Sydney Corporation changed the way it depreciates its computers from the sum-of-

Question

Sydney 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, 2018. Domingo also changed its estimated residual value used in computing depreciation for its office building. At the end of 2018, Domingo changed the specific subsidiaries constituting the group of companies for which its consolidated financial statements are prepared. Required:

1. For each accounting change Domingo undertook, indicate the type of change and how Domingo should report the change. Be specific.

2. Why should companies disclose changes in accounting principles?

Explanation / Answer

1. Change in depreciation method.

The change of deprection method from sum-of-the-year's-digit method to straight line method is called as change in accounting estimate. This leads to changes in depreciation value for every year and the accounting principle for the company. Domingo is required to report in the accounting notes the change in method of depreciation and the reason for the change.

2. Change in residual value

Change in the residual value of the office building results in the change of calculations of the depreciation. The change if material should be reported in the accounting notes of the company.

3. Change in subsidiaries constituting the group of companies

This change is a change in method of the accounting policy. Domingo is required to report the follwing :

(i) The change in the constitution of the group

(ii) The reason for the changes made

(iii) The financial impact on the consolidtaed financial statements due to the change in the exclusion of the subsidiary.

The reasons because of which the changes in the accounting principles should be disclosed are as follows:

1. The accounting principles determine the basis of recording the transactions, The disclosure of these changes enable the user to read and understand the financial statements better.

2. The impact of the changes on the financial statement reported enable to analyze the impact on the financial statements.

3. As per US GAAP the companies are mandatorily required to report the changes

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