There are various types of accounting changes requiring different types of reporting treatments.
Understanding the different changes is important to analysis of financial statements.
Required:
a. Under what category of accounting changes is the change from sum-of-the-years'-digits method of depreciation to the straight-line method for previously recorded assets classified? Under what circumstances does this type of accounting change occur?
b. Under what category of accounting changes is the change in expected service life of an asset (due to new information) classified? Under what circumstances does this type of accounting change occur?
c. Regarding changes in accounting principle:
(1) How does a company compute the effect of such changes? (2) How does a company report the effect of these changes?
d. Why are accounting principles, once adopted, normally consistently applied over time?
e. What is the rationale for disclosure of a change from one accounting principle to another?
f. Discuss how your analysis of mandatory accounting changes might differ from that of voluntary accounting changes.
g. Discuss how companies might time the adoption of mandatory accounting changes for their own benefit.
h. Discuss how the adoption of mandatory accounting changes can create an opportunity to establish a hidden reserve. Cite examples.