When a change in accounting principle is made, what must be disclosed in the financial statements?

When a change in accounting principle occurs, it is essential for the financial statements to disclose the justification for that change. This requirement exists because stakeholders and users of the financial statements need to understand the reasons behind the shift in accounting practices. Providing the justification helps them assess the reliability and comparability of the financial information presented.

Disclosing the justification allows for greater transparency and helps maintain trust among investors, creditors, and other interested parties. It demonstrates that the entity is adhering to standards and principles that govern accounting practices, thus ensuring that financial reporting remains consistent and understandable.

While the historical financial statements, profit projections, and impact on future earnings are important aspects of financial reporting, they are not required disclosures specifically mandated in the context of a change in accounting principle. Instead, focusing on the rationale for the change ensures that users can evaluate its appropriateness and the potential effects it might have on the financial statements as a whole.