Change in accounting estimate

An accounting estimate alteration results in changes in existing liabilities and assets; it alters all subsequent accounting processes for future or existing assets and liabilities. The alteration arises when an existing estimate appears to be incorrect or when new information comes up. The alteration process is necessary when reviewing the existing status, future merits, and obligations on assets and liabilities. Instances of changes in accounting estimates include bonuses for unproven accounts, obsolete stocks, warranty obligations, and usefulness or value of depreciating assets.

Difference between a change in accounting principle and a change in accounting estimate

An accounting principle’s alteration takes effect when preceding principles are no longer relevant when multiple universal principles apply, or the methods of applying the principles have changed. An accounting estimate change due to an accounting principle change is an accounting estimate change that cannot be separated from the impacts of accounting principle changes. An instance of an estimated change due to principle change is a shift in methods of amortization, depreciation, and depletion.

Codification guidance to the format of accounting disclosures

According to the codification guidance (FASB ASC 225), one shall disclose extraordinary materials separately and integrate them into the net income of the affected period in which they arise. To ascertain material value, one shall affiliate extraordinary components with the projected income of the financial year. One shall separately report the effects of item disposal or infrequent material movements concerning the interim period’s benchmark results. Additionally, information about business combinations and seasonal outcomes shall be revealed to make the financial report clearer. One shall not pro-rate the profits or losses of disposing of redundant or infrequent moving items over the fiscal annum balance (FASB, 2020).

The literature that addresses the disclosure of accounting policies.

According to the Codification reference: ASC 235, information concerning accounting policies is crucial for financial statement experts. Accounting policies need to be disclosed to present an unprejudiced financial position, GAAP description, or cash flows (FASB, 2020).

Accounting policies as defined in the literature

Accounting policies are the accounting principles and the formulas of using the principles as per the guidelines of the entity managers. The policies are customized for making financial statements by presenting the most accurate position of the firm’s financial status, cash flows, and outcomes of GAAP. In other words, accounting policies include systems of weighing, predicting, and applying principles to reasonably equate the firm’s financial obligations (FASB, 2020).

The three scenarios that would result in a detailed disclosure of the accounting methods used.

The disclosure of accounting policies needs proper judgment regarding revenue recognition and asset allocation to consequent periods. Disclosure looks at; Choices from existing alternatives, systems, and principles that are congruent with the entity, and creative or unusual GAAP applications (FASB, 2020).

Is it permissible to capitalize on interest in the cost of assets? Provide authoritative support for your answer.

Yes. ASC 835-20 states that one is allowed to integrate interest into the asset costs. The code stipulates that asset acquisition costs include logistics expenses incurred to bring the asset to its location. Also, the costs incurred during a period in which an asset is prepared for work are included in the historical costs (FASB, 2020).

Discuss which assets qualify for interest capitalization. Is there a limit to the amount of interest that may be capitalized in a period? If interest capitalization is allowed, what disclosures are required?

According to ASC 835-20, one shall capitalize interests of; assets that come from the firm’s use, assets produced as discrete projects and intended for sale, and investments (equity, advances, and loans) accounted for when the asset is under work (FASB, 2020).

The code further states that the accumulative interest cost spent in an accounting period should not exceed that period’s entity cost. The limit applies in consolidated statements by referring to all costs incurred in parent and subsidiary entities in consolidation terms. Financial statements that are separately issued call for a limitation on all the interest cost incurred by each entity; this includes intra entity borrowings.

References

FASB. (2020, August 03). Accounting Standards Codification. Retrieved from https://asc.fasb.org/