Analysis Case 20 10 DRS Corporation Various changes LO1 through LO4 DRS Corporation changed the way it depreciates its computers from the sum of the year s digits method to the straight line method beginning January 1 2011 DRS also changed its estimated residual value used in computing depreciation for its office building At the end of 2011 DRS changed the specific subsidiaries constituting the group of companies for which its consolidated financial statements are prepared Required 1 For each accounting change DRS undertook indicate the type of change and how DRS should report the change Be specific 2 Why should companies disclose changes in accounting principles Analysis Case 20 10 Requirement 1 DRS s change in depreciation method for computers represents a change in estimate resulting from a change in accounting principle This is because a change in the depreciation method is adopted to reflect a change in a estimated future benefits from the asset b the pattern of receiving those benefits or c the company s knowledge about those benefits Accordingly the company reports the change prospectively previous financial statements are not recast Instead the company simply employs the straight line method from then on The undepreciated cost remaining at the time of the change would be depreciated using the straight line method over the remaining useful life The change in residual value for the office building is a change in accounting estimate The company reports the change prospectively previous financial statements are not recast Instead the company simply employs the new residual value estimate from then on The undepreciated cost remaining at the time of the change would be reduced by the new estimate of residual value and the resulting amount would be depreciated over the remaining useful life of the building DRS s change in the specific subsidiaries constituting the group of companies for which consolidated financial statements are presented is a change in reporting entity A change in reporting entity is effected and disclosed by recasting all prior period financial statements in accordance with the method of presenting the current financial statements of the new reporting entity In the initial set of financial statements occurring after the change the nature of and reason for the change must be disclosed by footnote but subsequent financial statements need not repeat the disclosures Requirement 2 Applying the same accounting principles from one reporting period to another enhances the comparability of accounting information across accounting periods The FASB s conceptual framework describes consistency as one of the important qualitative characteristics of accounting information When accounting changes occur the usefulness of the comparative financial statements is enhanced with retrospective application of those changes especially when assessing trends If a change in accounting principle occurs the nature and effect of a change should be disclosed Disclosure is desirable because of the presumption that an accounting principle once adopted will not change