ASC 250: Retrospective Changes and the LIFO Exception

Question 1

In 20X6, before issuing comparative financial statements for 20X6 and 20X5, Nellis Co. identified the following material items. Assume no income taxes, no SEC issues, and that retrospective application is practicable whenever GAAP requires it unless the facts below indicate otherwise: 1. Nellis elected to change its inventory method from FIFO to LIFO for all inventories beginning in 20X6 because management concluded LIFO is preferable. Prior-period LIFO information was not maintained, making retrospective application impracticable under GAAP. 2. Based on a late-20X6 engineering study, Nellis revised the remaining useful life and residual value of a manufacturing asset effective January 1, 20X6. 3. Nellis discovered that advertising costs incurred and paid in 20X4 had been capitalized in 20X4 and amortized over 5 years; the unamortized balance and related amortization remained on the books through December 31, 20X5. Which reporting treatment is most appropriate in Nellis's 20X6 comparative financial statements?

Accepted Answer

Account for the FIFO-to-LIFO change prospectively beginning in 20X6 (retrospective application impracticable), apply the asset-life and residual-value revision prospectively, and correct the 20X4 advertising error by restating 20X5 and adjusting beginning retained earnings at January 1, 20X5.

Question 2

In preparing comparative financial statements for 20X6, Lark Co. identified the following items discovered after the 20X5 statements had been issued: 1. Effective January 1, 20X6, it changed inventory costing from FIFO to LIFO for all inventories. 2. Based on a new engineering study completed in 20X6, it changed a production machine's depreciation method from double‑declining balance to straight‑line and revised the machine's remaining useful life and salvage value. 3. It discovered a material 20X5 error: goods purchased FOB shipping point on December 29, 20X5 were omitted from ending inventory and accounts payable. Which reporting treatment is most appropriate under U.S. GAAP?

Accepted Answer

Restate 20X5 to correct the material inventory omission (correction of a prior‑period error); apply the FIFO‑to‑LIFO change as the LIFO‑specific change under U.S. GAAP beginning January 1, 20X6 (i.e., not by restating 20X5); and account prospectively for the depreciation method change and the revised useful life and salvage value.

Question 3

In 20X6, Lark Co. is preparing comparative financial statements for 20X6 and 20X5. During 20X6, Lark (1) voluntarily changes its inventory costing method from FIFO to weighted-average for all inventories; management concludes the new method is preferable, and records exist to apply it to periods before 20X5, and (2) discovers that equipment purchased on January 1, 20X5 for $500,000 was incorrectly expensed in 20X5. The equipment should have been capitalized and depreciated straight-line over 5 years with no salvage value. Ignore income taxes. Which reporting treatment is most appropriate under U.S. GAAP?

Accepted Answer

Restate 20X5 for both items, and adjust opening 20X5 retained earnings only for the cumulative effect of the inventory-method change arising before 20X5.

Question 4

In preparing comparative financial statements for the years 20X5 and 20X4, Banner Co. identified the following items: (1) Effective 1/1/20X5, Banner changed its inventory-costing method for a product line introduced in 20X4 from FIFO to weighted-average because management concluded weighted-average is preferable. (2) Effective 1/1/20X5, Banner changed the depreciation method for a class of machines from straight-line to units-of-production based on newly developed usage data showing benefits are consumed by output. (3) Banner discovered equipment purchased and placed in service on 1/1/20X3 for $900,000 had been expensed in 20X3. The equipment has a 10-year life and no salvage value. Ignore tax effects. Which presentation is most appropriate in the 20X5 comparative financial statements (20X5 and 20X4)?

Accepted Answer

Inventory: retrospective, restate 20X4; Depreciation: prospective, apply from 1/1/20X5; Equipment error: prior-period error, restate 20X4 and adjust opening retained earnings at 1/1/20X4 for the 20X3 error.

Question 5

While preparing comparative financial statements for 20X5 and 20X4, Apex Co. identified the following items: 1. In 20X4 Apex began carrying inventory for a new product line and used the weighted-average cost method. In 20X5 management concluded FIFO is preferable and the change is practicable. 2. Based on new usage data, Apex changed the depreciation method for its delivery fleet from double-declining-balance to straight-line, effective in 20X5. 3. In 20X3 Apex erroneously expensed a machine that should have been capitalized and depreciated over five years with no residual value. That error was not corrected in 20X4. Which treatment is most appropriate in Apex's 20X5 comparative financial statements?

Accepted Answer

Restate 20X4 for items 1 and 3, adjust opening retained earnings of 20X4 for the cumulative effect of item 3, and apply item 2 prospectively in 20X5.

Question 6

Before issuing its 20X6 comparative financial statements (which present 20X6 and 20X5), Hart Co. identifies three independent, material matters: 1. Since acquiring a machine on January 1, 20X4 for $900,000, Hart incorrectly expensed the entire amount. If properly accounted for, the machine would have been capitalized and depreciated straight-line over 10 years with no salvage value. 2. Effective January 1, 20X6, Hart changes its inventory-costing method from weighted-average to FIFO. Retrospective application is practicable and Hart used weighted-average before 20X5. 3. Effective January 1, 20X6, Hart changes depreciation on a class of equipment from straight-line to units-of-production because newly available usage data indicates units-of-production better reflects the pattern of economic benefit. This change is not due to error. Ignore income taxes. Which treatment is most appropriate in Hart's 20X6 comparative financial statements?

Accepted Answer

Restate 20X5 for the machine error and for the inventory-method change; adjust opening retained earnings at January 1, 20X5 for effects attributable to periods before 20X5; and apply the depreciation-method change prospectively beginning in 20X6.

Question 7

In Year 2, Doran Corp is preparing comparative Year 2 and Year 1 financial statements. Before the Year 2 statements are issued, management identifies the following unrelated items: 1. A Year 1 warranty accrual was understated because of a spreadsheet formula error. 2. The company elects to change its inventory costing method from weighted-average to FIFO. Management concludes the new method is preferable, and retrospective application is practicable. 3. Based on new collection experience in Year 2, the company revises its estimate of expected credit losses on existing trade receivables. Ignoring income taxes, which treatment is most appropriate under U.S. GAAP?

Accepted Answer

The mathematical mistake and the inventory method change should be reflected retrospectively; the revised credit loss estimate should be applied prospectively.

Question 8

In 20X6, Harbor Co. is preparing comparative 20X5 and 20X6 financial statements. During 20X6, management changes its inventory costing method from weighted-average to FIFO because it concludes FIFO better reflects inventory economics. All information needed to recast prior periods is available. During the same close, Harbor discovers it failed to record a warranty liability at 12/31/20X5 for products sold in December 20X5, even though the warranty terms and sufficient historical claims data existed at that date to make a reasonable estimate. Assume both matters are material and no impracticability exception applies. Under U.S. GAAP (ASC 250), which classification and reporting treatment is most appropriate?

Accepted Answer

The inventory-costing method change is a change in accounting principle applied retrospectively, and the omitted 12/31/20X5 warranty liability is a prior-period error corrected by restating the prior-period financial statements.

Question 9

In Year 3, Noll Co. is issuing comparative financial statements for Year 3 and Year 2. Assume all effects are material, all necessary information is available, and any required retrospective application is practicable. During Year 3, Noll identified the following: 1. It changed its inventory costing method from weighted-average to FIFO. 2. Based on new engineering studies, it revised the remaining useful life of a machine acquired in Year 1. 3. It discovered that a 12-month insurance policy purchased on October 1, Year 2, had been recorded entirely as insurance expense in Year 2, and no year-end adjusting entry had been made. Which reporting approach is most appropriate under U.S. GAAP?

Accepted Answer

Restate Year 2 for the inventory-method change and the insurance error, and account for the useful-life revision prospectively beginning in Year 3.

Question 10

At January 1, Year 3, after its Year 2 financial statements had been issued, Nola Co. identified the following items: 1. Nola changed its inventory costing method from weighted-average to FIFO because FIFO is considered preferable. Retrospective application is practicable. If FIFO had been used in prior years, ending inventory would have been $28,000 higher at December 31, Year 1, and $35,000 higher at December 31, Year 2. 2. A Year 2 accrued utilities expense of $9,000 was omitted from the Year 2 accounting records and financial statements. 3. Based on new usage information obtained on January 1, Year 3, Nola revised the remaining useful life of certain equipment. As a result, Year 3 depreciation expense will be $12,000 lower than it would have been under the previous estimate. Ignore income taxes. Assume Nola's Year 3 financial statements will present only Year 3 amounts, not comparative prior-year statements. What is the most supportable amount of the adjustment to beginning retained earnings at January 1, Year 3?

Accepted Answer

An increase of $26,000

	FIFO to weighted-average	FIFO to LIFO
Prior-period records	Prior-period effects can be determined.	Prior-period LIFO data were not maintained; retrospective application is impracticable.
Treatment	Retrospective application.	Prospective application beginning in 20X6.
20X5 comparative amounts	Restate using weighted-average.	Leave amounts reported under FIFO unchanged.
Opening retained earnings	Adjust January 1, 20X5 for cumulative effects before 20X5.	No retrospective adjustment for the LIFO change.
Prior-period effects in 20X6 income	Do not record a current-year cumulative-effect charge.	Do not record a catch-up charge for prior-year LIFO differences.
Disclosure	Describe the change and why weighted-average is preferable.	Describe the change, why LIFO is preferable, and why retrospective application is impracticable.

ASC 250: Retrospective Changes and the LIFO Exception

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