Run Inc. Case

Topics: Financial statements, Income statement, Generally Accepted Accounting Principles Pages: 4 (1098 words) Published: September 8, 2012
RUN, INC. Case

1) What are the practical differences in the accounting for a change in estimate and a correction of an error? Why might managements prefer one approach to another? What pictures do the two accounting presentations paint for readers outside the company?

A change in estimate is a normal and ongoing process of a company. It usually arises from the appearance of new information that alters the current situation. Accounting for a change in estimate is treated prospectively. Companies do not need to disclose a change in estimate made as part of normal operation. However, if the change in estimate will affect future periods and also affect the current period, disclosures of the effect of the change are required. Correction of errors is a correction of an error in previous financial statements. It also may be viewed as change from one non-GAAP method to GAAP. Corrections of errors are shown as restatement and it is treated retrospectively. This is done by restating comparative financial statements along with prior period adjustment. The nature of the error correction must be disclosed in the year of the change and the effect on net income and earnings per share for all prior years presented. Managers might prefer a change in estimate over a correction of error because FASB views a change in estimate as a normal recurring adjustment and prohibits retrospective treatment. Corrections of errors are treated as mistakes committed in prior periods financial statements. Readers outside the company might see correction of error or material change in estimates as a way to manipulate income or shift income from one year to another.

2) Considering the fact that the corporate controller is only one of several officers of a company, and not the most senior officer, where do his or her responsibilities begin and end regarding the company's financial statements? Does the controller have a different responsibility for the financial reports than the Vice...
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