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Chapter 4

05 - Chapter 4 Supplementary Notes.docx

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Department
Accounting
Course
ACCTG414
Professor
Jocelyn King
Semester
Fall

Description
ACCTG 414 Chapter 4 Supplementary Notes Statement of Financial Position, Changes in Shareholders’ Equity and Note Disclosure Statement of Financial Position Stantec Example Page 1 of 15 ACCTG 414 Chapter 4 Supplementary Notes Statement of Changes in Shareholders’ Equity Stantec Example Page 2 of 15 ACCTG 414 Chapter 4 Supplementary Notes Accounting Policy Changes and Error Correction Accounting Policy Changes Accounting policy changes occur when the company adopts an accounting principle that is different from the one previously used. Such changes are normally recognized through retroactive adjustment, which involves a determination of the change in the income of all prior periods affected via an adjustment to opening Retained Earnings. Please note that under IFRS, a policy change can only be made if it is required by a change in accounting standards or if it will result in reliable and more relevant information. Under ASPE, a change can be made without having to show that it will result in reliable and more relevant information. Occasionally, you will see a change in accounting policy accounted for prospectively, just like a change in estimate. Such treatment is only theoretically justifiable if the change in policy is motivated by a change in circumstances such that retroactive application is inappropriate. For example, consider two reasons for a change in amortization policy for tangible capital assets: (1) In the past, Company A has used declining-balance amortization while all the other companies in its industry were using the straight-line method. Company A decides to change to the straight-line method in conformity with industry practice. Retroactive application is clearly warranted. Company A’s circumstances have not changed, and the retroactive application makes Company A both more comparable with its peer group, and with itself, across time. (2) In the past, Company B has used declining-balance amortization for its manufacturing machinery because this equipment depreciated more heavily in its early years of use. Now, Company B has invested in a new technology, and these machines wear out evenly over their useful life. Accordingly, Company B switches to straight-line amortization. It is appropriate to apply this change prospectively: Company B’s circumstances have changed. Straight-line amortization is appropriate now, but would not have been appropriate in the past. Prospective application is also allowed under GAAP when the company has insufficient information to adjust retroactively. Examples of Changes in Accounting Policy  A construction company that previously recognized revenue using the completed contract method changes its revenue recognition policy to the percentage-of-completion method.  A company changes its basis of inventory valuation from FIFO to weighted average. Shaw Communications Example Page 3 of 15 ACCTG 414 Chapter 4 Supplementary Notes The following example is from the annual report of Shaw Communications Inc. for the reporting period ending August 31, 2006. This example illustrates disclosures related to the retroactive application with restatement and prospective application of changes in accounting policies. The effect of the retroactive application of a change in accounting policy is described in a note to the financial statements. The prospective application of another new standard, described in the second part of the note, had no effect on the company's financial statements. Notes to Consolidated Financial Statements (All amounts in thousands of Canadian dollars except per share amounts) Note 1 Significant Accounting Policies (in part) Adoption of Recent Canadian Accounting Pronouncements (I) Equity Instruments Effective September 1, 2006, the Company retroactively adopted the amended Canadian standard, Financial Instruments — Disclosure and Presentation, which requires obligations that may be settled at the issuer's option by a variable number of the issuer's own equity instruments to be presented as liabilities, which is consistent with US standards. As a result, the Company's Canadian Originated Preferred Securities ("COPrS") and Zero Coupon Loan have been classified as debt instead of equity and the dividend entitlements thereon are treated as interest expense instead of dividends. In addition, such US denominated instruments are translated at period-end exchange rates and to the extent they are unhedged, the resulting gains and losses are included in the Consolidated Statements of Income and Deficit. The impact on the Consolidated Balance Sheets as at August 31, 2006 and 2005 and on the Consolidated Statements of Income and Cash flows for each of the years in the three year period ended August 31, 2006 is as follows: Page 4 of 15 ACCTG 414 Chapter 4 Supplementary Notes
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