At a recent conference on financial accounting and reporting, three participants provided examples of similar accounting changes that they had encountered in the last few months. They all involved the current portion of long-term debt.
The first participant explained that it had just recently come to her attention that the current portion of long-term debt was incorrectly calculated in the last three years of her company’s financial statements due to an error in an accounting software product. The second participant explained that his company had just decided to change its definition of what is “current” to make it closer to the “operating cycle,” which is approximately 18 months. The company had been using “12 months from the balance sheet date.” The third participant also acknowledged that her company has decided to change from a “12 months from the balance sheet date” definition to one based on the company’s operating cycle, which is now close to two years. She explained that the company’s strategic plan over the last three years had moved the company into bidding on and winning significant longer-term contracts and that the average life of these contracts has now lengthened to about two years.
Instructions
(a) As a panellist at this conference who is expected to respond to the participants, prepare a brief report on the advice you would give on how each situation should be handled under GAAP. Identify what steps each participant should take and what disclosures, if any, each would be required to report.
(b) Under proposals for new financial statement presentation, the IASB is considering making the change that “current” would now mean 12 months, regardless of the company’s operating cycle. This is believed to make the statements more comparable across different companies. If this new change is accepted, what would likely be the accounting treatment required on implementing this change?