A company decides to voluntarily switch from one acceptable method of accounting for a class of transactions to another acceptable method, not because any new accounting standard requires the change and not to correct an error in a prior period. Under ASC 250 (Accounting Changes and Error Corrections), what must the company demonstrate to justify this voluntary change?
- Nothing beyond management's discretion; a company may switch between any two acceptable methods at any time without further justification
- That the new method reduces the company's reported tax liability more than the old method did
- That the new method is preferable to the one it replaces and, if the company is an SEC registrant, obtain its independent accountant's concurrence in a preferability letter
- That the change corrects a mistake in how the old method was applied in prior periods
Why C? And why not the others?
Correct answer: C. That the new method is preferable to the one it replaces and, if the company is an SEC registrant, obtain its independent accountant's concurrence in a preferability letter
ASC 250 permits a voluntary change from one acceptable accounting principle to another only when the entity justifies that the new principle is preferable, discloses the nature of and reason for the change, and, for an SEC registrant, files a preferability letter from its independent accountant concurring with that preferability conclusion, as elaborated in ASC 250-10-S99-4. The option allowing an unrestricted switch at management's discretion is wrong because a voluntary change still requires an affirmative preferability justification; it is not left to unexplained discretion. The option tying the justification to a reduced tax liability is wrong because preferability under ASC 250 is a financial-reporting judgment about which method better reflects the transactions being accounted for, not a tax-minimization criterion, and a tax benefit alone would not satisfy the standard's preferability requirement. The option describing the correction of a prior misapplication is wrong because that describes an error correction, a distinct category under ASC 250 governed by its own restatement requirements, not the preferability-driven voluntary change in principle described in this scenario.
Source: ASC 250, Accounting Changes and Error Corrections (change in accounting principle; ASC 250-10-S99-4)