Accounting Principle
Question
Accounting Principle
Why does FASB require the Retrospective Approach, what would happen if we did not use this approach? Weygandt, J. J., Kieso, D. E., & Warfield, T. D. (2016). Intermediate Accounting, Binder Ready Version. John Wiley & Sons.


Solution
Accounting
Principle
The significance of
Retrospective Approach to FASB
There
are several applications that the retrospective approach aids Financial
Accounting Standards Board (FASB) while establishing and improving accounting
standards used in the United States. Retrospective approach mandates the
application of financial changes that have occurred in previous periods
financial statements thus making it easy for the organization when formulating
new principles. Also, the approach is essential in correcting errors that have
occurred in the previous period’s financial statements thus ensuring that the
financial numbers and statements are the same (Weygandt, Kieso & Warfield
2016).
Additionally,
FASB needs a retrospective approach in the course of formulating accounting
standards involving the incorporation of a cumulative effect of the variation
of the times before the ones that are presented particularly in carrying
amounts of either liabilities or assets particularly in the beginning of
initial periods at which financial statements are presented. Also, they need a
retrospective approach while developing accounting principles that can be used
by companies when computing their financial statements such as income taxes
that have direct effects on reporting standards thus making the statements
verifiable. Therefore, it can be asserted that this approach is essential in
ensuring there is compatibility between new and past accounting principles
since it facilitates the application of new accounting principles in a manner
that the results of new principle become similar to the ones of the past
accounting principles (Weygandt, Kieso & Warfield 2016).
Limitations in case
Retrospective Approach is not applied
On
the other hand, in a scenario whereby the approach is not applied, there are
chances that there will be an incompatibility between the past and new
accounting principles formulated by FASB. Also, the lack of applying
retrospective approach will lead to inconsistency of financial statements since
past accounting principles will not be compatible with new ones (Weygandt, Kieso & Warfield 2016).
Reference
Weygandt,
J. J., Kieso, D. E., & Warfield, T. D. (2016). Intermediate Accounting,
Binder Ready Version. John Wiley & Sons.




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