Accounting Chapter 22 A change that has the effect of adjusting the

ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)

Analysis

Inventory turnover:

2020

2019

LIFO

N/A LIFO information not available

$300 ÷ $490 = 0.61

FIFO

Principles

The issue is consistency across time. When a company changes accounting

policies, financial statements from one period are not comparable to the

CE22.1

Master Glossary

(a) A change that has the effect of adjusting the carrying amount of an existing asset or liability or

altering the subsequent accounting for existing or future assets or liabilities. A change in accounting

estimate is a necessary consequence of the assessment, in conjunction with the periodic presen-

tation of financial statements, of the present status and expected future benefits and obligations

(c) The process of revising previously issued financial statements to reflect the correction of an error

in those financial statements.

CE22.2

According to FASB ASC 250-10–50-7 (Accounting Changes and Error Corrections—Disclosure):

When financial statements are restated to correct an error, the entity shall disclose that its previously

CE22.3

According to FASB ASC 250–10–45-5 (Accounting Changes and Error Corrections—Other Presentation

Matters):

An entity shall report a change in accounting principle through retrospective application of the new

CE22.4

According to FASB ASC 250-10-S99-4 (Accounting Changes and Error Corrections—SEC Materials):

If a registrant justified a change in accounting method as preferable under the circumstances, and the

circumstances change, may the registrant revert to the method of accounting used before the change?

CODIFICATION RESEARCH CASE

(a) According to FASB ASC 250-10-20 (Glossary), a change in accounting

estimate that is inseparable from the effect of a related change in

Under FASB ASC 250-10–45

45–17, A change in accounting estimate shall be accounted for in the

period of change if the change affects that period only or in the

45–19 Like other changes in accounting principle, a change in

accounting estimate that is affected by a change in accounting

principle may be made only if the new accounting principle is

(b) According to FASB ASC 250-10–45-18, distinguishing between a change

in an accounting principle and a change in an accounting estimate is

sometimes difficult. In some cases, a change in accounting estimate is

CODIFICATION RESEARCH CASE (Continued)

(c) According to FASB ASC 250–10–S50—Disclosure of the Impact that

Recently Issued Accounting Standards Will Have on the Financial

Statements of the Registrant when Adopted in a Future Period

S50-1 See paragraph 250-10–S99-5, SAB Topic 11.M, for SEC Staff

views regarding disclosure of the impact of recently issued

S99-5 The following is the text of SAB Topic 11.M, Disclosure of the

Impact that Recently Issued Accounting Standards Will Have on

the Financial Statements of the Registrant when Adopted in a

Future Period.

Question 1: Does the staff believe that these filings should

include disclosure of the impact that the recently issued

accounting standard will have on the financial position and

results of operations of the registrant when such standard is

adopted in a future period?

CODIFICATION RESEARCH CASE (Continued)

Interpretive Response: Yes. The commission addressed a

similar issue with respect to Statement 52 and concluded that

“The Commission also believes that registrants that have not yet

that have had or that the registrant reasonably expects will have

a material impact on future sales, revenues or income from

continuing operations. The staff believes that disclosure of

impending accounting changes is necessary to inform the

reader about expected impacts on financial information to be

reported in the future and, therefore, should be disclosed in

accordance with the existing MD&A requirements. With respect to

financial statement disclosure, GAAS9 specifically address the

need for the auditor to consider the adequacy of the disclosure

of impending changes in accounting principles if (a) the financial

CODIFICATION RESEARCH CASE (Continued)

– 6FRR 6, Section 2.

– 7In those instances where a recently issued standard will

Question 2: Does the staff have a view on the types of

disclosure that would be meaningful and appropriate when a

new accounting standard has been issued but not yet adopted

by the registrant?

Interpretive Response: The staff believes that the registrant

should evaluate each new accounting standard to determine the

The following disclosures should generally be considered by the

registrant:

– A brief description of the new standard, the date that

adoption is required and the date that the registrant plans to

CODIFICATION RESEARCH CASE (Continued)

– A discussion of the impact that adoption of the standard is

expected to have on the financial statements of the

IFRS CONCEPTS AND APPLICATION

IFRS22.1

The IFRS standard addressing accounting and reporting for changes in

IFRS22.2

FASB has issued guidance on changes in accounting principles, changes

in estimates, and corrections of errors, which essentially converges U.S.

GAAP to IAS 8. Key remaining differences are as follows.

• One area in which IFRS and U.S. GAAP differ is the reporting of

error corrections in previously issued financial statements. While

both GAAPs require restatement, U.S. GAAP is an absolute

standard—that is, there is no exception to this rule.

IFRS22.3

Currently, under U.S. GAAP, when a company prepares financial

statements on a new basis, comparative information must be provided for a

IFRS22.4

The indirect effect of a change in accounting policy reflects any changes in

current or future cash flows resulting from a change in accounting policy

IFRS22.5

The company prospectively applies the new accounting policy as of the

IFRS22.6

2. Depreciation.

a. This is a change in accounting estimate. Restatement of

IFRS22.6 (Continued)

3. Mathematical Error. This is a correction of an error and prior

period adjustment treatment would be in order.

4. Preproduction Costs—Furniture Division. This should probably

be construed as an inseparability situation in that the change in

5. FIFO to Average-Cost Change. This is a change in accounting

policy. Restatement of December 31, 2019 retained earnings is

6. Percentage–of–Completion. This is a change in accounting policy.

Retained earnings should be adjusted.

(b) The adjustment to the December 31, 2019 retained earnings balance

IFRS22.7

(a) The guidelines for reporting a change in accounting principle related to

(1) is required by an IFRS; or

IFRS22.7 (Continued)

(2) results in the financial statements providing reliable and more

relevant information about the effects of transactions, other events

IFRS22-8

(a) The following IFRS, IFRS IC interpretations and amendments are

effective for the first time in this financial year:

There have been no significant changes to accounting under IFRS which

The following IFRS have been issued but are not yet effective:

IFRS 9 ‘Financial Instruments’ replaces all phases of the financial

instruments project and IAS 39 ‘Financial Instruments:

Recognition and Measurement’. The standard is effective from periods

beginning on or after 1 January 2018 and introduces:

IFRS 15 ‘Revenue from Contracts with Customers’ is effective for periods

beginning on or after 1 January 2018. The standard establishes a principles

based approach for revenue recognition and is based on the concept of

recognizing revenue for obligations only when they are satisfied and the

> IFRS 16 ‘Leases’ was issued on 13 January 2016 and is effective for

periods beginning on or after 1 January 2019. Early adoption is permitted if

IFRS 15 ‘Revenue from Contracts with Customers’ has also been applied.

IFRS 16 is not yet endorsed by the EU. The standard represents a

significant change in the accounting and reporting of leases for lessees as

The Group has established a working group to assess the impact of the

new standard. Work performed includes assessing the accounting impacts

of the change, the process of collecting the required data from across the

IFRS22.8 (Continued)

(b) Critical accounting judgements and sources of estimation Uncertainty

The preparation of consolidated financial statements requires the Group to

make estimates and judgements that affect the application of policies and

reported amounts. Critical judgements represent key decisions made by

management in the application of the Group accounting policies. Where a

Critical accounting judgements

Adjusted items The directors believe that the adjusted profit and earnings

per share measures provide additional useful information for shareholders

on the performance of the business. These measures are consistent with

IFRS22.8 (Continued)

Sources of estimation uncertainty

Useful lives and residual values of property, plant and equipment

Depreciation is provided to write down the cost of property, plant and

equipment to their estimated residual values over their estimated useful

Impairment of property, plant and equipment Property, plant and

equipment are reviewed for impairment if events or changes in

circumstances indicate that the carrying amount may not be recoverable.

When a review for impairment is conducted, the recoverable amount is

determined based on value in use calculations. This method requires the

Group to determine the appropriate period over which to assess future

cash flows and discount rate assumptions. See notes 14 and 15 for further

details on the Group’s assumptions and associated sensitivities.

IFRS22.8 (Continued)

Revenue recognition Accruals for sales returns, deferred income in

relation to loyalty scheme redemptions and gift card and credit voucher

redemptions are estimated on the basis of historical returns and

redemptions. These are recorded so as to be allocated against revenue in

Inventory provisioning Inventory provisions are recognised where the net

realisable value from the sale of inventory is estimated to be lower than its

carrying value, requiring estimation of the expected future sale price. The