Question

1-In recent years, the Wall Street Journal has indicated that many companies have changed their accounting principles. What are the major reasons why companies change accounting methods?

Answer 1

Companies tend to change accounting principles primarily for 2 reasons

1. Change in accounting standards (involuntary change)

When there is a change in any of the accounting standards (or new standard has been notified), the company has to change its accounting policies to align with the requirement of the new standard. This change is considered as involuntary as the entity does not have any option but has to change its accounting principles to comply with the requirements of the new/modified standard

2. Change for more appropriate accounting

An entty can voluntarily change its accounting poliy when it believes that the revised accounting policy may result in a more appropriate presentation of the transaction. Such changes are expected to be rare and not frequent.

In either case, the entity has to provide the impact of change in accounting policy retrospectively, unless in case of an involuntary change, the revised/new standard provides an alternative transition approach. Further, the entity has to adjust the opening balances of the earliest comparative period, i.e. if financials are presented for year ending December 2018, the comparative will be December 2017. The opening balances for December 2017, i.e. balances as on January 2017 will have to be adjusted and presented.

Please comment for any clarifications