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CAPITULO 22 INTERMEDIA - Chapter 22 Accounting Changes and...

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CHAPTER 22 ACCOUNTING CHANGES AND ERROR ANALYSIS This IFRS Supplement provides expanded discussions of accounting guidance under International Financial Reporting Standards (IFRS) for the topics in Intermediate Accounting. The discussions are organized according to the chapters in Intermediate Accounting (13 th or 14 th Editions) and therefore can be used to supplement the U.S. GAAP requirements as presented in the textbook. Assignment material is provided for each supplement chapter, which can be used to assess and reinforce student understanding of IFRS. DIRECT AND INDIRECT EFFECTS OF CHANGES Are there other effects that a company should report when it makes a change in accounting policy? For example, what happens when a company like Lancer has a bonus plan based on net income and the prior year’s net income changes when FIFO is retrospectively applied? Should Lancer also change the reported amount of bonus expense? Or, what happens if we had not ignored income taxes in the Lancer exam- ple? Should Lancer adjust net income, given that taxes will be different under average cost and FIFO in prior periods? The answers depend on whether the effects are direct or indirect. Direct Effects The IASB takes the position that companies should retrospectively apply the direct effects of a change in accounting policy . An example of a direct effect is an adjust- ment to an inventory balance as a result of a change in the inventory valuation method. For example, Lancer Company should change the inventory amounts in prior periods to indicate the change to the FIFO method of inventory valuation. Another inventory-related example would be an impairment adjustment resulting from ap- plying the lower-of-cost-or-net realizable value test to the adjusted inventory balance. Related changes, such as deferred income tax effects of the impairment adjustment, are also considered direct effects. This entry was illustrated in the Denson example, in which the change to percentage-of-completion accounting resulted in recording a deferred tax liability. Indirect Effects In addition to direct effects, companies can have indirect effects related to a change in accounting policy . An indirect effect is any change to current or future cash flows of a company that result from making a change in accounting policy that is applied ret- rospectively. An example of an indirect effect is a change in profit-sharing or royalty payment that is based on a reported amount such as revenue or net income. The IASB is silent on what to do in this situation. U.S. GAAP (likely because its standard in this area was issued after IAS 8 ) requires that indirect effects do not change prior period amounts. For example, let’s assume that Lancer Company has an employee profit-sharing
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  • Spring '11
  • Alvarez
  • Accounting, International Financial Reporting Standards, international Accounting standards Board, indirect effects, International Accounting Standards Committee Foundation

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CAPITULO 22 INTERMEDIA - Chapter 22 Accounting Changes and...

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