For each of the following items, indicate the type of accounting change and how

Question

For each of the following items, indicate the type of accounting change and how each is recognized in the accounting records in the current year.

(a) Change from straight-line method of depreciation to sum-of-the-years'-digits

(b) Change from the cash basis to accrual basis of accounting

(c) Change from cost-recovery to percentage-of-completion method on construction contracts.

(d) Change due to failure to record depreciation in a previous period

(e) Change in the realizability of certain receivables

(f) Change from average cost to FIFO method for inventory valuation purposes.

Explanation / Answer

(a) Change from straight-line method of depreciation to sum-of-the-years'-digits - Change in Accounting Principle. This should be disclosed by way of a Note in the Notes to Accounts, stating the impact that the change in depreciation has on the Income Statement and Balance Sheet. Further, an additional disclosure is also required in the Fixed Assets Schedule (b) Change from the cash basis to accrual basis of accounting - Change in Accounting Principle This should be disclosed only by way of a note in the Notes to Accounts for Financial Statements. (c) Change from cost-recovery to percentage-of-completion method on construction contracts. - Change in Accounting Estimates. Although the change should be disclosed by way of a note in the Notes to Accounts, the impact thereof on the Financial Statements also needs to be calculated, and the statements accordingly reinstated. (d) Change due to failure to record depreciation in a previous period - Change in Accounting Estimates The impact which the value of the depreciation has on the Income Statement should be disclosed by way of a Note in the Notes to Accounts. At the same time, the monetary impact thereof on the Income Statement and Balance Sheet should be worked out and the financial statements reinstated to that effect. (e) Change in the realizability of certain receivables - Change in Accounting Estimates The amount of receivables, if necessary should be altered. A footnote should be added at the end of the receivables schedule explaining the change and the reason thereof. (f) Change from average cost to FIFO method for inventory valuation purposes. - Change in Accounting Principle. Although the change should be disclosed by way of a note in the Notes to Accounts, the impact thereof on the Financial Statements also needs to be calculated, and the statements accordingly reinstated.

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