Question

One purpose of financial accounting is to provide readers with comparable information to evaluate trends. GAAP requires companies that change accounting principles to restate prior years’ results, in the interest of comparability. Microsoft made such a change in 2018. However, GAAP does not require companies to fully restate prior year results after a major acquisition, instead simply requiring pro forma disclosure of revenues and net income as of the start of the prior year.

Discuss whether you feel this difference in the rules about restating prior year results is appropriate. If you do not feel it is appropriate, what change would you suggest in accounting rules?

Answer 1

As per GAAP, when accounting principles are changed to provide fair and better representation of financial information, Prior Year's Results are reinstated as per changed principles and presented along with current year figures. The rationale behind the same is that since change in Accounting Principle is a major change which impacts the financial position of current year as well as prior years to obtain Comparability and Uniformity in the Financial Statements. Financials will stand comparable only if accounting principles are consistently used.

However, in case of Major Merger or Acquisition, such reinstatement is not required relating to prior years. It simply required Disclosure of Pro Forma Revenues and Net income relating to start of the prior year. This is required to value Investment at correct value and to have knowledge of arising Goodwill or Capital Profits from the Acquisition. Since comparability and uniformity is not affected, hence reinstatement is not necessary.

Above treatment is Appropriate as per our views and hence require no change.