Question

financial statements for Gary and Allen for the year ended Decem- ber 31, 2017. Situation 3 A company decides in January 2017 to adopt the straight-line method of depreciation for plant equipment. This method will be used for new acquisitions as well as for previously acquired plant equipment for which depreciation had been provided on an accel- erated basis. Sometimes a business entity changes its method of accounting for certain items. The change may be classified as a change in accounting principle, a change in accounting estimate, or a change in reporting entity. Following are three independent, unrelated sets of facts relating to accounting changes. Situation / A company determined that the depreciable lives of its fixed assets were currently too long to fairly match the cost of the fixed assets with the revenue produced. The company decided at the beginning of the current year to reduce the depreciable lives of all its existing fixed assets by five years. Situation 2 On December 31, 2016, Gary Company owned 51 percent of Allen Company, at which time Gary reported its investment using the cost method owing to political uncertainties in the country in which Allen was located. On January 2, 2017, the management of Gary Company was satisfied that the political uncertainties were resolved and that the assets of the company were in no danger of nationalization. Accordingly, Gary will prepare consolidated Required: For each of the preceding situations, provide the following information. Complete your discussion of each situation before going on to the next situation. a Type of accounting change b. Manner of reporting the change under current U.S. GAAP, including a discussion, where applicable, of how amounts are computed c. Elfects of the change on the statement of financial position and earnings statement d. Required disclosures

Answer 1

Situation 1:- This is an example of change in Accounting Estimate as there is a change in the life of assets. ASC 250 provides that a change in accounting estimate that is effected by a change in accounting principle (e.g., a change in depreciation method for long-lived assets) is accounted for as a change in estimate.

Manner of reporting/effects of change/required disclosure.:- For a change in accounting estimate that affects several future periods, entities are required to disclose the effect of the change on income from continuing operations, net income (or other appropriate captions of changes in the applicable net assets or performance indicator), and any related per-share amounts of the current period. An example of a change that would affect several future periods is a change in service lives of depreciable assets. In contrast, disclosure of the effects is not necessary for estimates made each period in the ordinary course of accounting for items such as uncollectible accounts or inventory obsolescence.When an entity changes an accounting estimate by changing an accounting principle, the required disclosures for a change in accounting estimate and a change in accounting principle are made However, disclosure is required if the effect of such a change in estimate is material.If a change in estimate does not have a material effect in the period of change but is reasonably certain to have a material effect in later periods, a description of that change in estimate shall be disclosed whenever the financial statements of the period of change are presented.

Sample disclosure:- Effective 1 January 2019, ABC Company changed its estimates of the useful lives of certain machinery and equipment in its manufacturing plants. :Change in depreciable lives of property and equipment In accordance with its policy, the Company reviews the estimated useful lives of its fixed assets on an ongoing basis. This review indicated that the actual lives of certain machinery and equipment at its manufacturing plants were longer than the estimated useful lives used for depreciation purposes in the Company’s financial statements. As a result, effective 1 January 2019, the Company changed its estimates of the useful lives of its machinery and equipment to better reflect the estimated periods during which these assets will remain in service. The estimated useful lives of the machinery and equipment has been reduced by 5 years The effect of this change in estimate was to increase 2019 depreciation expense by $500,000, reduce 2019 net income by $300,000, and reduce 2019 basic and diluted earnings per share by $0.03.

Situation 2. This is an exmple of change in reporting entity. A change in reporting entity is a change that results in financial statements that are effectively those of a different reporting entity. This usually involves changing from individual to consolidated reporting, or altering the subsidiaries that make up a group of entities whose results are consolidated.

Manner of reporting/effects of change/required disclosure:-A change in reporting entity occurs when two or more previously separate entities are combined into one entity for reporting purposes, or when there is a change in the mix of entities being reported. When this combination occurs, the resulting entity must restate any prior financial statements that it is including in its reporting package for comparison purposes. By doing so, users of the financial statements can more accurately assess current performance against historical results. The reason for the change in reporting entity must be included in the disclosures that accompany the financial statements.

Sample disclosure:- Gary and Allen Company has restated the FY as on Dec 31, 2017 and has shown consolidated Financial statements of Garry and Allen co. Earlier the finacial statements had been reported for Gary Company alone due to some political uncertainities. Now that our management is satified that all the uncertainities are resolved, we are hereby restating our financial statements to the efffect of presenting our consolidated postion as on Dec 31,2017.

Situation 3. This is an example of accounting Principle change since the method of accounting has been changed to SLM. A change in accounting principle is the term used when a business selects between different generally accepted accounting principles or changes the method with which a principle /policy is applied.

Manner of reporting/effects of change/required disclosure:-Whenever a change in principle is made by a company, the company must retrospectively apply the change to all prior reporting periods, as if the new principle had always been in place, unless it is impractical to do so. This is known as "restating."If the adoption of a new accounting principle results in a material change in an asset or liability, the adjustment must be reported to the retained earnings' opening balance. Additionally, the nature of any change in accounting principle must be disclosed in the footnotes of financial statements, along with the rationale used to justify the change.

The disclosures relating to the coming up changes in accounting policies are as follows:

• the reason behind the change and the interpretation that is responsible for causing it.
• the type of nature and the changes occurring in the policies.
• a detailed description of provisions that will consist of all the necessary options for the changes in the coming time.

The disclosures relating to the coming up voluntary changes in accounting policies are as follows:

• change of nature in the policies.
• the probable reasons behind the relevant information that is easily accessible to gain more reliable details.
• adjustments that were made every time.

Sample Disclosure:-

Effective Jan 2017 ,DEF Company changed its method of computing depreciation from Accelerated method to the straight-line method for the Company's Plant and equipment. The change is considered preferable because the straight-line method will more accurately reflect the pattern of usage and the expected benefits of such assets and provide greater consistency with the depreciation methods used by other companies in the Company's industry. Old plant and equipmet will also be covered under SLM method only. As a result of the change to the straight-line method of depreciating Long term Asset assets, depreciation expense increased by $ 5000 for the said month period and the decrease in Profit by $5000.