Changes in Concepts for Analysis
Sports Pro Athletic, Inc is a company that deals with the manufacturing of various sporting equipment. Recently the company’s management has decided to change some few accounting concepts in relation to the international accounting standards and the company’s accounting policy. The first change that they have decided to change is the depreciation of the production machinery from the double declining balance method to the production method. The second concept/principle the company is changing is the salvage values used in computing depreciation for its office equipment. Lastly, they have changed the specific subsidiaries constituting the group of companies for which consolidated financial statements are presented.
Change in the depreciation of the production machinery
The first change is when the depreciation of the production machinery is being changed. Double declining balance method is a method of depreciation used in the calculation of the depreciation of the different fixed assets. It usually follows the straight-line method but it is multiplied with the factor two due to its double effect. However, it has a salvage value, which only applies if the equipment has been depreciated to the point where it has gone lower than the salvage (Kennon, 2011). Production method, depreciation is calculated where the useful life of the product is expressed in terms of the total number of units which are expected to be produced by the machine at the end of its life (Porter, & Norton, 2010).
When changing from one concept to another in the accounting system the company should consider the following rules. First, they should follow the international accounting standards. Secondly, change is only made in effective from the year in which it has been affected (Tracy, 2008). Therefore, in the case of your company, the effect is to be made in the year of January 2010, where they will start using the new accounting method of depreciation, which is the production method of depreciation. A good example to show the necessary changes will be as follows. If the production machine of the company initial cost was $1,750,000 and it has being depreciated to $ 750,000 after, five years using the double declining balance method. The machine has a useful life of twelve years and salvage value of $10,000 (Calculator soup, 2011).
To show this in the current books of accounting, using the international standards of accounting, the cost of the machine remains $1,750,000, the accumulated depreciation will be $1,000,000, the useful life of the machine will be twelve years and the salvage value will be $10,000. This will be affected in the accounting years of January 2010 using the new method. In addition to this, the accountants of the company are expected to show this in the final accounts of the year in which this has been affected and they are supposed to write small notes indicating the necessary changes of the accounting changes at the end of every financial statement. Moreover, this change will affect the tax payments and the profits at the end of the year. Therefore, it would be very important of this note was shown to the respective accounting statements (Reimers, 2007).
Change in the salvage value of the office equipment
The second change, which has been made in the books of accounts, is the salvage value used in the computation of depreciation of the office equipment. Salvage value can be defined as the amount of money realized at the end of the usage life of machine or equipment (United States, 2010). This means that after a machines has been used, the value, which the machine can be re-sold, or the value, which the machine has obtained after its usage (Investment.com, 2011). This value is determined using methods of depreciation, which are in accordance with international standards of accounting (Stittle & Wearing, 2008). However, it is important to note that the salvage value of the office equipment may change as result of change in the method of depreciation or other economic factors affecting the market forces. To show this an example can be used to explain the change better (Patry, Statistics Canada & Statistics Canada, 2007).
If the office equipment had a salvage value of $15,000, which was calculated seven years ago, using the double reducing balance method. This may have also been done in accordance with the market forces, which were there seven years ago. However, due to the changes in the market forces the company has decided to change their salvage value. After using the double reducing balance method and the different percentage changes in the market forces the company has come up with the salvage value of $13,000 (Financial Accounting Standards Board, 2007).
To show this change in the books of account the company should follow the rules of the international accounting standards. First, this change is to be effected in the year in which the change has occurred. For this case, the change is to be reflected in the current year, which is January 2010. They should indicate the method in which they have used to calculate the salvage and the different percentage values that have been used in the calculation of the salvage values. Lastly, they should show, which areas have been affected by the salvage values (Garrison & Noreen, 2000). It is for this reason that the company should try to make it clear to the users of the accounting statements.
Change in the specific subsidiaries constituting the group of companies
The last change in which the company has made changes is where some specific subsidiary companies constituting the group of companies have been changed. Subsidiary companies are those companies, which are being controlled by a larger company known as the parent company (Chatham-Kent, 2000). The subsidiary companies are part of the parent company and the subsidiary companies have the right to be included and presented with the consolidated financial statement of the company.
The consolidated financial statements can be described as the financial statement of the company, which are prepared for two companies, which are working together. The companies can either be working in a certain business together (Brewer, Garrison & Noreen, 2010). These two companies are expected to prepare their different consolidated accounts, which are presented to show that the two companies are conducting business together. Therefore, incase there has been a change in the subsidiary companies the final accounting statement of the company are expected to change.
However, their may be changes in the different subsidiary companies due to either inclusion or omission of the subsidiary companies (Tidwell, 1974). These changes can happen due to, if the parent company decides to sell or buys the companies subsidiary company. When the parent company sells its controlling shares of the subsidiary company, which were more that fifty-one percent, the subsidiary company ceases from becoming part of the parent company. This means that the parent company must have the full controlling rights of ownership of another company. Therefore, for a parent company to become a mother company it must have more than fifty-one percent shares of the subsidiary company (Ould & Plumb, 1991).
To show these changes an example will be required to evaluate and explain better. For example, if the company parent has seven subsidiary companies in which they are conducting business together and after several years, two of the subsidiaries finish conducting business with them. This means that they will no longer prepare the consolidated financial statements again. Therefore, the parent company must indicate this in its final accounting statements to indicating the reason as to why the different accounting statements have been changed (Heisinger, 2008). In addition to this, the company should indicate this in the notes while preparing the financial statements so that the users of the different financial statements may have clear understanding as to what has happened.
Therefore, the following should be noted when these changes are being effected in the books of account as they occur. The different international accounting standards should be followed while doing. The company accounting policies should also be followed to indicate this change in the accounting statements (Law, 2007). The changes should be effected in the accounting period in which they have occurred. Lastly, the final accounting statement should contain the necessary notes showing the different changes for the purposes of the different users of the financial statements (Hansen & Mowen, 2006).
Brewer, P. C., Garrison, R. H., & Noreen, E. W. (2010). Managerial accounting. Boston: McGraw-Hill Create.
Calculator Soup, (2011). Double reducing balance method of depreciation. Calculator Soup. Retrieved from http://www.calculatorsoup.com/calculators/financial/depreciation-declining-double.php
Chatham-Kent (Ont.). (2000). Consolidated financial statement of the Corporation of the Municipality of Chatham Kent, December 31, 2000. Chatham-Kent, Ont: The City,.
Financial Accounting Standards Board. (2007). Noncontrolling interests in consolidated financial statement, an amendment of ARB no. 51: Statement of financial accounting standards no. 160. Norwalk, Conn: Financial Accounting Standards Board.
Garrison, R. H., & Noreen, E. W. (2000). Managerial accounting. Boston: Irwin/McGraw-Hill.
Hansen, D. R., & Mowen, M. M., (2006). Managerial accounting. Mason, OH: Thomson/South-Western.
Heisinger, K. (2008). Introduction to managerial accounting. Boston, Mass: Houghton Mifflin.
Investment.com, (2011). Salvage Value. Investment.com. Retrieved from http://www.investorwords.com/4372/salvage_value.html
Juan, E., N., (2001). Consolidated accounts: Singapore. New York, NY: Talisman.
Kennon, J. (2011). Double Decline Balance Depreciating Method. About.com. Retrieved from http://beginnersinvest.about.com/od/incomestatementanalysis/a/double-declining-balance-depreciation-method.htm
Law, D. W., Peter C. Brewer, Ray H. Garrison, and Eric W. Noreen. (January 01, 2007). Introduction to Managerial Accounting. Issues in Accounting Education, 22, 1, 119.
Money Terms, (2011). Consolidated Accounts. Moneyterms.co.uk. Retrieved from http://moneyterms.co.uk/consolidated_ac/
Ould, J., & Plumb, R. (1991). Controlling subsidiary companies. Woodhead-Faulkner.
Patry, A., Statistics Canada., & Statistics Canada. (2007). Economic depreciation and retirement of Canadian assets: a comprehensive empirical study and retirement of Canadian assets: A comprehensive empirical study. Ottawa: Statistics Canada.
Porter, A., G. & Norton, C., L., (2010). Using Financial Accounting Information: The Alternative to Debits and Credits. New York, NY: Cengage Learning.
Reimers, J. L. (2007). Financial accounting. Upper Saddle River, N.J: Prentice Hall.
Stittle, J., & Wearing, R. (2008). Financial accounting. Los Angeles: Sage Publications.
Tracy, J. A. (2008). Accounting for dummies. Hoboken, NJ: Wiley Pub., Inc.
Tidwell, S., B., (1974). Financial and managerial accounting for elementary and secondary school systems. New York, NY: Research Corporation, Association of School Business Officials
United States. (2010). Full committee hearing on bonus depreciation: What it means for small business : hearing before the Committee on Small Business, United States House of Representatives, One Hundred Eleventh Congress, second session, hearing held July 14, 2010. Washington: U.S. G.P.O.