As part of the year-end accounting process and review of operating policies, Cullen Co. is considering a change in the accounting for its equipment from the straight-line method to an accelerated method. Your supervisor wonders how the company will report this change in principle. He read in a newspaper article that the FASB has issued a standard in this area and has changed GAAP for a “change in estimate that is effected by a change in accounting principle.” (Thus, the accounting may be different from what he learned in intermediate accounting.) Your supervisor wants you to research the authoritative guidance on a change in accounting principle related to depreciation methods.

Instructions

(a) What are the accounting and reporting guidelines for a change in accounting principle related to depreciation methods?

(b) What are the conditions that justify a change in depreciation method, as contemplated by Cullen Co.?

(c) What guidance does the SEC provide concerning the impact that recently issued accounting standards will have on the financial statements in a future period?

The guideline for reporting the change in accounting principle is related to the depreciation methods which can be found in IAS 8, paragraphs 32-38 under the heading of changes in accounting estimates.

According to paragraph 14, the business entity shall change an accounting policy only if the change:

1. Is required by an IFRS or

2. 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.

If the cost of sales or operating expenses exclude charges for depreciation, depletion, and amortization of property, plant, and equipment, the description of the line item should read somewhat as follows: “Cost of goods sold (exclusive of items shown separately below)” or “Cost of goods sold (exclusive of depreciation shown separately below).” To avoid placing undue emphasis on “cash flow,” depreciation, depletion, and amortization should not be positioned in the income statement in a manner that results in reporting a figure for income before depreciation.