Which statement justifies a departure from generally accepted accounting principles (GAAP)?

Which statement justifies a departure from generally accepted accounting principles (GAAP)?

• A. The literal application of GAAP would render the financial statements misleading.
• B. Departing from GAAP would make the company appear more profitable.
• C. Adhering to GAAP is significantly more expensive than an alternative method.
• D. None of the above

Answer: (A)

The key idea here is that departures from GAAP are allowed only to prevent misleading financial statements. The purpose of financial reporting is to provide a faithful representation of the company’s financial position and results; if applying GAAP literally would mislead users, a deviation can be justified, with the departure and its effects clearly disclosed. Choices based on trying to look more profitable or on cost savings do not justify departing from GAAP because they undermine reliability and comparability. So, the statement that the literal application of GAAP would render the financial statements misleading is the proper justification.

The key idea here is that departures from GAAP are allowed only to prevent misleading financial statements. The purpose of financial reporting is to provide a faithful representation of the company’s financial position and results; if applying GAAP literally would mislead users, a deviation can be justified, with the departure and its effects clearly disclosed. Choices based on trying to look more profitable or on cost savings do not justify departing from GAAP because they undermine reliability and comparability. So, the statement that the literal application of GAAP would render the financial statements misleading is the proper justification.