Yates Manufacturing Ltd. is preparing its year-end financial statements. Yates is a private enterprise. The controller,...

Yates Manufacturing Ltd. is preparing its year-end financial statements. Yates is a private enterprise. The controller, Theo Kimbria, is confronted with several decisions about statement presentation for the following items.

1. Management has decided to switch from the FIFO inventory cost formula to the average cost inventory cost formula for all inventories.

Instructions:

For each of the changes that Yates Manufacturing Ltd. made in the current year, advise Theo on whether the change is a change in accounting policy, a change in estimate, a correction of an error, or none of these. Explain if the accounting treatment would be different under ASPE or IFRS. Provide a short explanation for your choice. Determine if retrospective or prospective application would be required in each case and what information would be required in any note disclosure. If the information that is provided is insufficient for you to determine the nature of the change, identify what additional information you would need and how this might affect your response.

Expert Solution

1.

In this case, no reason is provided for the change. The justification for the change will determine the appropriate accounting treatment.

If the nature of the change is to provide more relevant information, then this would be treated as a voluntary change in accounting policy. The change would be applied retrospectively and comparative information would be restated as if the average cost method had been used for all prior periods. Under IFRS, an opening statement of financial position would also be required for the earliest comparative period presented, and adjusted basic and fully diluted earnings per share (EPS) as a result of the change in policy would also be reported.

However, if the reason for the change is due to changed circumstances, for example if the type and composition of inventory items has materially changed, the change would be treated as the application of accounting standards to a new situation and would be accounted for on a prospective basis. The change may also be due to a change in estimate, for example if the inventory flow pattern is different from what was previously estimated, the change would be accounted for on a prospective basis.

ekkarill92 answered 2 years ago

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