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Chapter 3 — Financial Statement Preparation and Disclosure Requirements

3.5 Changes in Accounting Principles

3.5 Changes in Accounting Principles

The presumption that an entity should not change an accounting principle, once adopted, in accounting for events and transactions of a similar type is basic to the preparation of financial statements. An entity may change an accounting principle only if management can justify that the newly adopted accounting principle is both acceptable and preferable. Factors that may justify that an accounting treatment is preferable include authoritative literature, changes in the structure and economics of principal transactions, industry practice, business judgment, and business planning. However, industry practice, in and of itself, may not always demonstrate that an alternative principle is preferable. Ultimately, whether a change is preferable depends on the entity’s facts and circumstances, and the burden of justification rests with the reporting entity.