect the financial statements of a private business enterprise differently. Assume that each item on the following list would have a material effect on the financial statements of a private enterprise in the current year:

1. A change to the income taxes payable method from the tax liability method

2. A change in the estimated useful life of previously recorded capital assets where the straight-line depreciation method is used

3. A change from deferring and amortizing development costs to immediate recognition. The change to immediate recognition arises because the company does not have the resources to market the new product adequately

4. A change from including the employer share of CPP premiums with Payroll Tax Expenses to including it with Salaries and Wages Expense on the income statement

5. The correction of a mathematical error in inventory costing that was made in a prior period

6. A change from straight-line amortization to a double-declining method in recognition of the effect that technology has on the pattern of benefits received from the asset’s use

7. A change from presenting unconsolidated statements (using the cost method for the subsidiaries) to presenting consolidated statements for the company and its two long-held subsidiaries

8. A change in the method of accounting for leases for tax purposes to conform with the financial accounting method; as a result, both future and current taxes payable changed substantially

9. A change from the periodic inventory method to the perpetual method with the introduction of scanning equipment and updated computer software

10. A change in an accounting method due to a change in a primary source of GAAP

Instructions

Identify the type of accounting change that is described in each item, and indicate whether the prior years’ financial statements must be restated when they are presented in comparative form with the current year’s statements. Also indicate if the company is required to justify the change.

Item Change		Type of Change		Restatement of Prior Years
1.		This appears to be a voluntary change in an accounting policy which is allowed under ASPE.  The company has adopted the taxes payable method.  There is no justification that is required that this represents more relevant information.   .		Yes
2.		An accounting change involving a change in an accounting estimate.		No
3.		This may represent a change in an accounting policy or a change in an estimate.  If it is a change in the accounting policy to expense all development costs from now on, then under ASPE, there is no requirement to disclose why the change was made or why it is more relevant.  But retrospective application would be required and prior year’s statements adjusted. However, it may be that the conditions for these particular development costs have changed.  This then means that the estimated future benefits arising from these capitalized development costs have changed (declined).  This would then be a change in an estimate and disclosure would be required if material.   Not all situations are clear cut and students should be aware that alternative answers may be justified.		Yes No
4.		Treated as if it were an error correction, as a change in classification.		Yes
5.		An error correction.		Yes
6.		This is a change in estimate from a change in the pattern of benefits.		No

Item Change		Type of Change		Restatement of Prior Years
7.		Under ASPE, the company has a choice to report subsidiaries as consolidated, or using either the equity method or the cost method.  This is a voluntary change in an accounting policy and requires retrospective application.  However, the standard does not require the company to justify that the change is more relevant.		Yes
8.		Not a change in accounting policy. Simply, a change in tax accounting; done prospectively.		No
9.		This change should not have any impact on the financial statements. The cost of goods sold and the ending inventory should be the same regardless of whether the periodic or perpetual method was used.		n/a
10.		A change in accounting principle that results from applying the transitional provisions of a primary source of GAAP.		Yes/No*

* The treatment would be specified in the transitional provisions of the new accounting pronouncement.