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.
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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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