To: Mr. Hyde, President
In following up on your interests in changing the below summarized accounting methods of your company, GAAP requires these changes to be properly accounted for within your financial statements. Accounting changes to accounting principles, accounting estimates and or changes to the reporting entity are required to be reported and disclosed in the period that the change occurs (Wahlen, Jones, & Pagach, 2013). There are two methods used related to accounting for changes within your financial statements.
The first is retrospective adjustment method in which the current period’s financial statement will be adjusted as if the new changes were always in effect (Wahlen, Jones, & Pagach, 2013). The second being the prospective method, requires the reported the changes to be recorded as of the period the changes are made and future reporting periods effected (Wahlen, Jones, & Pagach, 2013).
Situation I (summary):
Depreciation of fixed assets are too long to match the cost of the fixed assets with the revenue produced. Decision made at the beginning of the current year to reduce the depreciable lives of all of your existing fixed assets by 5 years.
When estimates change, GAAP requires that company’s account for the change in an accounting estimate in the period of the change and future periods that follow, if affected. In addition to including the revised estimate amounts, your company would disclose the effect of the change on income from continuing operations, net income, and the related earnings per share (Wahlen, Jones, & Pagach, 2013).
Situation II (summary):
Investments reported using cost method, satisfied your conclusion that the political uncertainties were resolved and the assets of your company were in no danger of nationalization. As a result, your company consolidated financial statements with Patten Company (Wahlen, Jones, & Pagach, 2013).
Companies who consolidate financial companies from separately reported entities, accounts for this change as a retrospective adjustment, so all financial statements presented are for the same entity (Wahlen, Jones, & Pagach, 2013). Within the disclosure notes, these changes will be communicated based on the period in which the change takes place that includes the description of the change and the reason for the change. The effect of the change on EBIT, net income and related earnings per share for all periods presented will also be disclosed in the notes of the financial statement (Wahlen, Jones, & Pagach, 2013).
Situation III (summary):
Straight line depreciation method your company adopted for equipment, will now be used for acquisitions as well as for previously acquired equipment that has been depreciated on an accelerated basis (Wahlen, Jones, & Pagach, 2013).
When a company changes its depreciation method, the change should reflect a change to the estimated amount or timing of future benefits to be received from the asset. A change in depreciation method is considered a change in an estimate per GAAP reporting rules and would follow the reporting requirements associated with change in estimates (Wahlen, Jones, & Pagach, 2013).
In conclusion, it is my recommendation that you have your financial statements reviewed to ensure the above GAAP requirements are accounted for.