Question

You work as an accountant for regional CPA firm of Cash and Green. Your supervisor asked you to conduct research for three unrelated clients.

1.Hester Company is planning this year to present comparative income statements but only the current year’s balance sheet. Devin, president of Hester Company requests your advice as to whether comparative cash flow statements for both the current and prior periods are necessary considering only the current year’s balance sheet is presented. Are there any authoritative pronouncements that address this issue that you could present to Devin?

2.After the M. Forte Company issued its previous years’ financial statements, it noticed that it incorrectly calculated depreciation expense and, thus, disclosed this fact as a prior period adjustment in its current years’ financial statements. (This difference also did not affect any cash balances, since M. Forte maintained an operating loss for both periods.) However, M. Forte did not issue comparative financial statements in the current year. M. Forte now wonders how to disclose this prior period adjustment in its current year’s Statement of Cash Flows

.3. A new client for your firm is G. Sayers who is preparing personal financial statements for a bank loan. Mr. Sayers is attempting to list his social security benefits to be received based on his future life expectancy as an asset on his financial statements. Mr. Sayers states that such benefits meet the definition of an asset. Would you agree to allow the social security benefits to be listed as an asset? Required: a) Provide responses for each independent case on the appropriate accounting treatment. b) Support your responses with code sections from the FASB Accounting Standards Codification (ASC).

Answer 1

FIRST UNDERSTAND BASIC

What Are Comparative Financial Statements?

Preparing Comparative Financial Statements is the most commonly used technique for analyzing financial statements. This technique determines the profitability and financial position of a business by comparing financial statements for two or more time periods. Hence, this technique is also termed as Horizontal Analysis. Typically, the income statements and balance sheets are prepared in a comparative form to undertake such an analysis.

Furthermore, there is a provision attached to comparing the financial data showcased by such statements. This relates to making use of the same accounting principles for preparing each of the comparative statements. In case the same accounting principles are not followed to prepare such statements, then the difference must be disclosed in the footnote below.

Comparative Balance Sheet

A comparative balance sheet showcases:

Assets and liabilities of business for the previous year as well as the current year

Changes (increase or decrease) in such assets and liabilities over the year both in absolute and relative terms

Thus, a comparative balance sheet not only gives a picture of the assets and liabilities in different accounting periods. It also reveals the extent to which the assets and liabilities have changed during such periods.

Furthermore, such a statement helps managers and business owners to identify trends in the various performance indicators of the underlying business.

The Financial Accounting Standards Board has the authority to establish and interpret generally accepted accounting principles (GAAP) in the United States for public and private companies and nonprofit organizations. GAAP is a set of standards that companies, nonprofits, and governments should follow when preparing and presenting their financial statements, including any related party transactions.

The Securities and Exchange Commission (SEC) recognizes the FASB as the accounting standard setter for public companies. It is also recognized by state accounting boards, the American Institute of Certified Public Accountants (AICPA), and other organizations in the field.

Accounting Standards Codification (ASC) 205, Presentation of Financial Statements, is divided into four subtopics: ASC 205-10, Overall: ASC 205-20, Discontinued Operation: ASC 205-30, Liquidation Basis of Accounting, and ASC 204-40, Going Concern. ASC 205 emphasizes the principle of comparability and the importance of consistency to comparability. ASC 205-10-45-1 explains that the presentation of comparative financial statements in annual reports enhances the usefulness of annual reports and brings out more clearly the nature and trends of current changes affecting the enterprise. Comparative financial statements allow investment analysts and other interested readers to perform comparative analysis of pertinent information. Comparative presentation emphasizes the fact that the statements for a series of periods are far more significant than those for a single period and that the accounts for one period are but an installment of what is essentially a continuous history.

1.Answer

205-10 Overall

ASC 205-10 notes that the Subtopic "describes the benefits of presenting comparative financial statements instead of single-period financial statements, and addresses how the comparative information shall be presented and the required disclosures."

205-20 Discontinued Operations

ASC 205-20 addresses the accounting for components that have been disposed of or are classified as held for sale, and specifically states:

This Subtopic provides guidance on when the results of operations of a component of an entity that either has been disposed of or is classified as held for sale would be reported as a discontinued operation in the financial statements of the entity. It also addresses the allocation of interest and overhead to discontinued operations. Subtopic 360-10 establishes held for sale criteria in paragraphs 360-10-45-9 through 45-14.

205-30 Liquidation Basis of Accounting

ASC 205-30 was added to the Codification by ASU 2013-07, which is effective for entities that determine liquidation is imminent during annual periods beginning after December 15, 2013, and interim reporting periods therein. ASC 205-30 notes:

The Liquidation Basis of Accounting Subtopic provides guidance on when and how an entity should prepare its financial statements using the liquidation basis of accounting and describes the related disclosures that should be made.

What Are Comparative Financial Statements?

Preparing Comparative Financial Statements is the most commonly used technique for analyzing financial statements. This technique determines the profitability and financial position of a business by comparing financial statements for two or more time periods. Hence, this technique is also termed as Horizontal Analysis. Typically, the income statements and balance sheets are prepared in a comparative form to undertake such an analysis.

Furthermore, there is a provision attached to comparing the financial data showcased by such statements. This relates to making use of the same accounting principles for preparing each of the comparative statements. In case the same accounting principles are not followed to prepare such statements, then the difference must be disclosed in the footnote below.

Comparative Balance Sheet

A comparative balance sheet showcases:

Assets and liabilities of business for the previous year as well as the current year

Changes (increase or decrease) in such a ssets and liabilities over the year both in absolute and relative terms

Thus, a comparative balance sheet not only gives a picture of the assets and liabilities in different accounting periods. It also reveals the extent to which the assets and liabilities have changed during such periods.

Furthermore, such a statement helps managers and business owners to identify trends in the various performance indicators of the underlying business.

Steps To Prepare a Comparative Balance Sheet

1. Step 1

Firstly, specify absolute figures of assets and liabilities relating to the accounting periods considered for analysis. These amounts are mentioned in Column I and Column II of the comparative balance sheet.

2. Step 2

Find out the absolute change in the items mentioned in the balance sheet. This is done by subtracting the previous year’s item amounts from the current year ones. This increase or decrease in absolute amounts are mentioned in Column III of the comparative balance sheet.

3. Step 3

Finally, calculate the percentage change in the assets and liabilities of the current year relative to the previous year. This percentage change in assets and liabilities is mentioned in Column V of the comparative balance sheet.

Percentage Change = (Absolute Increase or Decrease)/Absolute Figure of the Previous Year’s Item) * 100

So, let’s understand a comparative balance sheet through an example. Consider the following balance sheets of M/s Kapoor and Co as on December 31st, 2017 and December 31st, 2018 for the illustration.

1.What is a Comparative Statement?

A comparative statement is a document used to compare a particular financial statement with prior period statements. Previous financials are presented alongside the latest figures in side-by-side columns, enabling investors to identify trends, track a company’s progress and compare it with industry rivals.

How Comparative Statements Work

Analysts, investors, and business managers use a company’s income statement, balance sheet, and cash flow statement for comparative purposes. They want to see how much is spent chasing revenues from one period to the next and how items on the balance sheet and the movements of cash vary over time.

2.Answer

ASC 250-10 notes the following:

An accounting change can be a change in an accounting principle, an accounting estimate, or the reporting entity. This Subtopic establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to a newly adopted accounting principle. This Subtopic provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable.

The correction of an error in previously issued financial statements is not an accounting change. However, the reporting of an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively. Therefore, the reporting of a correction of an error by restating previously issued financial statements is also addressed by this Subtopic.

This Subtopic also:

Specifies the method of treating error corrections in comparative statements for two or more periods

Specifies the disclosures required when previously issued statements of income are restated

Recommends methods of presentation of historical, statistical-type financial summaries that are affected by error corrections.

2.Accounting Policies, Changes in Accounting Estimates” requires retrospective adjustment of prior period errors and omissions by restating the comparative amounts for prior period presented or, where the errors relates to the period(s) before the earliest prior period presented, restating the opening balance of assets, liabilities and equity for that period.

2. Prior to Ind AS 8, prior period error and omission were accounted in accordance with the Accounting Standard 5 – “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies”. Accounting standard 5, provides prospective correction of prior period error and omissions in the current year’s profit and loss account and requires disclosures of nature and amount of prior period item in such a manner that the impact on profit and loss could be perceived.

3. We can see, Ind AS 8 gives completely different accounting treatment for period items as compared to AS 5. Before understanding the new accounting treatment under the Ind AS 8, let’s analyze the basic differences between Ind AS 8 and AS 5 in the table below:

We can see, Ind AS 8 gives completely different accounting treatment for period items as compared to AS 5. Before understanding the new accounting treatment under the Ind AS 8, let’s analyze the basic differences between Ind AS 8 and AS 5 in the table below:

Basis Ind AS 8 AS 5

Period of adjustment Ind AS 8 requires rectification of prior period errors with retrospective effect subject to limited exceptions AS 5 requires the rectification of prior period items with prospective effect

Definition Errors or omissions arising from a failure to use or misuse of reliable information that was available when the financial statements of the prior periods were approved for issuance and could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements. Prior period items are incomes or expenses which arise in the current period as a result of errors or omissions in the preparation of financial statements of one or more prior periods.

Use of separate head for prior period items Not Allowed Requires as per disclosure requirement

Restatement of Financial of previous period Required to present the adjustment in prior periods Not required

4. Analysis of Ind AS 8 on Prior period Items.

A. What is prior period error?

Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that:

– Was available when financial statements for those periods were authorized for issue

– Could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.

B. What may cause errors?

Errors discovered during a current period which relate to a prior period may arise through:

(a) Mathematical mistakes

(b) Mistakes in the application of accounting policies

(c) Misinterpretation of facts

(d) Oversights

(e) Fraud

C. What is the accounting treatment given in Ind AS 8 for correction of prior period errors?

Prior period errors: correct retrospectively. There is no longer any allowed alternative treatment.

This involves:

(a) Either restating the comparative amounts for the prior period(s) in which the error occurred, or

(b) When the error occurred before the earliest prior period(s) presented, restating the opening balances of assets, liabilities and equity for that period, so that the financial statements are presented as if the error had never occurred.

A. What is prior period error?

Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that:

– Was available when financial statements for those periods were authorized for issue

– Could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.

B. What may cause errors?

Errors discovered during a current period which relate to a prior period may arise through:

(a) Mathematical mistakes

(b) Mistakes in the application of accounting policies

(c) Misinterpretation of facts

(d) Oversights

(e) Fraud

C. What is the accounting treatment given in Ind AS 8 for correction of prior period errors?

Prior period errors: correct retrospectively. There is no longer any allowed alternative treatment.

This involves:

(a) Either restating the comparative amounts for the prior period(s) in which the error occurred, or

(b) When the error occurred before the earliest prior period(s) presented, restating the opening balances of assets, liabilities and equity for that period, so that the financial statements are presented as if the error had never occurred.

3.Answer.

​

FASB Accounting Standards Codification (ASC) 274, Personal Financial Statements, states that personal financial statements should present assets at their estimated current values and present liabilities at their estimated current amounts at the date of the financial statements

A personal financial statement is a document that details an individual's assets and liabilities. It's often used by lenders to learn a loan applicant's net worth and other details of their financial life.

Learn how to prepare a personal financial statement, and why it's so important for loans.

What Is a Personal Financial Statement?

A personal financial statement details your finances in a simple form. This is an important document for those seeking a business loan proposal. It allows lenders to quickly glean your assets and liabilities. If you are married, the personal financial statement may include your spouse's assets and liabilities, as well.