Chapter 23

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					Chapter 23. Accounting Changes and Errors

Chapter topics

1. Change in accounting method

2. Change in accounting estimate

3. Change in accounting entity

4. Correction of errors
Topic 23-1: Accounting Change

Readings

1. Textbook pages 1198-1213

Activities

23-1.1. Obtain the 2008 annual report of C&D Technologies at
http://www.sec.gov/Archives/edgar/data/808064/000119312508079165/d10k.htm
Then, obtain the 2007 annual report of C&D Technologies at
http://www.sec.gov/Archives/edgar/data/808064/000116923207001886/d71547_10-k.txt
Compare the numbers reported for fiscal 2007 as reported in the 2007 annual report to the numbers for fiscal
2007 as reported in the 2008 annual report. You will notice that the numbers are different. Why? What sort of
accounting change has occurred? Was the change made prospectively or retrospectively?
What journal entry must C&D have made during 2008 to “recast” their 1/31/2007 balance sheet? Show the
journal entry in detail.

Footnote disclosure found in 2008 annual report:

2. CHANGE IN METHOD OF ACCOUNTING

       On September 7, 2007 the Company changed the method of accounting for its inventory from the last-in, first-out (“LIFO”)
method to the first-in, first-out (“FIFO”) method. With the divestiture of the Company’s Power Electronics Division which was
announced on August 31, 2007, the Company’s remaining business is all battery-related, and as a result, the Company believes the
FIFO inventory method provides better comparability with industry peers, more accurate matching of the Company’s revenues and
expenses, a relevant and meaningful balance sheet valuation methodology and a more efficient financial closing process. In
accordance with SFAS No. 154, “Accounting Changes and Error Corrections”, the Company has retrospectively applied this change in
method of inventory costing. Had the Company continued to use the LIFO method inventory would have decreased and the net loss
for the year would have increased by $21,711.

20. DISCONTINUED OPERATIONS
      In connection with the restructuring plan discussed in note 15, the Company completed the sale of its Power Electronics
Division on August 31, 2007 for $85,000 and recognized a gain of approximately $3,900. As a result of this decision and in
accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company presents the results
of operation of the Power Electronics Division for the fiscal years ended January 31, 2008, 2007 and 2006, respectively, as
discontinued operations.

      On October 24, 2007, the Company announced the sale of certain assets of its Motive Power Division. As a result of this
decision and in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company
presents the results of operation of the Motive Power Division for the fiscal years ended January 31, 2008, 2007 and 2006,
respectively, as discontinued operations. The Company received $3,100 during the fiscal year for the sale of finished goods and
certain identified equipment.

      At January 31, 2007, property, plant and equipment in the amount of $3,538 related to the Motive Power Division was classified
as held for sale. In addition, at January 31, 2007, inventory in the amount of $3,869 was also classified as held for sale. As of
January 31, 2008, the balance sheet has $450 in fixed assets related to discontinued operations that are held for sale.
                                                                   2007 2007 restated                  acctg change      disc op            total
ASSETS
Current assets:
Cash and cash equivalents                                       $12,596                        5,384                          ($7,212)               ($7,212)
Accounts receivable, less allowance for doubtful accounts
of $1,869 in 2007 and $2,889 in 2006                              84,241                      55,397                         ($28,844)              ($28,844)
Inventories                                                       88,229                      53,172              9022       ($44,079)              ($35,057)
Deferred income taxes                                                  134                      134                                  $0                  $0
Prepaid taxes                                                      2,634                       2,634                                 $0                  $0
Other current assets                                               7,082                       6,121                               ($961)             ($961)
Assets held for sale                                                                      132,878                 2755      $130,123            $132,878
---------------------------------------------------------------
                                                      --------------         --------------
Total current assets                                             194,916                  255,720                11777        $49,027               $60,804


Property, plant and equipment, net                               100,815                      80,460                         ($20,355)              ($20,355)
Deferred income taxes                                                  531                      531                                  $0                  $0
Intangible and other assets, net                                  35,429                      15,543                         ($19,886)              ($19,886)
Goodwill                                                          68,520                      59,733                          ($8,787)               ($8,787)
---------------------------------------------------------------
                                                      --------------
TOTAL ASSETS                                                   $400,211                   411,987                11777                 -1           $11,776
                                                          ============================


LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt                                                  $6,498                        1,286                          ($5,212)               ($5,212)
Accounts Payable                                                  54,215                      40,282                         ($13,933)              ($13,933)
Book overdrafts                                                    2,310                       2,310                                 $0                  $0
Accrued liabilities                                               21,910                      13,708                          ($8,202)               ($8,202)
Other current liabilities                                         32,010                      28,983                          ($3,027)               ($3,027)
Liabilities held for sale                                                                     36,532                          $36,532               $36,532
---------------------------------------------------------------
                                                      --------------         --------------
Total current liabilities                                        116,943                  123,101                                  6,158             $6,158


Deferred income taxes                                              9,155                       9,155                                 $0                  $0
Long-term debt                                                   147,925                  147,925                                    $0                  $0
Other liabilities                                                 34,750                      28,591                          ($6,159)               ($6,159)
---------------------------------------------------------------
                                                      --------------
Total liabilities                                                308,773                  308,772                                      -1                ($1)
---------------------------------------------------------------
                                                      --------------
Commitments and contingencies (see Note 9)


Minority interest                                                  7,548                       7,548                                 $0                  $0


Stockholders' equity:
Common stock, $.01 par value, 75,000,000
shares authorized; 29,040,960 and 28,828,428
shares issued in 2007 and 2006, respectively                           290                      290                                  $0                  $0
Additional paid-in capital                                        74,188                      74,188                                 $0                  $0
Treasury stock, at cost, 3,391,536 and
3,380,102 shares in 2007 and 2006, respectively                  -47,110                  -47,110                                    $0                  $0
Accumulated other comprehensive loss                             -13,952                  -13,952                                    $0                  $0
Retained earnings                                                 70,474                      82,251             11777               $0             $11,777
---------------------------------------------------------------
                                                      --------------
Total stockholders' equity                                        83,890                      95,667                                   0                 $0
---------------------------------------------------------------
                                                      --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                     $400,211                   411,987                11777               ($1)           $11,776
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended JANUARY 31,
(Dollars in thousands, except per share data)

                                                       2007 2007 restated     acctg change     disc op        total
--------------------------------------------------
                                           ----------------
<S>                                        <C>
NET SALES                                       $524,580           287,241                        -237339 ($237,339)
--------------------------------------------------
                                           ----------------
COST OF SALES                                     450,995          249,385             -3344 ($198,266) ($201,610)
--------------------------------------------------
                                           ----------------
GROSS PROFIT                                        73,585          37,856              3344     ($39,073)      ($35,729)

OPERATING EXPENSES:
Selling, general and administrative expenses        60,907          33,228                       ($27,679)      ($27,679)
Research and development expenses                   27,302           6,232                       ($21,070)      ($21,070)
Identifiable intangible asset impairment   --
Goodwill impairment                                 13,947                                       ($13,947)      ($13,947)
--------------------------------------------------
                                           ----------------
OPERATING LOSS                                     -28,571           -1,604             3344     $23,623         $26,967
--------------------------------------------------
                                           ----------------
Interest expense, net                               13,437          11,260                        ($2,177)        ($2,177)
Other expense (income), net                           1,245          1,393                           $148            $148
--------------------------------------------------
                                           ----------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST -43,253              -14,257             3344     $25,652         $28,996
--------------------------------------------------
                                           ----------------
Provision (benefit) for income taxes                  4,094             919                       ($3,175)        ($3,175)
--------------------------------------------------
                                           ----------------
LOSS BEFORE MINORITY INTEREST                      -47,347          -15,176             3344     $28,827         $32,171
--------------------------------------------------
                                           ----------------
Minority interest                                    -1,273          -1,273                              $0              $0

Loss from continuing operations                     -46,074         -13,903             3344     $28,827         $32,171

Loss from discontinued operations                                   -28,827                      ($28,827)      ($28,827)


--------------------------------------------------
                                           ---------------- ----------------
NET LOSS                                        ($46,074)            -42,730            3344             $0           $3,344
==================================================
                                           ================ ================
AJE to record discontinued operations
                                               DR          CR
Cash and cash equivalents                                    7,212
Accounts receivable                                         28,844
Inventories                                                 44,079
Other current assets                                           961
Assets held for sale                           130123
Property, plant and equipment                               20,355
Intangible and other assets                                 19,886
Goodwill                                                     8,787
Short-term debt                                  5212
Accounts payable                                13933
Accrued liabilities                              8202
Other current liabilities                        3027
Liabilities held for sale                                   36,532
Other current liabilities                        6159
Sales                                          237339
Cost of sales                                              198266
Selling, general and administrative expenses                27,679
Research and development                                    21,070
Goodwill impairment                                         13,947
Interest expense                                             2,177
Other expense                                       148
Provision for income tax expense                             3,175
Loss from discountinued operations              28827
                                               432970      432970

AJE to record accounting change

Inventories                                         9022
Assets held for sale                                2755
Cost of sales                                                3,344
Retained earnings                                            8,433
                                                11777       11777
23-1.2. Obtain the quarterly financial statements for Teekay Corp. for Q1 2008 at
http://www.sec.gov/Archives/edgar/data/911971/000091197108000018/form6k.htm

The company made an accounting change during Q1 2008. What type of change was made? What sort of
disclosure did they make regarding the change? Was the change handled retrospectively or prospectively?

Footnote disclosure:

17.      Change in Accounting Estimate

Because of an increase in steel prices and scrap values for vessels, the Company has increased the estimated residual value of certain
of its vessels. As a result, depreciation and amortization expense has decreased by $3.3 million and net income has increased by $3.3
million, or $0.05 per share for the three months ended March 31, 2008.
23-1.3. Obtain the 1999 annual report of Exxon at
http://www.sec.gov/Archives/edgar/data/34088/0000930661-00-000656.txt
Next, obtain the 1998 annual report of Exxon at http://www.sec.gov/Archives/edgar/data/34088/0000930661-
99-000626.txt
Compare the 1998 financial statement numbers as reported in the 1999 annual report to the 1998 financial
statement numbers as reported in the 1998 annual report. Are the amounts the same? Why? What sort of
accounting change occurred? How was the change handled? Prospectively or retrospectively?

3. Merger of Exxon Corporation and Mobil Corporation

On November 30, 1999, a wholly-owned subsidiary of Exxon Corporation (Exxon)
merged with Mobil Corporation (Mobil) so that Mobil became a wholly-owned
subsidiary of Exxon (the "Merger"). At the same time, Exxon changed its name to
Exxon Mobil Corporation (ExxonMobil). Under the terms of the agreement,
approximately 1.0 billion shares of ExxonMobil common stock were issued in
exchange for all the outstanding shares of Mobil common stock based upon an
exchange ratio of 1.32015. Following the exchange, former shareholders of Exxon
owned approximately 70 percent of the corporation, while former Mobil
shareholders owned approximately 30 percent of the corporation. Each outstanding
share of Mobil preferred stock was converted into one share of a new class of
ExxonMobil preferred stock.

   As a result of the Merger, the accounts of certain refining, marketing and
chemicals operations jointly controlled by the combining companies have been
included in the consolidated financial statements. These operations were
previously accounted for by Exxon and Mobil as separate companies using the
equity method of accounting.

   The Merger was accounted for as a pooling of interests. Accordingly, the
consolidated financial statements give retroactive effect to the Merger, with
all periods presented as if Exxon and Mobil had always been combined. Certain
reclassifications have been made to conform the presentation of Exxon and Mobil.
23-1.4. Obtain the 2006 annual report of Stage Stores, Inc. at
http://www.sec.gov/Archives/edgar/data/6885/000000688507000046/form10k.htm

Read footnote #2 to the financial statements. What sort of accounting change occurred during 2006? How was
the change handled? Prospectively or retrospectively? Was the approach used typical or atypical for this type
of change? Why was this approach used? Is it acceptable under GAAP?

NOTE 2 – CHANGES IN ACCOUNTING PRINCIPLES

          The Company changed its method of accounting for merchandise inventories from the retail method to the weighted average
cost method (the “cost method”) during the second quarter of 2006, retrospectively applied as of the beginning of 2006. The Company
believes the cost method is preferable as it results in an inventory valuation that more closely reflects the acquisition cost of the
Company’s inventory. In addition, the cost method provides for a better matching of cost of sales with related sales. Cost of sales
under the cost method represents the weighted average cost of the individual item sold rather than the cost of an item based on an
average margin realized on an entire department as under the retail method. In connection with the change in its method of accounting
for merchandise inventories to the cost method, the Company also changed its accounting policy related to its historical treatment of
distribution center costs associated with preparing inventory for sale, such as distribution payroll, benefits, occupancy, depreciation,
and other direct operating expenses, and now capitalizes these related costs. The Company believes it is preferable to capitalize these
costs as it incorporates a key component of the costs associated with preparing inventory for sale into the valuation of inventory on a
cost basis and achieves a better matching of cost of sales with related sales. The effect of the changes in accounting principles for
periods prior to 2006 is not determinable as the period-specific information required to value inventory on the cost method is
not available for periods prior to January 29, 2006. As stated in SFAS 154, when it is impracticable to determine the
cumulative effect of applying a change in accounting principle to any prior period, the new accounting principle shall be
applied as if the changes were made prospectively as of the earliest date practicable. Therefore, the Company adopted the new
methods of accounting for inventory retrospectively to January 29, 2006, the first day of 2006. The effect of the changes in
accounting principles on inventory values as of the beginning of 2006 was a net reduction of $15.6 million, of which $21.5 million
was a reduction related to the change to the cost method, partially offset by a $5.9 million increase related to capitalizing distribution
center costs. Approximately $9.8 million, net of tax of approximately $5.8 million, was recorded as a reduction of retained earnings in
the Statement of Stockholders’ Equity as of the beginning of 2006.
23-1.5

Distinguish between a change in accounting method and a change in accounting estimate. Are the two
accounted for the same? Differently? Explain.

Change in accounting method: retrospectively

Change in accounting estimate: prospectively
Topic 23-2: Error Corrections

Readings

1. Textbook pages 1213-1225

Activities

23-2.1. Obtain the 2007 annual report of Dell Computer at
http://www.sec.gov/Archives/edgar/data/826083/000095013407022267/d48366e10vk.htm

Next, obtain the 2006 annual report of Dell Computer at
http://www.sec.gov/Archives/edgar/data/826083/000095013406005149/d33857e10vk.htm

Compare the 2006 financial statement numbers as reported in the 2007 annual report to the 2006 financial
statement numbers as reported in the 2006 annual report. Are the numbers the same or different? Why? What
happened? How was this event handled in the 2007 annual report?

Note: the circumstances involving this event are outlined in two Wall Street Journal articles (“Dell Details
Accounting Woes” 10/31/2007; “Dell to Restate” 8/17/2007). This event shows how actions that seem fairly
harmless at the time can be viewed in a very different light after the fact and can land you in big trouble.
Anything approaching aggressive accounting is very unwise in today’s environment.

Software revenue recognition:

The new filings suggest that one of the biggest problems uncovered in the investigation was the way Dell
recognized revenue on certain software products it sells. Dell, a large reseller of other companies' software
products, said it historically recognized revenue from software licenses at the time the products were sold, while
deferring some revenue associated with support.

The Round Rock, Texas, company said in its filings that based on its internal review, it should have deferred the
recognition of more revenue from software sales. In its restated financial statement for fiscal 2005, Dell
deducted $105 million from software revenue because of the issues.

Warranty liabilities:

Another issue was product warranties. In some cases, Dell said it improperly recognized revenue associated
with warranties over a shorter period of time than the duration of the contract, according to the filings.
23-2.2. Textbook M23-2

See solutions manual

23-2.3 Textbook M23-3

See solutions manual

23-2.4 Textbook E23-13

See solutions manual

23-2.5 Textbook P23-9

See solutions manual

23-2.6 Textbook P23-10

See solutions manual

23-2.7 Textbook P23-11

See solutions manual

				
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