b There is a presumption that an accounting principle once adopted should not

B there is a presumption that an accounting principle

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b. There is a presumption that an accounting principle once adopted should not be changed in accounting for events and transactions of a similar type. Consistent use of accounting principles
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from one accounting period to another enhances the utility of financial statements to users by facilitating analysis and understanding of comparative accounting data. The presumption that an entity should not change an accounting principle may be overcome only if the enterprise justifies the use of an alternative acceptable accounting principle on the basis that it is preferable. But a method of accounting that was previously adopted for a type of transaction or event that is being terminated or that was a single, nonrecurring event in the past should not be changed. For example, the method of accounting should not be changed for a tax or tax credit that is being discontinued or for preoperating costs relating to a specific plant. But this does not imply that a change in the estimated period to be benefited for a deferred cost (if justified by the facts) should not be recognized as a change in accounting estimate. The issuance of an Accounting Standards Update by the FASB that creates a new accounting principle, that expresses a preference for an accounting principle is sufficient support for a change in accounting principle. The burden of justifying other change rests with the entity proposing the change. The nature of and justification for a change in the method of inventory pricing should be disclosed in the financial statements for the period the change was adopted; the change should be justified on the basis that the new method is more appropriate than the old. In addition, the effect of the change on income before extraordinary items, net income and the related per share amounts should be disclosed for all periods presented. This disclosure may be on the face of the income statement or in the notes. Financial statements of subsequent periods need not repeat the disclosures. In one specific situation the application of these provisions may result in financial statement presentations of results of operations that are not of maximum usefulness to intended users. For example, a company owned by a few individuals may decide to change from one acceptable inventory method to another in connection with a forthcoming public offering of shares of its equity securities. The potential investors may be better served by the statements of income for a period of years reflecting the use of the newly adopted accounting principle because it will be the same as that expected to be used in future periods. In recognition of this situation, financial statements for all prior periods presented may be restated retroactively when a company first issues its financial statements for any one of the following purposes: (1) obtaining additional capital from investors, (2) effecting a business combination or (3) registering securities. This
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  • Spring '12
  • Dacanay
  • Income Statement, Generally Accepted Accounting Principles

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