ACCOUNTING CHANGES ©
Written by Professor Gregory M. Burbage, MBA, CPA, CMA, CFM
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A "Change in an accounting principle" is changing from one generally accepted accounting principle to another generally accepted accounting principle, or changing the method of application of a particular principle. A change should only be made when the new principle is preferable over the former. When the FASB issues a new pronouncement that expresses preference for a particular principle, justification for a change is demonstrated; otherwise the burden of justification is on the entity. To report higher net income is not justification!
CHANGE IN AN ACCOUNTING PRINCIPLE (General Rule):
Use the Current or Catch-up Approach by:
a. Reporting current results using the new basis. I.e., use the new method to determine income, balance sheet, etc.
b. Reporting the cumulative effect of the adjustment in the current income statement between the captions "extraordinary items" and "net income".
c. Presenting prior period financial statements as previously stated. d. Presenting pro-forma (as if) data on any item affected, net income and earning per share for all prior periods presented.
e. Presenting pro-forma data for the current period income statement, i.e., without the cumulative effect of the change.
There are two exceptions to the general rule:
1. Changes whose cumulative effect is not determinable.
2. Retroactive application of some types of changes.
The change to the LIFO method of inventory valuation usually presents exception number one above, as the necessary detail on inventory valuation for prior years is not available. The APB specified that this type of change is impossible to determine the effect of. Therefore, employ the change to LIFO by: a. Not restating prior years' financial statements.
b. Using opening inventory in the year the method is adopted as the base year inventory. c. Disclosing the effect of the...
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