Definition from ASC 250-10-20
A change from one generally accepted accounting principle to another generally accepted accounting principle when there are two or more generally accepted accounting principles that apply or when the accounting principle formerly used is no longer generally accepted. A change in the method of applying an accounting principle also is considered a change in accounting principle.
A change in accounting principle can be required by newly issued guidance or as the result of a decision by the reporting entity to adopt a different accounting principle on the basis that it is preferable.
New accounting guidance generally provides specific transition requirements (e.g., prospective application, full retrospective application, modified retrospective application, etc.). Accordingly, the provisions of ASC 250
do not apply when a reporting entity is adopting a new accounting pronouncement that specifies the manner of adopting the change. However, if transition requirements are not provided by the new accounting guidance, a change in accounting principle should be reported in accordance with ASC 250
In certain situations, a reporting entity may elect to change its financial statement presentation from one acceptable alternative to another (e.g., a change from presenting accumulated depreciation and amortization on the face of the financial statements to the footnotes or changing from a “one-step” income statement to a “two-step” income statement). We believe a change in financial statement presentation does not constitute a change in accounting principle and thus would not require a preferability assessment. However, a reporting entity should have consistent presentation for all periods presented within the financial statements.
The adoption of accounting principles in certain situations are outside the scope of ASC 250
Excerpt from ASC 250-10-45-1
Neither of the following is considered to be a change in accounting principle:
- Initial adoption of an accounting principle in recognition of events or transactions occurring for the first time or that previously were immaterial in their effect
- Adoption or modification of an accounting principle necessitated by transactions or events that are clearly different in substance from those previously occurring.
Some examples of scenarios that would not constitute a change in accounting principle under ASC 250-10-45-1a
may include the selection of a date for the annual goodwill impairment test after completing a business combination that resulted in recording goodwill for the first time or conforming the accounting policies of an acquired business to those of the acquirer.
An example of a scenario that may not be deemed a change in accounting principle under ASC 250-10-45-1b
is when changes in the contractual relationship between the reporting entity and other parties result in a conclusion that the reporting entity is no longer the principal in a revenue transaction and should present that revenue on a net basis.
Generally, accounting principles that are not material are not disclosed in the footnotes. Therefore, it would be unusual for an accounting principle that is disclosed in previously-issued financial statements to be deemed immaterial for the purpose of considering ASC 250-10-45-1a
. However, in certain instances, reporting entities may have historically disclosed immaterial accounting principles for comparability with peers or for consistency with prior years. In these situations, reporting entities should perform an assessment of the materiality of the accounting principle that they are changing, the materiality of the change, and the preferability of the change to determine what level of disclosure, if any, is warranted. Even if a reporting entity concludes that a change is immaterial and retrospective application is not required (refer to FSP 30.4.2
and discussion of SAB Topic 5.F
), if the change is disclosed, an SEC registrant may still be required to file a preferability letter from their independent registered public accountants. See FSP 30.4.1
and FSP 30.4.2
Once an accounting principle is adopted, it should be applied consistently when accounting for similar events and transactions because the consistent use of accounting principles is critical to the utility of financial statements. A reporting entity that wants to voluntarily change an accounting principle must justify that the alternative accounting principle is preferable. For example, a change in a reporting unit’s annual goodwill impairment test date is a change in the method of applying an accounting principle requiring a preferability assessment (see BCG 220.127.116.11
Preferability may vary depending upon the circumstances of the reporting entity. For example, one reporting entity may consider the LIFO inventory method to be preferable due to the nature of its inventory costs, while for others, FIFO may be preferable. The disclosure should include an explanation of why the newly adopted change is preferable.
SAB Topic 6.G.2.b
, Reporting Requirements for Accounting Changes
(codified in ASC 250-10-S99-4
), provides guidance on assessing the justification for a change in accounting principle. It includes considerations such as whether an authoritative body has deemed an accounting principle preferable, how the change impacts business judgment and planning, and whether the change results in improved financial reporting.
Question FSP 30-1 discusses whether a preferability assessment is required when a private company changes accounting principles upon filing an IPO registration statement.
Question FSP 30-1
When a private company changes accounting principles to conform with public company accounting principles in connection with filing an IPO registration statement, does the change require a preferability assessment?
No. When a private company is required to change accounting principles to conform with public company accounting requirements (e.g., discontinuing the application of the Private Company Council (PCC) goodwill alternative), a preferability assessment is not necessary. This is because such a change in accounting principle is not “voluntary” and is required by a regulator to conform to GAAP. Such a change is not considered a change in accounting principle by the reporting entity and does not trigger the disclosures associated with a change in accounting principle.
Question FSP 30-2 discusses whether a private company is required to perform a preferability assessment when adopting a PCC accounting alternative for the first time.
Question FSP 30-2
When a private company voluntarily adopts a PCC accounting alternative for the first time, is a preferability assessment required?
No. Although the adoption of a PCC accounting alternative is a voluntary change in accounting principle, ASU 2016-03
, Intangibles—Goodwill and Other (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810), Derivatives and Hedging (Topic 815)
, allows private companies to forgo a preferability assessment the first time they elect any of the PCC accounting alternatives within the scope of the ASU. However, after the initial election of a PCC accounting alternative, any future accounting changes require a preferability assessment, except when a private company changes accounting principles to conform with public company accounting principles in connection with filing an IPO registration statement (see Question FSP 30-1).