A company changes from one acceptable inventory costing method to another partway through the year. To apply the change retrospectively under ASC 250, it would need to reconstruct years of transaction-level data using assumptions about prior management intent that cannot be independently substantiated from any records that still exist. Under ASC 250, what is the correct treatment when retrospective application is impracticable in this way?
- The company must still apply the change retrospectively, because impracticability is never an acceptable reason to depart from retrospective application
- The company must treat the change as an error correction instead, since it cannot be applied as a change in principle
- The company must abandon the change in accounting principle entirely and continue using the original method indefinitely
- The company should apply the new accounting principle prospectively, as of the earliest date practicable, and disclose the reasons retrospective application was impracticable
Why D? And why not the others?
Correct answer: D. The company should apply the new accounting principle prospectively, as of the earliest date practicable, and disclose the reasons retrospective application was impracticable
ASC 250 provides that when it is impracticable to apply a change in accounting principle retrospectively — including situations where doing so would require assumptions about management's intent in a prior period that cannot be independently substantiated — the entity should instead apply the new principle prospectively as of the earliest date practicable and disclose the reasons retrospective application was impracticable along with a description of the alternative method used. The option requiring retrospective application regardless is wrong because ASC 250 specifically carves out an impracticability exception for exactly this situation; treating it as never available contradicts the standard. The option requiring treatment as an error correction is wrong because nothing in the scenario indicates the prior method was applied incorrectly or in error; it was an acceptable method that the company voluntarily changed away from, which is the definition of a change in accounting principle, not an error. The option requiring the company to abandon the change and keep the old method is wrong because ASC 250 does not require abandoning a properly justified change merely because full retrospective restatement is impracticable; the impracticability exception exists precisely so the change can still proceed, just with prospective application instead.
Source: FASB Accounting Standards Codification: ASC 250-10, Accounting Changes and Error Corrections