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UOPX ACC 306 - Analysis Case 20–10 - DRS Corporation

Course: Acc 306-
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Analysis Case 20–10 - DRS Corporation - Various changes ● LO1 through LO4DRS 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 specificsubsidiaries 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 20-10Requirement 1DRS's change in depreciation method for computers represents a change inestimate resulting from a change in accounting principle. This is because achange in the depreciation method is adopted to reflect a change in (a)estimated future benefits from the asset, (b) the pattern of receiving thosebenefits, or (c) the company’s knowledge about those benefits. Accordingly,the company reports the change prospectively; previous financial statementsare not recast. Instead, the company simply employs the straight-line methodfrom then on. The undepreciated cost remaining at the time of the changewould be depreciated using the straight-line method over the remaining usefullifeThe change in residual value for the office building is a change in accountingestimate. The company reports the change prospectively; previous financialstatements are not recast. Instead, the company simply employs the newresidual value estimate from then on. The undepreciated cost remaining at thetime of the change would be reduced by the new estimate of residual valueand the resulting amount would be depreciated over the remaining useful lifeof the building.DRS's change in the specific subsidiaries constituting the group of companiesfor which consolidated financial statements are presented is a change inreporting entity. A change in reporting entity is effected and disclosed byrecasting all prior-period financial statements in accordance with the methodof presenting the current financial statements of the new reporting entity. Inthe initial set of financial statements occurring after the change, the nature ofand reason for the change must be disclosed by footnote, but subsequentfinancial statements need not repeat the disclosures.Requirement 2Applying the same accounting principles from one reporting period to anotherenhances the comparability of accounting information across accountingperiods. The FASB’s conceptual framework describes consistency as one ofthe important qualitative characteristics of accounting information. Whenaccounting changes occur, the usefulness of the comparative financialstatements is enhanced with retrospective application of those changes,especially when assessing trends.If a change in accounting principle occurs, the nature and effect of achange should be disclosed. Disclosure is desirable because of thepresumption that an accounting principle once adopted will not

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