Why did the accounting profession choose to handle changes i

Why did the accounting profession choose to handle changes in estimates using the prospective approach instead of the retrospective approach? Do you think information that is important to the user of financial statements is lost by using this approach? Please explain your answer.

Solution

As per prospective approach, no changes are made to the prior year’s financial statement of a company. Contrary to this, in retrospective approach the financial statements require updating from the point of change occurred. Therefore, accounting profession choose prospective approach on a going-forward basis.

However, the prospective approach might involve loss of information. In some cases, information is required about transaction that occurred in the past. If long time periods are elapsed between the transactions the information might be lost.