Question

Use the Internet or Strayer Library to research a company that had a change in accounting principles within the past five (5) years. Discuss the accounting principles that the identified company changed and explain the major reasons why the company changed accounting principles. Give your opinion on whether you believe the change in accounting principles was motivated by an attempt to provide more useful information or to make financial results look better to investors and creditors. Provide a rationale for your response.  

Extra Credit

Examine the treatment of a change to the LIFO method of inventory valuation when it is impractical to determine previous LIFO inventory amounts.

Answer 1

An accounting principle is a general guideline to follow when recording and reporting financial transactions. There is a change in accounting principle when:

· There are two or more accounting principles that apply to a particular situation, and you shift to the other principle; or

· When the accounting principle that formerly applied to the situation is no longer generally accepted; or

· The method of applying the principle is changed.

You should only change an accounting principle when doing so is required by the accounting framework being used (either GAAP or IFRS), or you can justify that it is preferable to use the new principle.

A change in accounting principle is the term used when a business selects between different generally accepted accounting principles or changes the method with which a principle is applied. Changes can occur within accounting frameworks for either generally accepted accounting principles or international financial reporting .

For investors or other users of financial statements, changes in accounting principles can be confusing to read and understand. The adjustments look very similar to error corrections, which often have negative interpretations. Changing an accounting principle is different from changing an accounting estimate or reporting entity. Accounting principles impact the methods used, whereas an estimate refers to a specific recalculation. An example of a change in accounting principle occurs when a company changes its system of inventory principal, perhaps moving from LIFO to FIFO.

You are required to retrospectively apply a change in accounting principle to all prior periods, unless it is impracticable to do so. To complete a retrospective application, the following steps are required:

· Include the cumulative effect of the change on periods prior to those presented in the carrying amounts of assets and liabilities as of the beginning of the first period in which you are presenting financial statements; and

· Enter an offsetting amount in the beginning retained earnings balance of the first period in which you are presenting financial statements; and

· Adjust all presented financial statements to reflect the change to the new accounting principle.