An Investigation Of The Effect Of Methods Of Recording Accounting Principle Changes On The Decisions Of Users In The United States, Germany, And Austria

Abstract

Formerly in the United States, most accounting principle changes were traditionally recorded using the cumulative effect method, wherein the net effect of the principle change flows through the income statement as a special item.  International accounting standards, in comparison, have recorded accounting principle changes retrospectively by adjusting beginning stockholders’ equity in the year of the change.  In 2002, the FASB began a convergence project with the IASB, in which they have and are attempting to agree on standard accounting treatments in areas in which the U.S. standards and IAS differ.  The project initially looked at seventeen areas of difference in which it was believed that convergence could be reached.  One of those areas was in accounting for principle changes.  Resulting from the convergence project, the FASB issued SFAS No. 154 in 2005, which changes U.S. GAAP to require that accounting principle changes be recorded retrospectively, as is required by international standards.  This study examines the decisions of statement users in the U.S., Germany, and Austria to determine if the method of accounting used for principle changes affects their decisions.  The findings reveal that the method used in interaction with the home country of the user has a significant effect on the decisions of statement users.