Demonstration Case Frequent Fixer Frequent Fixer is a manufacturer of commercial-use heavy equipment. During 2017, Frequent Fixer participated in an industry benchmark study, conducted by a key competitor, of the accounting policies used for the accrual of product liabilities. Based on the results of the benchmark study, Frequent Fixer noted that the majority of companies in the industry accrue for the costs of product recalls at the time of sale. Frequent Fixer's accounting policy for the accrual of the costs of product recalls consists of two methods. The first is the accrual of "small campaigns" that are subject to a threshold of $1 million (total campaign costs per product). Small campaigns are estimated and recorded together with the warranty reserve at the time of sale. The second is the accrual of "major campaigns" when announcement of the recall campaign is made. A major campaign involves consideration of numerous variables (for example, the number of defect occurrences, public safety issues, public relation concerns, evaluation of potential litigation, and so forth) and requires management approval prior to being announced. As a result of the benchmark study, Frequent Fixer began an internal evaluation of their product recall costs and their ability to reliably estimate and record product recall costs at the time of sale. The following table summarizes the costs of announced product recall campaigns by Frequent Fixer in recent years (amounts in thousands): 2010 $10,000 2011 $ 15,000 2012 $20,000 2013 $25,000 2014 $ 35,000 2015 $50,000 2016 $ 60,000 2017 $100,000 From the data above, Frequent Fixer identified that the frequency and size of product recall campaigns, either voluntarily or mandated by industry regulators, have increased significantly in recent years. Frequent Fixer believes that the increased frequency and costs of product recall campaigns are the result of increases in regulatory activity, focus on customer satisfaction, and competitive pressure to perform outside of the contractual warranty coverage period. As a result of the internal evaluation, Frequent Fixer is proposing to change its accounting policy for major campaigns to recognize a liability at the time of sale, consistent with small campaign Frequent Fixer believes the change in the business environment (i.e., the increased frequency and costs of product recall campaigns), better Adapted from Deloitte & Touche Trueblood Case Study

Demonstration Cass Frequent Fixer Frequent Fixer is a manufacturet of commercial-use heavy equipment. During 2017. Frequent Fixer participated in an industry benchmark study, conducted by a key competitor, of the accounting policies used for the accrual of product liabilities. Based on the results of the benchmark study, Frequent Fixer noted that the majority of companies in the industry accrue for the costs of product recalls at the time of sale. Frequent Fixer's accounting policy for the acenual of the costs of product recalls consists of two methods. The first is the acental of "small campaigns" that are subject to a threshold of $1 million (total campaign costs per product). Small campaigns are estimated and recorded together with the warranty reserve at the time of sale. The second is the accrual of "major campaigns" when announcement of the recall campaign is made. A major campaign involves consideration of numerous variables (for example, the number of defect oceurrences, public safety issues, public relation concerns, evaluation of potential litigation, and so forth) and requires management approval prior to being. announced. As a result of the benchmark study, Frequent Fixer began an internal evaluation of their product recall costs and their ability to reliably estimate and record product recall costs at the time of sale. The following table summarizes the costs of announced product recall campaigns by Frequent Fixer in recent years (amounts in thousands): 20102011201220132014201520162017$$$$$$$$10,00015,00020,00025,00035,00050,00060,000100,000 From the data above, Frequent Fixer identified that the frequency and size of product recall campaigns, either voluntarily or mandated by industry regulators, have increased significantly in recent years. Frequent Fixer believes that the increased frequency and costs of product recall campaigns are the result of increases in regulatory activity, focus on customer satisfaction, and competitive pressure to perform outside of the contractual warranty coverage period. As a result of the intemal evaluation, Frequent Fixer is proposing to change its ccounting policy for major campaigns to recognize a liability at the time of sale, onsistent with small campaigns. Frequent Fixer believes the change in the business ivironment (i.e,, the increased frequency and costs of product recall campaigns), better Adupted from Deimite \& Teoche Iroeblood Cane Stuify information, and more experience (historical data) now available allows management to estimate with reliability the eosts of future product recalis at the time of sale. Frequent Fixer further believes that an estimate of future product recall costs based on histonical experience can be actuarially supported (similar to a warranty reserve, self-insured product liability reserve, or incurred-but-not-repotted (IBNR) claims reserve) and has engaged an actuary to perform such an analysis. Frequent Fixer believes that recognixing the costs of product recall campaigns in the period of sale is a preferable method because product reealls are inherent to the industry, are predictable based on historieal experience, and provides a proper matching of revenues and expenses in the period of sale. Further. this method is preferable because it is supported by industry practice. Required: - When does Frequent Fixer incur a liability for the costs associated with a product recall campaign? - Is the proposed accounting change a change in accounting principal or a change in accounting estimate? - If a change in accounting principal, is the change to a preferable method