Read the Basis for Conclusions (paragraphs B1 through B38) in FAS B’s Statement of Financial Accounting Standards No. 154 to respond to the following questions.
1. When debating the issues of FAS B’s Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections,” the FAS B concluded that the retrospective method is the correct approach to use for changes in accounting principles. Why did FAS B reach this conclusion?
2. Changes in accounting principle can have both direct and indirect effects. The direct effects are the impact on the related balance sheet and income statement accounts. Firms always apply direct effects retrospectively, unless it is impractical to do so. Indirect effects are changes to current or future cash flows that result from the change in accounting principle. Firms only apply indirect effects prospectively. There is some disagreement as to whether indirect effects should be applied retrospectively or prospectively. What are the arguments for each reporting method?