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Why did the accounting profession choose to handle changes in estimates using the prospective approach instead of the retrospective approach? Do you think that information important to the user of financial statements is lost by using this approach? Please explain your answer

In order to have accuracy, the accountants and companies try to revise estimates and change the decisions while are mistakes are rectifying. Such changes are allowed through the Generally Accepted Accounting Principles and the changes may take place prospectively or retrospectively. Under the prospective application, no changes are made to prior year’s financial statements. But in the case of the Retrospective application, the financial statements required to be updated from the point of change occurred.

Therefore the accountants choose the prospective approach on a going-forward basis. But using prospective approach the users of financial statements may get confused and take wrong decisions. All users may not have sufficient exposure undertaking other statements than financial statements. As the financial statements give elaborative disclosures thereby users can understand and take correct decisions. So whenever changes are required to be made, it is better to use retrospective approach. It means the financial statements are updated from the point of change

When the retrospective approach is impracticable, prospective approach is used. Besides, the entity may require to use the prospective approach as per the mandate of FASB to adopt new accounting standard. Though there is a change in accounting principle of depreciation, amortization, depletion methods required to be reported on prospective basis than retrospective basis. Sometimes, the management is required to restate the financial statements of all prior periods. The situation may arise when there is change in the reporting entity. At that time, all such changes are to be reported on retrospective basis.

As far as changes in accounting estimates, the changes are to be recorded prospectively. It means, changes in accounting estimates are to be recorded on prospective basis. These are the estimations only and hence prospective basis preferred. Such changes do not influence on financials statements. Hence prospective basis is preferred in case of Change in accounting estimates. Using prospective in changes of accounting estimates, the users of financial statements may not involve any loss of the information as the changes are with the estimates but not with the actual. In fact, the changes in estimates is not important information, therefore retrospective approach is not required.

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