How are accounting policies defined in the literature

FASB Codification Assignment-2

The purpose of this assignment is to complete the FASB Codification Assignment. Complete Items 1-4.

Item 1

Access the glossary (Master Glossary) to answer the following

What is a change in accounting estimate?
How is a change in accounting principle distinguished from a “change in accounting estimate affected by a change in accounting principle?”
Item 2

What guidance does the codification provide concerning the format of accounting disclosures?

Item 3

In light of the full disclosure principle, investors and creditors need to know the balances for assets, liabilities, and equity as well as the accounting policies adopted by management to measure the items reported in the balance sheet.

Instructions: Go to http://aaahq.org/asclogin.cfm to log in and prepare responses to the following. Provide codification references for your responses.

Identify the literature that addresses the disclosure of accounting policies.
How are accounting policies defined in the literature?
What are the three scenarios that would result in detailed disclosure of the accounting methods used?
Item 4

Your client is in the planning phase for a major plant expansion, which will involve the construction of a new warehouse. The assistant controller does not believe that interest cost can be included in the cost of the warehouse because it is a financing expense. Others on the planning team believe that some interest cost can be included in the cost of the warehouse, but no one could identify the specific authoritative guidance for this issue. Your supervisor asks you to research this issue.

Instructions: Go to http://aaahq.org/asclogin.cfm to log in and prepare responses to the following. Provide codification references for your responses.

Is it permissible to capitalize interest into the cost of assets? Provide authoritative support for your answer.
Discuss which assets qualify for interest capitalization.
Is there a limit to the amount of interest that may be capitalized in a period?
If interest capitalization is allowed, what disclosures are required?
General Requirements

APA style is not required, but solid academic writing?is expected.

This assignment uses a rubric. Please review the rubric prior to beginning the assignment to become familiar with the expectations for successful completion.

You are required to submit this assignment to LopesWrite. Refer to the LopesWrite Technical Support articles for assistance.

Items 1-4 provided with permission for use in ACC-616 from: Keiso, D. E., Weygandt, J. J., & Warfield, T. D. (2016). Intermediate accounting (16th ed.). Danvers, MA: John Wiley & Sons, Inc.

(Also, I have attached what I have done. It is not complete, but it is a starting point)

Notes from the Professor:

Description

Hello:

I received a really great question on how best to approach the FASB Codification Assignment. This is what I provided--I hope this helps in developing your skills from 'copy and paste' to articulating in essay format our responses. Remember, we are not 'just answering questions'...you demonstrated that skill as undergraduates. Now, we take the readings and synthesize what was written, paraphrase it in our own words, and properly cite our sources.

What I would do, is first, you can have a header for each of the questions/topics. For example, I would have aheader called: Item 1: Accounting Estimates and Accounting Changes.

I would then have a paragaph that covers what a change in accounting estimate is, in your own words with an example (Cite your source though in the paragraph). I would then have another paragraph on describing the differences between an accounting change and an accounting estimate (again, with example and citation). So, you can write a minimum of 2 paragraphs as if you are writing an essay response on these concepts.

The key is can you articulate, through synthesis and paraphrasing the concepts and can you provide examples that demonstrate how the concept may be applied in practice.

When we are covering information on guidance, it is more than just providing the link. Again, provide an essay response as to what concerns are addressed regarding accounting disclosures and provide examples.

FASB Codification Assignment

Item 1

Access the glossary (Master Glossary) to answer the following

1. What is a change in accounting estimate?

A change in accounting estimate is a change that affects the carrying amount of an existing assets or liabilities or alters the subsequent accounting for existing or future assets or liabilities. The change in accounting estimate results from new information or in some cases that the estimate may have been proven to be incorrect. The change in accounting estimate is a necessary part of the ongoing process of reviewing the present status and future benefits and obligations related to assets and liabilities. Examples of the necessary change in accounting estimates are allowance for doubtful accounts, reserve or obsolete inventory, useful life and salvage values of depreciable assets, and warranty obligations.

2. How is a change in accounting principle distinguished from a “change in accounting estimate affected by a change in accounting principle?”

A change in accounting estimate affected by a change in accounting principle is a change in accounting estimate that is inseparable from the effect of a related change in accounting principle. A change in accounting principle reflects when there are two or more Generally Accepted Accounting Principle (GAAP) that apply to a particular situation, when the accounting principle formerly used is no longer generally accepted, or a change in the method of applying the principle. A change in accounting principle can be distinguished from a change in method of inventory method, such as change from FIFO method to a different type of method that causes a change in the cost. Examples of a change in estimate affected by a change in principle are a change in the method of depreciation, amortization, or depletion for long-lived, nonfinancial assets

Item 2

What guidance does the codification provide concerning the format of accounting disclosures?

Codifications references: ASC 235-10-50 Paragraph 6

50-6 “This Subtopic recognizes the need for flexibility in matters of format (including the location) of disclosure of accounting policies provided that the entity identifies and describes its significant accounting policies as an integral part of its financial statements in accordance with the provisions of this Subtopic. Disclosure is preferred in a separate summary of significant accounting policies preceding the notes to financial statements, or as the initial note, under the same or a similar title”.

Item 3

In light of the full disclosure principle, investors and creditors need to know the balances for assets, liabilities, and equity as well as the accounting policies adopted by management to measure the items reported in the balance sheet.

Instructions: Go to http://aaahq.org/asclogin.cfm to log in and prepare responses to the following. Provide codification references for your responses.

1. Identify the literature that addresses the disclosure of accounting policies.

Codifications references: ASC 235-10-05 Overview and Background

General Note: The Overview and Background Section provides overview and background material for the guidance contained in the Subtopic. It does not provide the historical background or due process. It may contain certain material that users generally consider useful to understand the typical situations addressed by the standards. The Section does not summarize the accounting and reporting requirements.

Codifications references: ASC 235-10-50 Paragraphs 1-2, & 5-6

50-1 “Information about the accounting policies adopted by an entity is essential for financial statement users. When issuing the financial statement in order to fairly present financial position, cash flows, and a description in accordance with GAAP, all significant accounting policies of the entity (including the disclosure of the pertinent accounting policies) need to be integrally included and disclosed in the financial statement”.

50-2 “ The provisions above “are not intended to apply to unaudited financial statements issued as of a date between annual reporting dates if the reporting entity has not changed its accounting policies since the end of its preceding fiscal year”.

50-5 “financial statement disclosure of accounting policies shall not duplicate details presented elsewhere as part of the financial statements. In some cases, the disclosure of accounting policies shall refer to related details presented elsewhere as part of the financial statements; for example, changes in accounting policies during the period shall be described with cross-reference to the disclosure required by Topic 250”.

In addition, the need for flexibility in matters of format of disclosure of accounting policies is also important (especially the use of subtopic). 50-6 “Disclosure is preferred in a separated summary of significant accounting policies preceding the notes to financial statements (notes), or as the initial note, under the same or similar title.”

2. How are accounting policies defined in the literature?

Codifications references: ASC 235-10-05 Paragraph 3

05-3 “The accounting policies of an entity are the specific accounting principles and the methods of applying those principles that are judged by the management of the entity to be the most appropriate in the circumstances to present fairly financial position, cash flows, and results of operations in accordance with generally accepted accounting principles (GAAP) and that, accordingly, have been adopted for preparing the financial statements”.

Thus, accounting policies includes methods or systems of measuring, estimating, and applying principles to fairly present an entity’s financial position and other financial statements. Therefore, the accounting policies adopted by an entity should be well represent the entity and help readers understand the entity’s overall financial position.

3. What are the three scenarios that would result in detailed disclosure of the accounting methods used?

Codifications references: ASC 235-10-50 Paragraphs 3

50-3 “Disclosure of accounting policies shall identify and describe the accounting principles followed by the entity and the methods of applying those principles that materially affect the determination of financial position, cash flows, or results of operations. In general, the disclosure shall encompass important judgments as to appropriateness of principles relating to recognition of revenue and allocation of asset costs to current and future periods; in particular, it shall encompass those accounting principles and methods that involve any of the following:

a. A selection from existing acceptable alternatives

b. Principles and methods peculiar to the industry in which the entity operates, even if such principles and methods are predominantly followed in that industry

c. Unusual or innovative applications of GAAP”.

Item 4

Your client is in the planning phase for a major plant expansion, which will involve the construction of a new warehouse. The assistant controller does not believe that interest cost can be included in the cost of the warehouse because it is a financing expense. Others on the planning team believe that some interest cost can be included in the cost of the warehouse, but no one could identify the specific authoritative guidance for this issue. Your supervisor asks you to research this issue.

Instructions: Go to http://aaahq.org/asclogin.cfm to log in and prepare responses to the following. Provide codification references for your responses.

1. Is it permissible to capitalize interest into the cost of assets? Provide authoritative support for your answer.

YES . According to Codifications references: ASC 835-20 , it is permissible to capitalize interest into the cost of assets.

Codifications references: ASC 835-20-05-01

05-1 “This Subtopic establishes standards of financial accounting and reporting for capitalizing interest cost as a part of the historical cost of acquiring certain assets. The historical cost of acquiring an asset includes the costs necessarily incurred to bring it to the condition and location necessary for its intended use. If an asset requires a period of time in which to carry out the activities necessary to bring it to that condition and location, the interest cost incurred during that period as a result of expenditures for the asset is a part of the historical cost of acquiring the asset”.

2. Discuss which assets qualify for interest capitalization.

Codifications references: ASC 835-20-15-5

“Interest shall be capitalized for the following types of assets (qualifying assets):

a. Assets that are constructed or otherwise produced for an entity's own use, including assets constructed or produced for the entity by others for which deposits or progress payments have been made.

b. Assets intended for sale or lease that are constructed or otherwise produced as discrete projects (for example, ships or real estate developments).

c. Investments (equity, loans, and advances) accounted for by the equity method while the investee has activities in progress necessary to commence its planned principal operations provided that the investee's activities include the use of funds to acquire qualifying assets for its operations. The investor's investment in the investee, not the individual assets or projects of the investee, is the qualifying asset for purposes of interest capitalization.”

3. Is there a limit to the amount of interest that may be capitalized in a period?

Codifications references: ASC 835-20-30 Paragraph 6

30-6 “The total amount of interest cost capitalized in an accounting period shall not exceed the total amount of interest cost incurred by the entity in that period. In consolidated financial statements, that limitation shall be applied by reference to the total amount of interest cost incurred by the parent entity and consolidated subsidiaries on a consolidated basis. In any separately issued financial statements of a parent entity or a consolidated subsidiary and in the financial statements (whether separately issued or not) of unconsolidated subsidiaries and other investees accounted for by the equity method, the limitation shall be applied by reference to the total amount of interest cost (including interest on intra-entity borrowings) incurred by the separate entity”.

4. If interest capitalization is allowed, what disclosures are required?

Codifications references: ASC 835-20-50 Paragraph 1

50-1 “An entity shall disclose the following information with respect to interest cost in the financial statements or related notes:

a. For an accounting period in which no interest cost is capitalized, the amount of interest cost incurred and charged to expense during the period

b. For an accounting period in which some interest cost is capitalized, the total amount of interest cost incurred during the period and the amount thereof that has been capitalized”.

References:

Items 1-4 provided with permission for use in ACC-616 from: Keiso, D. E., Weygandt, J. J., & Warfield, T. D. (2016). Intermediate accounting (16th ed.). Danvers, MA: John Wiley & Sons, Inc.

Asc.fasb.org. 1999. FASB Accounting Standards Codification®. [online] Available at: [Accessed 28 August 2020].