A change in an estimate is simply a change in the way

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A change in an estimate is simply a change in the way an individual perceives the realizability of an asset or liability. Examples of changes in estimate are: (1) change in the realizability of trade receivables, (2) revisions of estimated lives, (3) changes in estimates of warranty costs, and (4) change in estimate of deferred charges or credits. A change in accounting estimate affected by a change in accounting principle occurs when a change in accounting estimate is inseparable from the effect of a related change in accounting principle.
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An example would be switching from capitalizing advertising expenditures to expensing them if the future benefit of the expenditures can no longer be estimated with reasonable certainty. Q8. Indicate how the following are recorded. (a) Impairment of GW. Charge to expense—possibly separately disclosed. (b) Change from accel depr to SL. Change in estimate that is effected by a change in accounting principle—currently and prospectively. (used to be retrospective) (c) Large writeoff of inventory due to obsolescence. Charge to expense— possibly separately disclosed. (d) Change from cash basis to accrual. Correction of an error and reported as a prior period adjustment—adjust the beginning balance of retained earnings. (unacceptable to acceptable) (e) LIFO to FIFO Change in accounting principle—retrospective application to all affected prior-period financial statements. (to LIFO is impracticable) (f) Change in estimate of lives. Change in accounting estimate—currently and prospectively. Q10 What difficulties develop in assessing preferability regarding changes in principle? Preferability is a difficult concept to apply. The problem is that there are no basic objectives to indicate which is the most preferable method, assuming a selection between two generally accepted accounting practices is possible, such as completed-contract and percentage-of-completion. If a FASB standard creates a new principle or expresses preference for or rejects a specific accounting principle, a change is considered clearly acceptable.
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A more appropriate matching of revenues and expenses is often given as the justification for a change in accounting principle. Q12 How should consolidated financials be reported this year when statements of individual companies were presented last year? Where individual company statements were reported in prior years and consolidated financial statements are to be prepared this year, the following reporting and disclosure practices should be implemented: (1) The financial statements of all prior periods presented should be restated to show the financial information for the new reporting entity for all periods. (2) The financial statements of the year in which the change in reporting entity is made should describe the nature of the change and the reason for it.
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  • Spring '10
  • George
  • Accounting, ........., Generally Accepted Accounting Principles

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