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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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When the FASB issues a new generally accepted accounting principle, it may require companies to apply the new principle prospectively, or to account for the change by the retrospective adjustment method.

Required:

Why do you think that the FASB requires one of two different transition methods when a company adopts a newly required accounting principle? Do you agree with the use of two alternative methods?

To determine

Explain the reasons to report the newly adopted change in accounting principle by any of the transition methods, as required by Financial Accounting Standards Board (FASB).

Explanation

Change in an accounting principle: This change occurs when a company decides to change from an accounting principle to another, like change from LIFO to FIFO. A change in accounting principle effects the values that impact the figures of previous and current years, thus, impairs the consistency and comparability. Hence, the changes in accounting principle should be adjusted with a retrospective effect to impact the previous financial statements, to increase the comparability and the consistency of the values between the previous and current accounting periods.

Reasons:

  • When a company implements a new principle due to new changes introduced by FASB, it is mandatory to implement that change in accounting standards as it becomes preferable over the old method...

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