Understanding ASPE Section 1506, Accounting Changes
Seven questions for private business owners: Accounting Changes A better working world begins with better questions. Asking better questions leads to better answers. To help preparers of financial statements with Canadian accounting standards for private enterprises ( ASPE ) Section 1506, Accounting Changes, we ve summarized the key aspects of the Section and offer relevant practical considerations for private mid-market companies through answering seven commonly asked questions. Question 1Section 1506 is applicable to changes in accounting policies, changes in accounting estimates and corrections of prior period errors. What is the difference between these three concepts? Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. A change in accounting policy may be voluntary, such as a change between ASPE tax methods or it may be involuntary, such as a change in ASPE. An entity that changes its accounting policy as a result of following sources other than ASPE would be considered voluntary. A change in accounting estimate is an adjustment of the carrying amount of an asset or a liability, or the amount of the periodic consumption of an asset, that results from assessing its present status and expected future benefits/ obligations. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors or changes in policy. For example, an entity may find it appropriate to change the estimated useful life of a depreciable asset as a result of new circumstances. Prior period errors are omissions from and misstatements in the entity s financial statements for one or more prior periods. These arise from a failure to use, or misuse of, reliable information that was available when the financial statements for those periods were completed and could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those statements. Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud. Error corrections are distinguished from changes in accounting estimates. Accounting estimates by their nature are approximations that may need revision as additional information becomes known. 2 Understanding ASPE Section 1506, Accounting Changes
Question 2When can an entity change an accounting policy? Per Section 1506.06, an accounting policy may be changed if the change: is required by a primary source of ASPE; results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity s financial position, financial performance or cash flows, or is any of the following: to consolidate subsidiaries, to account for them using the equity method or in accordance with Section 3856, Financial Instruments to account for investments subject to significant influence using the equity method or in accordance with Section 3856 to account for interests in joint ventures using the proportional consolidation method, the equity method, or in accordance with Section 3856 to capitalize or expense expenditures on internally generated intangible assets during the development phase to measure a defined benefit obligation for which an appropriate funding valuation has been prepared using that funding valuation or a separate actuarial valuation prepared for accounting purposes to account for income taxes using the taxes payable method or the future income taxes method to initially measure the equity component of a financial instrument that contains both a liability and an equity component at zero Question 3How is a change in accounting policy applied? Per Section 1506.10-1506.13, when applying a change to an accounting policy: an entity shall account for a change in accounting policy resulting from the initial application of a primary source of ASPE in accordance with the specific transitional provisions, if any, in that primary source of ASPE; and when an entity changes an accounting policy upon initial application of a primary source of ASPE that does not include specific transitional provisions applying to that change, or changes an accounting policy voluntarily, it shall apply the change retrospectively. When retrospective application is impracticable because the extent of the period specific effects or the cumulative effect of the change in accounting policy cannot be determined the entity shall apply the new accounting policy to the carrying amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable, which may be the current period, and shall make a corresponding adjustment to the opening balance of each affected component of equity for that period, or adjust the comparative information to apply the new accounting policy prospectively from the earliest date practicable, when it is impracticable to determine the cumulative effect at the beginning of the reporting period. Understanding ASPE Section 1506, Accounting Changes 3
Question 4What are some examples of changes in estimates? An estimate may need revision if changes occur in the circumstances on which the estimate was based or as a result of new information or more experience. Some examples of these estimates include: bad debts; inventory obsolescence; the fair value of financial assets or financial liabilities; the useful lives of, or expected pattern of consumption of the future economic benefits embodied in, depreciable assets; and warranty obligations Question 5How are changes in estimates accounted for? The effect of a change in an accounting estimate shall be recognized prospectively by including it in net income in: the period of the change, if the change affects that period only; or the period of the change and future periods, if the change affects both Prospective recognition of the effect of a change in an accounting estimate means that the change is applied to transactions, other events and conditions from the date of the change in estimate. To the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or relates to an item of equity, it shall be recognized by adjusting the carrying amount of the related asset, liability or equity item in the period of the change. 4 Understanding ASPE Section 1506, Accounting Changes
Question 6 How is a prior period error corrected in an entity s financial statements? Paragraphs 1506.27 and 28 state, an entity shall correct material prior period errors retrospectively in the first set of financial statements completed after their discovery by: restating the comparative amounts for the prior period(s) presented in which the error occurred; or if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented. Question 7 How is the adjustment to retained earnings for a change in accounting policy or correction of error presented in the statement of changes in equity? In the case of a change in accounting policy, the statement of changes in equity would reflect the beginning balance of retained earnings as previously stated, impact of the change in accounting policy, which totals to the beginning balance of retained earnings as restated. Net income for the prior period would be presented as restated. In the case of a correction of an error, the statement of changes in equity would reflect net income as restated for the prior period. The correction of a prior period error is excluded from net income for the period in which the error is discovered. Any information presented about prior periods, including any historical summaries of financial data, is restated. To learn more about these items or for application guidance, please contact our Private Mid-Market practice at privatecompanyinfo@ca.ey.com. Understanding ASPE Section 1506, Accounting Changes 5
A better working world begins with better questions. 6 Understanding ASPE Section 1506, Accounting Changes
Understanding ASPE Section 1506, Accounting Changes 7
EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. For more information about our organization, please visit ey.com/ca. 2015 Ernst & Young LLP. All Rights Reserved. A member firm of Ernst & Young Global Limited. 1567865 ED None This publication contains information in summary form, current as of the date of publication, and is intended for general guidance only. It should not be regarded as comprehensive or a substitute for professional advice. Before taking any particular course of action, contact Ernst & Young or another professional advisor to discuss these matters in the context of your particular circumstances. We accept no responsibility for any loss or damage occasioned by your reliance on information contained in this publication. ey.com/ca