Some in your department at work are arguing that accounting changes are the same thing as accounting errors. Based on your study of accounting changes, what key points
would you address concerning this issue and why?
Respond to this…
Question 1
Some in your department at work are arguing that accounting changes are the same thing as accounting errors. Based on your study of accounting changes, what key points
would you address concerning this issue and why?
Respond to this… I would say that accounting changes are not the same as accounting errors. An error might include a mathematical mistake, the misapplication of an
accounting principle or standard, or an oversight or misunderstanding of fact(s). In some cases, the error will be material and result in inaccurate financial
statements. Other times the errors will be insignificant and be ignored. On the other hand, an accounting change occurs when there is a change in an accounting
principle, an estimate, or an entity type, as defined in the FASB reporting framework. A change in an accounting principle indicates a change in policy to use an
alternate standard under GAAP. Estimates can be changed when new, or updated, information becomes available that is relevant to the estimate. Finally, a change in
accounting may occur when a company’s subsidiary organization changes, or the company’s entity type changes. These changes are not errors. Even though accounting
changes are often made as a result of an error, there are other reasons to make a change. For example, an accounting change may increase accuracy, provide a better
representation of the facts, or improve accounting policy in general. Accounting changes and accounting errors are not the same thing. Accounting errors do not always
force change, and accounting changes do not necessarily indicate an error.
Respond to this… The first thing I would tell the others in my department is changes are not the same as errors. There are many things that can change in the life of
a business requiring accounting changes. Sometimes at the time you make an entry you do not have all of the information, and have no way of getting the information
until a later date in time. For example there is something called a 1031 exchange in real estate in which you can sell a property and buy another property and deffer
the taxes. You would transfer the basis from one to another, this could carry over from one period to the other and you might not know the cost of the property you
are buying.
Another accounting change can come from rules the IRS has, for example as a restaurant reached a certain amount of sales it is required to be on accrual accounting, if
you were on a cash basis before that you would make the changes and let who ever is reviewing the financial of the change and the impact it made on the periods before
and after the change.
So in summary before one should get to worked up and calling something an error, one should see why a change is being made. There is a chance it could be an error and
then would just need to be fixed too
