Researching GAA Sometimes a business entity may change its method of accounting

Question

Researching GAA Sometimes a business entity may change its method of accounting for certain items. It may classify the change as a change in accounting principle, a change in accounting estimate, or a change in reporting entity. The following are three situations faced by Hyde Company relating to accounting changes. were in no danger of nationalization Accordingly, Hyde will prepare consolidated financial statements for Hyde and Patten for the year ended December 31, 2016 Situation I Hyde determined that the depreciable lives of its fixed assets are presently too long to fairly match the cost of the fixed assets with the revenue produced. Hyde decided at the beginning of the current year to reduce the depreciable lives of all of its existing fixed assets by 5 years. Situation II Hyde decides in January 2016 to adopt the straight-line method of depreciation for equipment. The straight-line method will be used for new acquisitions, as well as for previ- ously acquired equipment for which depreci- ation had been provided on an accelerated basis. SituationII On December 31, 2015, Hyde owned 51% of Patten Company, at which time Hyde reported its investment using the cost method, owing to political uncertainties in the country in which Patten was located. On January 2, 2016, the management of Hyde was satisfied that the political uncertainties were resolved and the assets of the company Directions For each of the preceding situations, rescarch the related generally accepted accounting princi- ples and prepare a short memo to the president that explains the following: type of accounting change; manner of reporting the change under current generally accepted accounting principles including a discussion, where applicable, of how amounts are computed; effect of the change on the balance sheet and income statement; and note disclosures that would be necessary. Cite your references and applicable paragraph numbers

Explanation / Answer

Situation1

In this situation there is a change in accounting estimate.the depreciable life of the fixed assets are reduced by 5 years which will increase the depreciation amount. The value of the fixed asset will be divided over remaining life of the fixed assets to get the depreciation amount. In income statement expenses will be increased due to increase in depreciation amount. In balance sheet the value of the fixed assets will be decreased by the depreciation amount. Disclosure has to be given in notes to account about change in accounting estimate. Depreciation computes after change in estimate and it's effect on the balance sheet and income statement.

Situation 2

In this situation there is a change in reporting requirements of the entity. Due to political uncertainty Hyde reported it's investment in Patten company using cost method on December 2015. In current year it will be preparing consolidated financial statement. For preparing consolidated financial statement it has follow procedure given in accounting standards for consolidation. There will be no effect on balance sheet and income statement of the individual financial statement of the company. Financial statement of both the companies are used to prepare consolidated financial statement. Disclosure has to be given stating that consolidated financial statement has been prepared in current year and also the reason for not preparing the same in last year.

Situation 3

In this situation there is change in accounting method. Straight line method is adopted for all the new acquisition and previously acquired assets. There will be retrospective change in accounting method. Depreciation is computed for all the previous year and the change in depreciation amount is adjusted in current year income statement. Disclosure has to be given in notes to account regarding changing in accounting method, computation of revised depreciation, it's effect on financial statement.

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