Accounting

An accounting change may represent A change in (a) accounting principle, (b) an accounting estimate, or (c) the reporting enterprise (which is a special type of change in accounting principle). This definition can be found under APB 20 paragraph 6.

Situation I
This is a change in estimates used in accounting which are necessary consequences of periodic presentations of financial statements. Preparing financial statements requires estimating the effects of future events. Future events and their effects cannot be perceived with certainty estimating, therefore, requires the exercise of judgment. Thus accounting estimates change as new events occur, as more experience is acquired, or as additional information is obtained (APB 20 paragraph 10)

The effect of a change in accounting estimate should be accounted for in the period the change is being made if that is the only period being affected. If the change affects the period in which the change is being made and any future periods, then the effect should be accounted for in the period of change and in the future periods being affected for example in this situation, the change will affect entitys entries for as far as the initial estimated live of the fixed assets. A change in estimate should not be accounted for by restating amounts reported in prior period financial statements. The effect upon the income statement for a change in estimate that affects several future periods should be disclosed. For ordinary changes in accounting estimates made each period, only changes, which are, material to the financial statements should be disclosed (APB 20 paragraphs 31 and 33)

Situation II
This is a change in the reporting entity. It refers to Accounting changes that result in financial statements that are in effect the statements of a different reporting entity (APB 20 paragraph 34). This type of accounting change is limited mainly to (a) presenting consolidated or combined statements in place of statements of individual enterprises, (b) changing specific subsidiaries comprising the group of enterprises for which consolidated financial statements are presented, and (c) changing enterprises included in combined financial statements (APB 20 paragraph 12).

To record the changes there should be restatement of the financial statements of all prior periods presented in order to show financial information for the new reporting entity for all periods (APB 20 paragraph 34). The financial statements of the period of the change (i.e. period ended December 2009) in the reporting entity (Gary Company) should describe the nature of the change and the reason for it. In addition, the effect of the change on income before extraordinary items and net income should be disclosed for all periods presented. Gary Company should now report its stake in Allen as a subsidiary. Financial statements of subsequent periods need not repeat the disclosures, according to APB 20 paragraph 35.

Situation III
This is a change in accounting principle. It results from adoption of a generally accepted accounting principle different from the one used previously for reporting purposes. The term accounting principle includes not only accounting principles and practices but also the methods of applying them.(APB 20 paragraph 7 as amended by FAS 111 paragraph 9.a. (1). Examples include a change in depreciation methods for previously recorded assets (i.e. as in this situation, change from accelerated to straight-line), changes in methods of inventory valuation (LIFO to FIFO), and other similar changes which affect the method of accounting for specific items andor transactions

To report this change, the financial statements for periods prior to January 2009 included for comparative purposes, should be presented as previously reported. For the first year of implementation, there is a waiver from HUD, so comparative statements do not need to be presented. The cumulative effect of changing to a new accounting principle, which is the difference between actual retained earnings at the beginning of the period and retained earnings that would have been reported at the beginning of the period had the accounting principle been applied retroactively, should be reported in the income statement between the captions extraordinary items and net income. In this case, the effect on previously acquired plant equipment will be under extraordinary items since it will reflect an increase in the amount of depreciation in that period, while the newly acquired plant equipments will be recorded under net income since it reflects a decrease in the amount of depreciation. The effect upon the income statement for adoption of the new accounting principle, in the period of the change, should be disclosed in the footnotes (APB 20 paragraph 20 as amended by FAS 128). As the conversion currently being implemented by the Public Housing Authorities is from a non-GAAP basis of accounting to a GAAP basis of accounting, as interpreted upon review of APB 20 paragraph 13, the GAAP conversion constitutes a correction of an error. As such, adjustments restating beginning balances, as applied by the Housing Authorities pursuant to the GAAP conversion, necessitate they be made to beginning fund balanceretained earnings rather than accounted for within current operations.