For each scenario above, state if the situation is a change in policy, a correction of an error, or a change in estimate. Explain your answers. Also state if the situation requires a restatement of retained earnings on January 1, Year 4. What disclosures, if any, are required. Fully discuss any ethical implications related to the scenarios.
The recently hired CFO of Finger Lakes Vacation Sales Corp. is concerned about some of the Year 4 situations. The CFO has come to you for advice. Finger Lakes Vacation Sales Corp. follows IFRS.
Required
For each scenario above, state if the situation is a change in policy, a correction of an error, or a change in estimate. Explain your answers. Also state if the situation requires a restatement of
The items of concern are:
A. Finger Lakes Vacation Sales Corp. has provided a loyalty rewards program to customers for the past 6 years. During that time, the amounts were insignificant, and no revenues were deferred, and no accruals were made. With Year 4 changes to the plan, the amount of rewards has become material. The Controller decided that starting in January, Year 4, Finger Lakes Vacation Sales Corp. will defer the revenue related to these rewards. This will result in a liability.
B. In Year 4, Finger Lakes Vacation Sales Corp. decided to change its depreciation for PP&E to depreciating based on components. The company hired appraisers to determine the relative value of the components. Finger Lakes Vacation Sales Corp. determined that in prior years the documentation to
C. One division of Finger Lakes Vacation Sales Corp. has shown consistent increases to net income every year for the past several years. The CFO noted that charges against income due to obsolescence are much lower than the other divisions. After discussing this with the Controller, the CFO determined that the Controller knowingly makes low estimates in order to “Manage” the bottom line.
D. Products sold by Finger Lakes Vacation Sales Corp. include a 3-year warranty. Warranty expense is estimated at 1% of sales. Due to a number of improvements in Year 4, Finger Lakes Vacation Sales Corp. believes that a warranty estimate of .5% of sales is appropriate. During Years 2 and 3, warranty costs were $56,000 and $64,000 respectively.
E. In another division, the CFO noticed there were many changes to the depreciation assumptions. Asset’s useful lives were substantially reduced when they were halfway through their original useful lives. For example, the useful life of one piece of heavy equipment was changed from 10 years to 6 years in its fifth year of operation. The divisional manager told the CFO that it is good practice to change estimates of the useful life of assets when better information is available. The CFO also determined that a large portion of the divisional manager’s compensation is based on bonuses. related to divisional profit.
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