Sometimes a business entity may change its method of accounting for certain items. It may classify the change as a change in accounting principle, a change in accounting estimate, or a change in reporting entity. The following are three independent, unrelated sets of facts relating to accounting changes. Situation I A company determined that the depreciable lives of its fixed assets are presently too long to fairly match the cost of the fixed assets with the revenue produced. The company decided at the beginning of the current year to reduce the depreciable lives of all of its existing fixed assets by five years.
Situation II On December 31, 2009, Hyde Company owned 51% of Patten Company, at which time Hyde reported its investment using the cost method, owing to political uncertainties in the country in which Patten was located. On January 2, 2007, the management of Hyde Company was satisfied that the political uncertainties were resolved and the assets of the company were in no danger of nationalization. Accordingly, Hyde will prepare consolidated financial statements for Hyde and Patten for the year ended December 31, 2007.
Situation III A company decides in January 2007 to adopt the straight-line method of depreciation for plant equipment. The straight-line method will be used for new acquisitions, as well as for previously acquired plant equipment for which depreciation had been provided on an accelerated basis.
Required
For each of the preceding situations, provide the following information. Complete your discussion of each situation before going on to the next situation.
1. Type of accounting change.
2. Manner of reporting the change under current generally accepted accounting principles, including a discussion, where applicable, of how amounts are computed.
3. Effect of the change on the statement of financial position and earnings statement.
4. Note disclosures that would be necessary.