Question: Competency
Justify the proper accounting for transactions with respect to accounting changes and error corrections using the accounting codification and other accounting research tools.
Scenario: CM Corporation (CMC) was founded six years ago by Phil Connor and Eric Martin. The company designs, installs, and services security systems for high-tech companies. The founders, who describe themselves as "entrepreneurial geeks," met in a computer lab when they were teenagers and found they had common interests in working on security systems for critical industries. CMC hired you as a junior accountant this year.
Lately, Connor and Martin have been working with "radio frequency identification" (RFID) technology. They have developed a detailed system designed to track inventory items using RFID tags embedded invisibly in products. This technology has numerous inventory applications in multiple industries.
One of the most basic applications is tracking manufacturing components; if tagged components "go walking" (if employees attempt to take them), companies can easily track and find them. Connor and Martin have sold their system to several high-tech companies in the area. These companies have a number of government contracts that require extensive security systems to protect sensitive data from infiltration by terrorists and others. To date, CMC's cash flow from sales and services has adequately funded its operations.
CMC expects much growth potential for its products. As a result, they are considering going public and expanding internationally in the near future. Many of the issues you will address in this course project involve researching topics involving these anticipated events.
Instructions: Since CMC has decided to expand and possibly go public, it has been reviewing its operating policies. Connor and Martin are contemplating a change in the accounting for its equipment from the straight-line method to an accelerated method. However, they wonder how the company will report this accounting change and how it will affect their financial statements. As per CMC's request, they would like you to research and present your findings in a memorandum format on how to you feel they should justify and incorporate the accounting changes under both the US GAAP and IFRS standards.
In your memorandum, present your findings on the following:
1. What are the categories of accounting changes?
2. What are the accounting and reporting guidelines for a change in accounting principle related to depreciation methods?
3. What are the conditions that justify a change in depreciation method, as considered by CMC?
4. If they proceed with the change in depreciation methods, how will it affect their balance sheet and income statement (in general)?
5. Assume they do go public and are registered with the SEC. If CMC justifies a change in accounting method as preferable under the circumstances, and the circumstances change, can they switch back to the prior method of accounting before the change? Why or why not?
6. How does IFRS differ from GAAP regarding accounting changes? Are there any major issues?
Memorandum Mechanics should be as follows:
1. The body of the memorandum should be a professional presentation centered on clear and concise writing. The responses to the questions should be detailed, well researched, and specifically related to CMC's industry.
2. Use the FASB Codification and IFRS to address all technical accounting issues presented in the questions, being certain to reference the applicable sections of the Codification and IFRS in your report. You may quote directly from the Codification and IFRS as long as all direct quotes are included in quotation marks.
3. Any other sources used to support your responses should similarly be properly documented. You should have other credible sources in addition to the Codification and IFRS.