Ch22 Kieso Ifrs4

Intermediate Accounting
IFRS Edition
Kieso, Weygandt, Warfield
Fourth Edition
Chapter 22
Accounting Changes and Error Analysis
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
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Copyright ©2020 John Wiley & Sons, Inc.
Learning Objectives
After studying this chapter, you should be able to:
LO 1 Discuss the types of accounting changes and the
accounting for changes in accounting policies.
LO 2 Describe the accounting and reporting for changes in
estimates.
LO 3 Describe the accounting for correction of errors.
LO 4 Analyze the effect of errors.
Copyright ©2020 John Wiley & Sons, Inc. 2

PREVIEW OF CHAPTER 22

Learning Objective 1
Discuss the types of accounting
changes and the accounting for
changes in accounting policies.
LO 1 Copyright ©2020 John Wiley & Sons, Inc. 4

Accounting Changes
ภาย ใ% &'ราคา
*น
Background Inventory
y
Specific
FIFO ,า Inventory
CSGS
-ง
→ →
,
ย
AVC
Accounting Alternatives: -ง Inventory ๓ำ

→ [ 56s
,
ใน เป8ยบเ:ยบ
ความ สามารถ การ ลด
• Diminish the comparability of financial information.

• Obscure useful historical trend data. เป=ยนนโยบาย ใ@ เป8ยบเ:ยบ AอCล ไF ? ไE
ใG AอCล 1 ใน อHต มา Predict )
Types of Accounting Changes:

1. Change in Accounting Policy.
2. Changes in Accounting Estimate. เKอม Salvage
IX. Jา ราคา -
Straight 1in e
ก
ะ
" " lite →
Value
change ; Estimate
Errors are not considered an accounting change.

1 change
=

Changes In Accounting Policy
↳
Mบ N ผล Pาง เAา OCI
Change from one accepted accounting policy to another.

Examples include: เป=ยน นโยบาย นโยบาย U จาก Rง → Sก %อง เTน ยอม Mบ
• Weighted Average to FIFO

→ Inventory.
N ไF U Wน
Mบ ราย บน
ไE เVน %น *น เVด
^ญญา ค XเYจ ของ งาน คาด การ[ ค XเYจ → \เTน % ]บ
• Cost-recovery* to percentage-of-completion method

→ ×
. .
→ Construction Contract. IFRS 15
Adoption of a new policy in recognition of events that have

occurred for the first time or that were previously immaterial
is not an accounting change. นโยบายใหE คbง chang ก .
` ใG
มา แรก 1
=
*
Chapter 18
dไร จะ -ง กeา Cost Recovery
↳ Mบ NรายไFGา กeา %

Three Approaches
Three approaches for reporting changes:
1) Currently.
2) Retrospectively.
3) Prospectively (in the future).
ปMบ fอนหgง
IASB requires use of the retrospective approach.
Rationale - Users can then better compare results from one
period to the next.

Three Approaches
ไE %อง แhi jอน
dไร ขาด*นi jอน เ:ยบ ]บ dไร ขาด*นU` Policy มาใG
=
ผล Pาง
ก
1) Report changes currently. เหoยง

; เอา ผล
1- ระ ทบ สะสม มา กระทบ ]บ incomestatement
lจmnน → งบ i ป จบ .
จะ
• In this approach, companies report the cumulative effect of

the change in the current year's income statement.
o The cumulative effect represents the difference in prior
years' income between the newly adopted and prior
accounting policy.
• Under this approach, the effect of the change on prior
years' income appears only in the current-year income
statement.
• The company does not alter prior-year financial statements.

Three Approaches
เป8ยบเ:ยบ T %อง แhpง i
= แhfอนหgง ก %อง Present งบ 2
Begining RE 2
2) Report changes retrospectively. i q is i แh งบ jอน ห` แP

Begining
( เป=ยน
แh Beginning
บช .
แh :
Adjvst ]บ
%อง หา cvmulativeettect
มา
ของ 3
Rl E
i แรก
i U 4 %อง นโยบาย แtว
Retainedearnin 9) U
→
i sไE %อง ปMบ แtว
• The application of a different accounting policy to recast

previously issued financial statements-as if the new policy
had always been used. In other words, the company "goes
back" and adjusts prior years' statements on a basis
consistent with the newly adopted policy. เvม i change Vจการ %อง ? งบuล 3 wา x การ 2 i มา Adjvst
%อง ` เสนอ งบ การ เyน เป8ยบเ:ยบ
• The company shows any cumulative effect of the change

as an adjustment to beginning retained earnings of the
earliest year presented. ปMบ U` dไร งวด แรก งบ สะสม มา เสนอ

Three Approaches
= Present + Fvture ไE %อง แh Begining Retained Earnings
3) Report changes prospectively (in the future).
• In this approach, previously reported results remain.
• Companies do not adjust opening balances to reflect the
change in policy.

Retrospective Accounting Change
Approach
IASB permits companies to change an accounting policy if:
1. It is required by IFRS (e.g., the IFRS on financial instruments is
subject to the proper accounting for changes in accounting policy);
or
2. It results in the financial statements providing more
representationally faithful and relevant information about a
company's financial position, financial performance, and cashflows.
For example, a company may determine that changing from the

average-cost method of inventory valuation to the FIFO method
provides more representationally faithful and relevant information
on the current value of its inventory
Retrospective Accounting Change
Approach
Company reporting the change
i
แh งบ jอน หzา .
i
Ex ตง มา s i %อง fอนกgบไป {งแP แรก
1) Adjusts its financial statements for each prior period

presented to the same basis as the new accounting policy.
liablity U เ|ยวAอง
แh assets ]บ ปMบ ]บ Begining Retained Earning
2) Adjusts the carrying amounts of assets and liabilities as of

the beginning of the first year presented. Also makes an
offsetting adjustment to the opening balance of retained
earnings or other appropriate component of equity or net
assets as of the beginning of the first year presented.

Retrospective Accounting Change: Long-
Term Contracts
Illustration: Denson SA has accounted for its income from ไE Mบ dไร Mบ เ}า %น *น
N N
long-term construction contracts using the cost-recovery
(zero-profit) method. In 2022, the company changed to the
N เ~อย Mบ dไร dไร -ง กeา [ ost -
recovery
ๆ
percentage-of-completion method. Management believes

this approach provides a more appropriate measure of the
income earned. For tax purposes, the company uses the cost-
recovery method and plans to continue doing so in the
future. (Assume a 40 percent enacted tax rate.)
นโยบาย ทาง บช .
1 นโยบาย ทาง ภา€
=
ผล Pาง =
Defertax

Comparative Income Statements for Cost-Recovery
versus Percentage-of-Completion Methods
560,000
780,000
| ๚
.
.
. .. . . . .
.
Befortax
LO 1 ILLUSTRATION 21.1 Copyright ©2020 John Wiley & Sons, Inc. 15

Data for Retrospective Change Example
Adjvst : ปMบ fอนหgง *ก i ILLUSTRATION 22.2 dไร -ง Wน %อง เ‚ย Tax เvม
dไร ทาง บช > dไร ทาง ภา€
Journal Entry Construction in Process 220,000

Deferred Tax Liability 88,000
beginning of
2022 Retained Earnings 132,000

Reporting a Change in Policy (1 of 2)
Major disclosure requirements are as follows.
1. Nature of the change in accounting principle.
2. Reasons why applying the new accounting policy provides
reliable and more relevant information;
ผล กระทบ Pอ งบ
3. For the current period and each prior period presented, to the
extent practicable, the amount of the adjustment:
a) For each financial statement line item affected; and
b) Basic and diluted earnings per share.
4. The amount of the adjustment relating to periods before those
presented, to the extent practicable.

Comparative Information Related to Accounting
Change (Percentage-of-Completion)

Retained Earnings
Statement Before
Retrospective Change
Retained earnings balance is €1,360,000 at the beginning of 2020.
ILLUSTRATION 22.4 1,360,000 + 360,000

Retained Earnings
Statement After
Retrospective
Application
Preseht งบ : ปMบ แJ i jอน i เHยว
↳ dไร
สะสม เƒม
→
Adjvst
Percentage-of-completion

wา ใ@? งบ i เHยว ใ@ Adjvst :i U แสดงไF เลย
Retrospective Accounting Change:
Inventory Methods
Illustration: Lancer Company has accounted for its inventory using
the average-cost method. In 2022, the company changes to the FIFO
method because management believes this approach provides a
more appropriate measure of its inventory costs.
f If 0 →
AVC i NI Iv
A V0 →
f If 0 i NI ก

Lancer Company Information
Inventory →
บช .
แp
→
บช .
„วคราว
|
|
:[ nventory
5,000
7,000 i
Inventory
wา ใ@ c 06s %อง เอา มา บอก ]น =

ผล สะสม
Inventory → ใG ไF เลย

Lancer Financial Statements (Average-Cost)
Income Statement and Retained Earnings Statement
ILLUSTRATION 22.7

Lancer Financial Statements (Average-Cost)
Statement of Financial Position and Statement of Cash
Flows
ILLUSTRATION 22.7

Retrospective Change: Inventory
Methods
Comparison with FIFO
Illustration 22.8 (to follow) shows Lancer’s income
statement, retained earnings statement, statement of
financial position, and statement of cash flows for 2020–
2022 under FIFO.
• The cash flow statement under FIFO is the same as
under average-cost. ไE กระทบ Cashflowsi Policy จะไE กระทบ cash Flows
• Net incomes are different in each period.

• There is no cash flow effect from these differences in net
income. (If we considered income taxes, a cash flow
effect would result.)
Lancer Financial Statements (FIFO)
Income Statement and Retained Earnings
Statement

Lancer Financial Statements (FIFO)
Statement of Financial Position and Statement of
Cash Flows
ILLUSTRATION 22.8

Data for Recording Change in
Accounting Policy
Under retrospective application, the change to FIFO inventory
valuation affects reported inventories, cost of goods sold, net
income, and retained earnings.
| ใG 106s / Inventory
ไFเลย
Adjust ILLUSTRATION 22.9
To account for the change, we make the following entry.

Inventory 5,000 Inventory 5,000
ใ… Policy เHยว ]น จะไE เVด
wา ทาง บช ]บ Tax
.
Retained Earnings 5,000 Deferred Tax Liability d 2,000

ลด Rl E
Retained Earnings 3,000

Reporting a Change in Policy (2 of 2)
Lancer Company
• reports net income under the newly adopted FIFO method
for both 2021 and 2022.
• retrospectively adjusted the 2021 income statement to
report the information on a FIFO basis.
• Notes to the financial statements
o indicate the nature of the change, why the company made
the change, and the years affected.
o provide data on important differences between the
amounts reported under average-cost versus FIFO.

Retained Earnings Adjustment
Cumulative Effect Difference
If Lancer presents comparative statements for 2021 and 2022
under FIFO, then it must change the beginning balance of retained
earnings at January 1, 2021. The difference between the retained
earnings balances under average-cost and FIFO is computed as
follows.

Retained Earnings Statements After
Retrospective Application
ILLUSTRATION 22.12
Lancer adjusted the beginning balance of retained earnings on

January 1, 2021, for the excess of FIFO net income over average-
cost net income in 2020.

Exercise I May be สอบ Aอ เ†ยน
In 2023, Frost Company, which began operation in 2021, decided to change the
inventory method from Average Cost (AVC) to FIFO because management
believed that FIFO better represented the flow of their inventory. Management
prepared the following analysis showing the effect of this change:
Given the tax rate is 30%
Net Income ($) Inventory ($)

AVC FIFO AVC FIFO Change
Year 2021 2,500,000 2,523,100 240,000 273,000 33,000
Year 2022 2,400,000 2,416,100 245,000 301,000 56,000 "
ใGไF เลย
Year 2023
|2,100,000 256,000
56,000-33,000×0.7 + 2,400,000
328,000 72,000
TI
1. Prepare the Journal entry
Cumulative effect
( vmulative effect
Inventory 30 %
โ ' l
Deferedtax RE → Netoftax
AVC f IFO Change
Year 2 021
240,000 273,000 33,000 Inventory
9,900 23,100 Deferred R/E
Year
Year
2 022
2 023
245,000
256,000
301,000
AVC
56,000
FIFO
16,800
Change
39,200
TAX 30% Change
328,000 72,000
Year 2021 240,000 273,000 33,000 9,900 23,100

YearInventory
Dr 2022
. 56,000 245,000 301,000 56,000 16,800 39,200
Deffered Liability
Cr Tax 16,800
Year 2023Earnings 328,000
.
Retained 39,200
2023 Journal entry

2. Prepare comparative statement of retained earnings for the
year 2023. AVC
2022 2021
Retained Earnings – Beginning 2,500,000 0
Net Income 2,400,000 2,500,000
Retained Earnings – Ending 4,900,000 2,500,000
Frost Company
2023
Statement 2022
of Retained Earnings
2021
Begining Rl E
For the year ended
4,900,000 2,500,000 December 2023 and 2022
Repurt as AVC
FIFO AVC
Adjvstmentforcumulative
effectonprior years ot
39,200 23,100 2023 2022 2021
applyingretrospectivelythe
new
Beginning
d.
metho
R/E as reported $4,900,000 $2,500,000 -
Adjustment for the cumulative effect
Begining RIE
as ond. prior years of4,939,200
Adjuste applying 2,523,100
Net retrospectively the

income
new method of
2,100,000 2,416,100 2,500,000
Ending
accounting
Rl E
for inventory
7,039,200
39,200 23,100 -
4,939,200 2,500,000
Beginning R/E as adjusted 4,939,200 2,523,100 -

Net Income 2,100,000 2,416,100 $2,500,000
Ending R/E $7,039,200 $4,939,200 $2,500,000
Exercise II
Koopman Company began operation on January 1, 2021, and uses the
FIFO inventory method for financial reporting and the average cost
inventory method for income!ใ#
tax. $าAt the beginning of 2023, Koopman
Netincome ลง
decided to switch to the average cost inventory method for financial

reporting. It had previously reported the following financial statement
information for 2023 and 2022.
Income Statement 2023 (AVC) 2022 (FIFO)
Revenues $130,000 $100,000
Cost of Goods Sold 80,000 (60,000) นา ลด
Gross Profit 50,000 40,000

Operating Expenses (30,000) (25,000)
Income before Tax 20,000 15,000
Income Tax 30% (6,000) (4,500)
Net Income $14,000 $10,500
EPS $1.40 $1.05
↳ 10,000
Exercise II
Statement of Retained Earnings 2016 (FIFO) 2015 (FIFO)

Beginning R/E $15,000 -
Add: Net Income 10,500 $15,000
Total 25,500 15,000
Less: Dividends (6,000) -
Ending R/E $19,500 $15,000
Cost of Goods Sold FIFO AVC

Year 2021 $50,000 $57,000
Year 2022 60,000 69,000
Year 2023 80,000
1. Prepare the Journal entry
Cost of Goods sold 30 %
RE
โ
FIFO
l
AVC
l
Change Deferedtax
Year 2021
57,000 7,000 2,100 4,900
Cost of |Goods| Sold Inventory Deferred R/E
50,000
Year
| +
+ +
69,000
เ,น
Change -น 3อนๆ
2022 6,300
2น
9,000 2,700
60,000
-อง 60 Cs เอา มา บอก
Year 2023
FIFO
70,000 80,000AC Change TAX Change
5น FIFO → AVC ; ขาย ลด
Year 2021 50,000 57,000 7,000 7,000 2,100 4,900

Dr Reta Ined Earning 11 2 00
Year 2022
.
60,000
(4,900+6,300)
69,000 9,000 16,000 4,800 11,200
Defferedtax Asset
4 (2,100+2,700) 8 00
Year 2023Cr.IN Vehtory

80,000
(7,000+9,000) 16,000
Year 2023
Deferred Tax Assets 4,800
Inventory 16,000
2. Prepare comparative Statement of Income
Cost of Goods Sold
Koopman Company FIFO AVC Change
Comparative Income statement
FortheyearYear 2021
Ended Delember 31,2022 and 2023
50,000 57,000 7,000
Year 2022 60,000 69,000 9,000
Year 2023 2023 2022
70,000 80,000 10,000
Revenve 130,000 100,000
Costof Goods Sold 180,000g

169,000 ) →
AVC
Gross Porfit 50,000 31,000
Operating Expense 130,0 ออ ) 125,000 )
Income befortax 20,000 6,000

2022
Ihcome tax Expense
l 6,000 ) 11,800 ) 2023
Net income
14,000 4,200
Earning Pershare
ำ9๊
1. 40
0.42 "
อ
3. Prepare comparative Statement of Retained Earnings
(Assume that Koopman declared and paid dividend $10,000 in 2023)
Koopman Company Koopman Company

Statementot Retained
[
Statement of Retained Earnings
arnings
Fortheyear Ended Delember 31,2022 and
For the year ended December 2023 and 2022
2023
2023 2022
2023 2022 2021

Begining unadjust Rl E 19,500 15,000
(AVC) As Adjusted (FIFO)
Beginning R/E as reported
lessi
$19,500 $15,000 -
Adjvstmentforcumulative
Adjustment
effect onprior yearsforof the cumulative effect
applyingretrospectivelythe
on prior years of applying
average costinventorymethod l 4.9 00 )
retrospectively the new method of
( net of tax
)
1 แ , เอ อา
Beginingaccounting for inventory

RIE
(11,200) (4,900) -
as Adjuste d.
8,300 10,100
Beginning
Add income
ะ R/E as adjusted
Net
4,200
$8,300 10,100 -
14,000
Add Net Income 22,300 14,300 14,000 4,200 $15,000

Less :D ividend
110,000 ) ( 6,000 )
22,300 14,300 15,000
Ending Rl E
8,300
12,300
Less Dividend (10,000) (6,000) -

Ending R/E $12,300 $8,300 $15,000
Direct and Indirect Effects of Changes
p -อง Adjust =น>
• Direct Effects - IASB takes the position that companies

should retrospectively apply the direct effects of a change
in accounting policy.
For example: Lancer Company should change the inventory

amounts in prior periods to indicate the change to the FIFO method
of inventory valuation.
Another inventory-related example -อง Check LCNRV
• an impairment adjustment resulting from applying the lower-of-

cost-or-net realizable value test to the adjusted inventory
balance. Related changes, such as deferred income tax effects of
the impairment adjustment, are also considered direct effects.

Direct and Indirect Effects of Changes
p ไ@ -อง ปBบ งวด 3อน
• Indirect Effect is any change to current or future cash

flows of a company that result from making a change in
accounting principle that is applied retrospectively.
For example, let's assume that Lancer has an employee profit-sharing plan based
on net income. Lancer would report higher income in 2021 and 2022 under the
FIFO method. In addition, let's assume that the profit-sharing plan requires that
Lancer pay the incremental amount due based on the FIFO income amounts. In
this situation,
• Lancer reports this additional expense in the current period; it would not
change prior periods for this expense.
• If the company prepares comparative financial statements, it follows that it
does not recast the prior periods for this additional expense.

Impracticability
!ไ@ ไD จFงในทาง ปHIJ
Companies should not use retrospective application if one of

the following conditions exists:
1. Company cannot determine the effects of the
retrospective application.
2. Retrospective application requires assumptions about
management’s intent in a prior period.
3. Retrospective application requires significant estimates
that the company cannot develop.
If any of the above conditions exists, the company
prospectively applies the new accounting principle.
↳ -องใ#เหLผล Dวย Nา !ไม ! ไ@ ไD

Describe the accounting and reporting
for changes in estimates.

Changes in Accounting Estimate
Examples of Estimates
1. Bad debts. Expected Credit Loss
=
2. Inventory obsolescence. OนPา เQอม สภาพ
3. Useful lives and residual values of assets.

4. Periods benefited by deferred costs.
5. Liabilities for warranty costs and income taxes.
6. Recoverable mineral reserves.
7. Change in depreciation estimates. UV Xด เQอม การ Yา
8. Fair value of financial assets or financial liabilities.

Changes in Accounting Estimates
Prospective Reporting
Changes in accounting estimates are reported prospectively.
Account for changes in estimates in Z3อน [ ใ\ แ^ Z 3อน
เพราะ
แ]วไ@ ๆ มา จาก Best Est . -อง
1. the period of change if the change affects that period

only, or
2. the period of change and future periods if the change
affects both.
IASB views changes in estimates as normal recurring
corrections and adjustments and prohibits retrospective
treatment.

Example
Illustration: Lao Labs purchased for ¥3,000,000 a building that
it originally estimated to have a useful life of 15 years and no
residual value. It recorded depreciation for five years on a
straight-line basis. On January 1, 2022, Lao Labs revises the
estimate of the useful life. It now considers the asset to have
a total life of 25 years. (Assume that the useful life for
financial reporting and tax purposes and depreciation method
↳ ไ@ เ_ด
are the same. =
Detertax
Required: No
entry
• What is the journal entry to correct prior years’ required
depreciation expense?
• Calculate depreciation expense for 2022.
Book Value After Five Years’
Depreciation
ILLUSTRATION 22.13
Lao Labs records depreciation for 2022 as follows.

p 2,000,000 ÷ 20Z
↳ 25-5
Depreciation Expense 100,000
Accumulated Depreciation—Building 100,000

Depreciation After Change in Estimate
Book Value of Asset ¥2,000,000

Depreciation Charge = = = ¥100,000
Remaining Service Life 25 years – 5 years
ILLUSTRATION 22.14
Companies sometimes find it difficult to differentiate

between a change in estimate and a change in accounting
policy. If it is impossible to determine whether a changed
in policy or a change in estimate has occurred the rule is
this: Consider the change as a change in estimate.

Disclosures
A company should disclose the nature and amount of a change
in an accounting estimate that has an effect in the current
period or is expected to have an effect in future periods
(unless it is impracticable to estimate that effect).
Companies need not disclose changes in accounting estimate
made as part of normal operations, such as bad debt
allowances or inventory obsolescence, unless such changes are
material.

Disclosure of Change in Estimated Useful
Lives
ILLUSTRATION 22.14
IAS 8

Exercise: change in Estimation
Z[ 4
การ•

Sum Of the yeari 5 +4+3+2+1=15
Year 1 (465,000-15,000) × 5115 =

150,000
Year 2
(465,000-15,000) × 4115 =
120,000
Year 3
(465,000-15,000) × 3115 =
90,000
360,000
าe
Net Book value balanle

465,000-360,000 =
105,000


Duble Declining ⇒ ไ@ -อง`ก ราคา ซาก
Year 1 : 780,000 ✗ 21 11 30 ) 6.67 %

=
52,026
Year 2 :( 780,000-52,02 6) =
727,974 × 6.67 % =
48,556
Year 3 I (727,974-48,556) =
679,418 × 6.67 % =
45,317
Net Book valve 679,418-45,317 =

634,101
Change in Policy or change in Estimation
• If it is impossible to determine whether a change in policy or a
change in estimate has occurred, the rule is this: Consider the
change as a change in estimate.
• A change in depreciation methods as a change in estimate.
• Companies should consider careful estimates that later prove to

be incorrect as changes in estimates. -อง มา จาก Best Estimates

Describe the accounting for correction
of errors.

Types of Accounting Errors
1. A change from an accounting principle that is not
generally accepted to an accounting policy that is
acceptable. ไ@cก-อง cก
→ -อง
2. Mathematical mistakes.
3. Changes in estimates that occur because a company did
not prepare the estimates in good faith.
4. An oversight, such as the failure to accrue or defer certain
expenses or revenues. ละเลย
5. Misuse of facts.
6. Incorrect classification of a cost as an expense instead of
an asset, and vice versa.
Accounting-Error Types
Accounting Category Type of Restatement
Expense recognition Recording expenses in the incorrect period or for an incorrect amount.
Revenue recognition Improper revenue accounting, including instances in which revenue was improperly recognized, questionable revenues
were recognized, or any other number of related errors occurred that led to misreported revenue.
Misclassification Misclassifying significant accounting items on the statement of financial position, income statement, or statement of
cash flows. These include restatements due to misclassification of current or non-current accounts or those that impact
cash flows from operations.
Equity—other Improper accounting for EPS, restricted shares, warrants, and other equity instruments.
Reserves/Contingencies Errors involving accounts receivables’ bad debts, inventory reserves, income tax allowances, and loss contingencies.
Long-lived assets Asset impairments of property, plant, and equipment; goodwill; or other related items.
Taxes Errors involving correction of tax provision, improper treatment of tax liabilities, and other tax-related items.
Equity—other comprehensive income Improper accounting for comprehensive income equity transactions, including foreign currency items, revaluations of
plant assets, unrealized gains and losses on certain investments in debt, equity securities, and derivatives.
Inventory Inventory costing valuations, quantity issues, and cost of sales adjustments.
Equity—share options Improper accounting for employee share options.
Other Any restatement not covered by the listed categories, including those related to improper accounting for acquisitions or
mergers.
Sources: T. Baldwin and D. Yoo, “Restatements—Traversing Shaky Ground,” Trend Alert, Glass Lewis & Co. (June 2,
2005), p. 8; and “2018 Financial Restatements: An Eighteen Year Comparison,” Audit Analytics Trend Reports (August
26, 2019).
ILLUSTRATION 22.16
Prior Period Adjustments
ปBบปdง รายการใน อeต
-
• All material errors must be corrected.

• Record corrections of errors from prior periods as an
adjustment to the beginning balance of retained earnings
in the current period. ปBบ 2บ Beginning Z gจhIน RIE
• Such corrections are called prior period adjustments.

เiอใ# เปjยบเ>ยบไD
งบ
• For comparative statements, a company should restate the

prior statements affected, to correct for the error.

Example of Error Correction
Illustration: In 2023 the bookkeeper for Selectro plc
discovered an error. In 2022 the company failed to record
£20,000 of depreciation expense on a newly constructed
building. This building is the only depreciable asset Selectro
owns. The company correctly included the depreciation
expense in its tax return and correctly reported its income
taxes payable. ไ@ ไDIนlก
ทาง บช .
Iนlก cก
แm ทาง Tax แ]ว

Error Correction Comparison
Selectro’s income statement for 2022 with and without the error.
Income tax rate 40%
nไร จFง ๆ p 80,000

× อ .
4
→ ผล mาง Hw .
Ac c. 2บ tax
ILLUSTRATION 22.17
What are the entries that Selectro Income Tax Expense 40,000
should have made and did make for Deferred Tax Liability 8,000
recording depreciation expense and Income Tax Payable 32,000
income taxes?
Error Entries
The £20,000 omission error in 2022 results in the following effects.
1. คช จ .
o เ_น
2. คช จ Tax
.
pง เ_น 8,000
3 nไร pง เ_น 12,000
→ ไ@ ควร q

Correcting Entry in 2023
To make the proper correcting entry in 2023, Selectro should recognize
that net income in 2022 is overstated by £12,000, the Deferred Tax
Liability is overstated by £8,000, and Accumulated Depreciation—
Buildings is understated by £20,000. The entry to correct this error in
2023 is as follows.
Deferred Tax Liability 8,000
Accumulated Depreciation—Buildings 20,000
The debit to Retained Earnings results because net income for 2022 is
overstated. The debit to the Deferred Tax Liability is made to remove this
account, which was caused by the error. The credit to Accumulated
Depreciation—Buildings reduces the book value of the building to its
proper amount.
Reporting an Error—Retained Earnings
Statement
Illustration: Selectro Company has a beginning retained earnings
balance at January 1, 2023, of £350,000. The company reports net
income of £400,000 in 2023.
ILLUSTRATION 22.19

Comparative Statements
Comparative Statements
Z
Company should -อง แ^ 3อน Dวย
1. make adjustments to correct the amounts for all affected

accounts reported in the statements for all periods
reported.
2. restate the data to the correct basis for each year
presented.
3. show any catch-up adjustment as a prior period
adjustment to retained earnings for the earliest period it
reported.

Reporting an Error—Comparative
Financial Statements
-อง Disltose ผล กระทบ } ปBบปdง แ]ว i
ILLUSTRATION 22.20

Error Correction – Hurley Enterprises →
คช จ
RIE
.
o เ_น
-นZ pง เ_น
พบ rอ sดพลาด 3อน tด บช Z .
23
ตอน uาย Iนlก
Dr .
Salary & Wages Exp .
1,500
Cr.la sh 1,500
v เลย -อง ]าง เพราะ [ Z 23 pง เ_น

f xp . ของ
If Hurley has closed the books for 2023, it makes no entry, because the
error is counterbalanced. wา หxง tด Z 4)
เจอ บช 1 202
ไ@ -อง Iนlก แ]ว yน ชดเชย หมด แ]ว

Error Correction – Hurley Enterprises
[cก ะ Dr Prepaid ปลาย Z :D r [ xp
Iนlก บช sด
.
1,000 . . soo
Crlash
.
1,000 lr .
Prepaidsoo
↳
คช จ .
pง เ_น →
Rl E o เ_น
error is counterbalanced. wา หxง tด Z 4)
เจอ บช 1 202
ไ@ -อง Iนlก แ]ว yน ชดเชย หมด แ]ว

Noentry

nไร pง เ_น Rl E pง เ_น
[ cก :D r.la sh 50.000
ออก
cr.vn earned Rent Revenve 50,0
RIE Over -อง ]าง ออก
⇒ -อง Bบ zรายไD ใ#ตรง งวด
error is counterbalanced. Noentry Beiausetheerroriscovnterbalance
✗ →
เ,น รายไDของ Z 23
→ RIE
pง เ_น ะ ไD pง เ_น
ราย
→ Bบ zรายไD
-
error is counterbalanced.
Inventory ปลาย Zcก แ]ว Perpetvrei Dr In v.

.
→
ยอด ห{อ , 23 จะ o เ_น -อง Dr .
เ|ม
→ ยอด }อ pง เ_น →
แแ pง เ_น
นา nไร o เ_น
error is counterbalanced.
( ostof Goods Sold
Beginning Inventory
Addi Purchase
Goods Availabletorsales
less Ending Inventory

Costot boods Sold
Gross Profit
wา Inventory sด Dวย ะ ไ@ -อง แ^ เพราะ yน จะไป หา 2น

→ Non -
covnterbalanle
ของ Z~ พบ 3อน tด บช .

Z [ าะ Expense pง เ_น
Asset $ เ_น
พบ 3อน tด บช .
[sด :D r Depreciation Exp

.
. เอ . อ 00
lr.lash 10,000
cก ะ Dr Machine
.
10,000
lr.la sh 10,000
1) ข .
Depreeiation [ xp .
เออ 0
lr . Aclmvlated Dep .
2,000
แ^ : เ|ม AIS
Non-Counterbalancing Errors—Depreciation
If Hurley has closed the books for 2023, the entry is:

\ •ง •
€ เ_น

2022
Sales 2 022 550
Sales 2023
Total
→
ของ 23 3อน tด บช .
→
ของ 22 tด บช แ]ว
.
:[ xp .
o เ_น →
Rl E pง เ_น
→ -อง •ง เ|ม

Non-Counterbalancing Errors—Bad Debts
If Hurley has closed the books for 2023, the entry is:

Error Correction – Hudson Haulers
The income statements of Hudson Haulers indicate the following net incomes for the
years ended December 31, 2021, 2022, and 2023.
Assuming that Hudson has not closed the books, correcting entries on
December 31, 2023, are as follows.

‚ม ƒง Yา แรง
$ไป ไ@ -อง ปBบ แ]ว

→
counterbalanel
pงไป
Year 2021 : No Entry เ ecauseitcounterbalanced
Erorr Dr Rl E 1.4 00
.
lr .
Salariesandwages [
xpense 1,400
Adjust Dr .
Salariesandwages Expense 1,600
lr .
Salariesandwages payable 1,600

If Hudson Haulers has closed the books for 2023, the correcting entries are:
DKRIE 1,600
lr .
Salariesandwages payable 1,600

Counterbalancing
No Entry เ ecauseitcounterbalanced
2021 2022 2023

Beginning Inventory Over 1,900
Ending Inventory Over 1,900
Cost of Goods Sold Under 1,900 Over 1,900
Net Income Over 1,900 Under 1,900
Retained Earnings Over 1,900 Under 1,900 Counterbalancing

=
Prepaid แm Iนlก เ,น Exp .
E xp .
pง เ_น → RIE $า
Counterbalancing

‚ม Iนlก Dr Int
.
Recivable ตอน Bบ เ„น Dr . Cash 240
lr Int
. . Revenue Cr Int Revenve
. .
240
Counterbalancing

[ cก Dr.la sh 1,800
Acc v. Depr .
2,400
lr.ba in 0ท Sale 300
Eguipment 3,900
sด Dr .
( ash 1,800
lr.MIscellaneoust.name 1,800 → nไร pง เ_น i RE pง เ_น

Dr .
Depreciation Exp . 390 → คชจ .
pง เ_น i RE o เ_น
Cr .
All V. Depre. 390
Erorr Dr .
RIE (1,800-390-300) 1,110
Alwmvlated Depreliation l 2,400+390+390 ) 3,180

lr . Depreciation Expense 390
Equipment 3,900



Changes in accounting policy
Summary of Employ the retrospective approach by:
Guidelines for a. Changing the financial statements of all prior periods presented.
b. Disclosing in the year of the change the effect on net income and earnings per share for all prior
Accounting periods presented.
c. Reporting an adjustment to the beginning retained earnings balance in the statement of retained
Changes and earnings in the earliest year presented.
If impracticable to determine the prior period effect:
Errors a. Do not change prior years’ income.
b. Use opening asset balance in the year the method is adopted as the base-year balance for all
subsequent computations.
c. Disclose the effect of the change on the current year, and the reasons for omitting the computation
of the cumulative effect and amounts for prior years.
Changes in accounting estimate
Employ the current and prospective approach by:
a. Reporting current and future financial statements on the new basis.
b. Presenting prior period financial statements as previously reported.
c. Making no adjustments to current-period opening balances for the effects in prior periods.
Changes due to error
Employ the restatement approach by:
a. Correcting all prior period statements presented.
ILLUSTRATION 22.21 b. Restating the beginning balance of retained earnings for the first period presented when the error
effects occur in a period prior to the first period presented.

Analyze the effects of errors.

Error Analysis
Companies must answer three questions:
1. What type of error is involved?
2. What entries are needed to correct for the error?
3. After discovery of the error, how are financial statements
to be restated?
Companies treat errors as prior-period adjustments and
report them in the current year as adjustments to the
beginning balance of Retained Earnings.

Error Analysis
Statement of Financial Position Errors
↳ …วนให† จะ เ,น ‡ด ประเภท รายการ sด
Statement of financial position errors affect only the
presentation of an asset, liability, or equity accounts.
• Current year error - reclassify item to its proper position.
• Prior year error - restate the statement of financial
position of the prior year for comparative purposes.

Error Analysis
Income Statement Errors
↳ ‡ด
ประเภท รายการ ให@
Improper classification of revenues or expenses.
• Current year error - reclassify item to its proper position.
• Prior year error - restate the income statement of the
prior year for comparative purposes.

Statement of Financial Position and
Counterbalancing Errors Situation 1
Counterbalancing errors will be offset or corrected over two
periods.
1. If company has closed the books in the current year:
a. If the error is already counterbalanced, no entry is
necessary.
b. If the error is not yet counterbalanced, make entry to
adjust the present balance of retained earnings.
For comparative purposes, restatement is necessary even if a
correcting journal entry is not required.
Counterbalancing Errors Situation 2
Counterbalancing errors will be offset or corrected over two
periods.
2. If company has not closed the books in the current year:
a. If error already counterbalanced, make entry to correct the
error in the current period and to adjust the beginning
balance of Retained Earnings.
b. If error not yet counterbalanced, make entry to adjust the
beginning balance of Retained Earnings.

Non-Counterbalancing Errors
• Not offset in the next accounting period.

• Companies must make correcting entries, even if they
have closed the books.

Error Analysis Exercise
E22.19 (Error Analysis; Correcting Entries): A partial trial balance
of Dickinson Ltd. is as follows on December 31, 2022.
มาก เ_น
→
14,350 )

Error Analysis Exercise
Additional Adjusting Data
1. A physical count of supplies on hand on December 31, 2022, totaled R1,100.
2. Through oversight, the Salaries and Wages Payable account was not changed during
2022. Accrued salaries and wages on December 31, 2022, amounted to R4,400.
3. The Interest Receivable account was also left unchanged during 2022. Accrued
interest on investments amounts to R4,350 on December 31, 2022.
4. The unexpired portions of the insurance policies totaled R65,000 as of December 31,
2022.
5. R24,000 was received on January 1, 2022, for the rent of a building for both 2022
and 2023. The entire amount was credited to rental income.
6. Depreciation for the year on equipment was erroneously recorded as R5,000 rather
than the correct figure of R50,000.
Instructions: (a) Assuming that the books have not been closed, what are the adjusting
entries necessary at December 31, 2022? (b) Assuming that the books have been closed,
what are the adjusting entries necessary at December 31, 2022.

Part (a) Adjusting Entries 1. and 2.
(a) Assuming that the books have not been closed, what are the
adjusting entries necessary at December 31, 2022?
1. A physical count of supplies on hand on December 31, 2022,
totaled R1,100.
Supplies Expense 1,400
Dr Svpply Expense
. (R2,500 – R1,100) 1,400
4. Supplies on Hand1,400
Supply ราย การ
ปBบปdง : ใน Z ˆงไ@1,400
+ tดบช
.
2. Through oversight, the Salaries and Wages Payable account

was not changed in 2022. Accrued salaries and wages on
December 31, 2022, amounted to R4,400.
Salary
Dr and Wages
Salaryand
. Wages Expense
Expense 2,900 2,900
lr .
AccruedWages
Salaryand Salaries and Wages
Payable 2,900 2,900

3. The Interest Receivable account was also left unchanged during
2022. Accrued interest on investments amounts to R4,350 on
December 31, 2022.
Dr Intenest Revenve 15,100-4,350 ) 750
.
Interest Revenue (R5,100 – R4,350) 750

Cr Interest Recivable 750
Interest Receivable 750
.
4. The unexpired portions of the insurance policies totaled

R65,000 as of December 31, 2022.
Dr . Insurance
Insvranie Expense
Exp 25,000
. 25,000
Cr .
Prepaid Insurance
Prepaid Insvranle 15,000 25,000

5. R24,000 was received on January 1, 2022, for the rent of a
building for both 2022 and 2023. The entire amount was
credited to rental income. ใน ไ& ' Unarned
งบ 2ง 3อน แสดง +า ตอน /บ เรา lr Rev
. .
Rental
RentRe v. Income
124,000 ÷(R24,000
2) 12,000÷ 2) 12,000
Unearned
Unearned
Re v. Rent 12,000 12,000
6. Depreciation for the year was erroneously recorded as R5,000

rather than the correct figure of R50,000.
Depreciation
DepreciationExp Expense 45,000
.
45,000
Accumulated
Accumulated Dep Depreciation 45,000
45,000
.

Part (b) Adjusting Entries 1. and 2.
(b) Assuming that the books have been closed, what are the
1. A physical count of supplies on hand on December 31, 2022,
totaled R1,100.
Dr Rl E
Retained
.
Earnings 1,400 1,400

4. Supply 1,400
Supplies 1,400
2. Through oversight, the Salaries and Wages Payable account was

not changed in 2022. Accrued salaries and wages on December
31, 2022, amounted to R4,400.
Retained
Dr
. Rl E Earnings 2,900 2,900
Accrued
lr Salaries
Salaryand
.
and Wages
Wages Payable 2,900 2,900

3. The Interest Receivable account was also left unchanged during
2022. Accrued interest on investments amounts to R4,350 on
December 31, 2022.
Retained Earnings (R5,100 – R4,350) 750
Interest Receivable 750
4. The unexpired portions of the insurance policies totaled

R65,000 as of December 31, 2022.
Prepaid Insurance 25,000

5. R24,000 was received on January 1, 2022, for the rent of a
building for both 2022 and 2023. The entire amount was
credited to rental income.
Retained
Dr
. Rl E Earnings
12,000 12,000
cr .
Unearned
UnearnedRent Rent
12,000 12,000
6. Depreciation for the year was erroneously recorded as R5,000

rather than the correct figure of R50,000.
Accumulated Depreciation 45,000

Practice Problem

Practice Problem

Practice Problem
เ4ด Defer Tax li a.

Practice Problem
ราย การ ป/บป8ง

Practice Problem
✗ = ห:

Copyright
Copyright © 2020 John Wiley & Sons, Inc.
All rights reserved. Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the express written
permission of the copyright owner is unlawful. Request for further information should be
addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may
make back-up copies for his/her own use only and not for distribution or resale. The
Publisher assumes no responsibility for errors, omissions, or damages, caused by the use
of these programs or from the use of the information contained herein.

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Intermediate Accounting

Copyright ©2020 John Wiley & Sons, Inc. 2

Copyright ©2020 John Wiley & Sons, Inc. 3

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 4

Accounting Alternatives: -ง Inventory ๓ำ

• Diminish the comparability of financial information.

ใG AอCล 1 ใน อHต มา Predict )

Types of Accounting Changes:

Errors are not considered an accounting change.

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 5

Change from one accepted accounting policy to another.

• Weighted Average to FIFO

• Cost-recovery* to percentage-of-completion method

→ Construction Contract. IFRS 15

Adoption of a new policy in recognition of events that have

dไร จะ -ง กeา Cost Recovery

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 7

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 8

1) Report changes currently. เหoยง

• In this approach, companies report the cumulative effect of

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 9

2) Report changes retrospectively. i q is i แh งบ jอน ห` แP

i sไE %อง ปMบ แtว

• The application of a different accounting policy to recast

• The company shows any cumulative effect of the change

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 10

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 11

For example, a company may determine that changing from the

1) Adjusts its financial statements for each prior period

2) Adjusts the carrying amounts of assets and liabilities as of

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 13

percentage-of-completion method. Management believes

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 14

LO 1 ILLUSTRATION 21.1 Copyright ©2020 John Wiley & Sons, Inc. 15

Journal Entry Construction in Process 220,000

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 16

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 17

LO 1 ILLUSTRATION 22.3 Copyright ©2020 John Wiley & Sons, Inc. 18

Retained earnings balance is €1,360,000 at the beginning of 2020.

ILLUSTRATION 22.4 1,360,000 + 360,000

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 19

Preseht งบ : ปMบ แJ i jอน i เHยว

LO 1 ILLUSTRATION 22.5 Copyright ©2020 John Wiley & Sons, Inc. 20

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 21

wา ใ@ c 06s %อง เอา มา บอก ]น =

LO 1 ILLUSTRATION 22.6 Copyright ©2020 John Wiley & Sons, Inc. 22

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 23

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 24

• Net incomes are different in each period.

LO 1 ILLUSTRATION 22.8 Copyright ©2020 John Wiley & Sons, Inc. 26

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 27

Adjust ILLUSTRATION 22.9

To account for the change, we make the following entry.

Retained Earnings 5,000 Deferred Tax Liability d 2,000

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 28

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 29

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 30

Lancer adjusted the beginning balance of retained earnings on

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 31

Net Income ($) Inventory ($)

Year 2021 240,000 273,000 33,000 9,900 23,100

2023 Journal entry

Net retrospectively the