Accounting Errors Even Though Bedrock\'s Capitalization Policy

Accounting Errors

Even though Bedrock's capitalization policy may have been in alignment in prior years, the policy does create a material unadjusted error in the third quarter that would require adjustment. By simply following the Bedrock capitalization policy simply means the quantifying effects of an unadjusted material error would occur, more especially with continuing capital expenditures due to the expansion of the additional quarry and rock finishing plant. The quantifying effects of capital expenses with the expansion alone would result in a material error for the current year, including the third quarter.

The evaluation of materiality must be based on all relative quantitative and qualitative factors. The process begins with quantifying potential misstatements, including prior year misstatements that were not corrected. This also adds the question of whether the capitalization policy has really been in alignment with ASC 250-10 (SAB 108) in prior years. Depending on the capital expenditures in prior years, there could have been unidentified material errors in prior years.

The materiality of the errors should be evaluated by all expenditures of the capital asset involved, including prior years and current year. In this case, the expansion of the additional plant is a capital asset. The materiality should be based on the quantitative and qualitative aspects of all the expenditures combined for the expansion, not just on the actual amount of the individual expenditure involved. The quantitative aspects of the expenditures would cause significant materiality alone, which would require an adjustment in the third quarter to reverse the expense accounts and capitalize the expenditures in the expansion asset account.

Part B

Using the cumulative effect in correcting the errors on the balance sheet could result in misstatements of income in the current year income statement. For example, the quantifying effects include errors that stem from all the years involved. By considering errors of each year, materiality of the errors would be more accurate in consideration of each year's financial statements. If the quantifying effects only show materiality in the current year, prior year errors would be included causing a misstatement of income where prior year errors are adjusted in the current year.