Sometimes a business entity will change its method of accounting for certain items. The change may be classified as a change in accounting principle, a change in accounting estimate, or a change in reporting entity.
Listed below are three independent, unrelated sets of facts relating to accounting changes.
Situation I: A company determined that the depreciable lives of its fixed assets are presently too long to fairly match the cost of the fixed assets with the revenue produced. The company decided at the beginning of the current year to reduce the depreciable lives of all of its existing fixed assets by five years.
Situation II: On December 31, 2010, Gary Company owned 51% of Allen Company, at which time Gary reported its investment on a nonconsolidated basis due to political uncertainties in the country in which Allen was located. On January 2, 2011, the management of Gary Company was satisfied that the political uncertainties were resolved and the assets of the company were in no danger of nationalization. Accordingly, Gary will prepare consolidated financial statements for Gary and Allen for the year ended December 31, 2011.
Situation III: A company decides in January 2011 to adopt the straight-line method of depreciation for plant equipment. The straight-line method will be used for new acquisitions as well as for previously acquired plant equipment for which depreciation had been provided on an accelerated basis.
For each of the situations described above, provide the information indicated below. Complete your discussion of each situation before going on to the next situation.
1. Type of accounting change.
2. Manner of reporting the change under current generally accepted accounting principles including a discussion, where applicable, of how amounts are computed.
3. Effect of the change on the balance sheet and income statement.
4. Footnote disclosures that would be necessary.