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| 2 | The following terms are used in
this statement:
(a) accounting change-- a change in (1) an accounting principle The Correction of an error in
previously issued
financial
statements is not an accounting change.
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| (b) accounting
pronouncement-- a
source of
generally accepted accounting principles (GAAP) in the
United States.
including FASB Statements of Financial Accounting
Standards, FASB
Interpretations, FASB Staff Positions, ... Emerging Issues
Task Force
Consensuses, other pronouncements of the FASB or other
designated
bodies, or other forms of GAAP as described in categories
(a)–(c) of
AICPA Statement on Auditing Standards (SAS) No. 69, The Meaning of Present Fairly
in Conformity
With Generally Accepted Accounting Principles, .
. . AICPA
accounting interpretations and implementation guides (“Q
& A’s”)
issued by the FASB staff, as described in category (d) of
SAS 69, also
are considered accounting pronouncements for the purpose
of applying
this Statement. |
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| (c) Change in Accounting Principle—a change from one generally accepted accounting principle to another generally accepted accounting principle when there are two or more generally accepted accounting principles that apply or when the accounting principle formerly used is no longer generally accepted. A change in the method of applying an accounting principle also is considered a change in accounting principle. | |||
| (d) Change in Accounting
Estimate—a change that has the effect of
adjusting the
carrying amount of an existing asset or liability or
altering the
subsequent accounting for existing or future assets or
liabilities. A change in accounting estimate is a necessary consequence of the assessment, in conjunction with the periodic presentation of financial statements, of the present status and expected future benefits and obligations associated with assets and liabilities. Changes in accounting estimates result from new information. Examples of items for which estimates are necessary are uncollectible receivables, inventory obsolescence, service lives and salvage values of depreciable assets, and warranty obligations. |
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| (e) Change in estimate effected by a change in accounting principle —a change in accounting estimate that is inseparable from the effect of a related change in accounting principle. An example of a change in estimate effected by a change in principle is a change in the method of depreciation, amortization, or depletion for long-lived, nonfinancial assets. | |||
| (f) Change in the Reporting Entity entity—a change that results in financial statements that, in effect, are those of a different reporting entity. A change in the reporting entity is limited mainly to (1) presenting consolidated or combined financial statements in place of financial statements of individual entities, (2) changing specific subsidiaries that make up the group of entities for which consolidated financial statements are presented, and (3) changing the entities included in combined financial statements. | |||
| (g) Direct effects of a change in accounting principle—those recognized changes in assets or liabilities necessary to effect a change in accounting principle. An example of a direct effect is an adjustment to an inventory balance to effect a change in inventory valuation method. Related changes, such as an effect on deferred income tax assets or liabilities or an impairment adjustment resulting from applying the lower-of-cost-or-market test to the adjusted inventory balance, also are examples of direct effects of a change in accounting principle. | |||
| (h)
Error in previously
issued financial statements—an error in recognition,
measurement, presentation,
or
disclosure in
financial statements resulting from mathematical mistakes, mistakes in
the
application of GAAP, or oversight or misuse of facts that existed at
the time the
financial statements were prepared. A change from an accounting
principle that is
not generally accepted to one that is generally accepted is a
correction of an
error. |
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| (i)
Indirect effects of a change
in accounting principle—any changes to current or
future
cash flows of an entity that result from making a change
in accounting
principle that is applied retrospectively.An example of an
indirect
effect is a change in a nondiscretionary profit sharing or
royalty
payment that is based on a reported amount such as revenue
or net
income. |
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| (j) Restatement—the
process
of
revising previously issued financial statements to reflect the
correction of an error
in those financial statements. |
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| k. Retrospective
application—the application of a different
accounting principle
to one
or more
previously issued financial statements, or to the
statement of
financial position at
the beginning of the current period, as if that principle
had always
been used,
or a
change to financial statements of prior accounting periods
to present
the financial
statements
of a new reporting entity as if it had existed in those
prior years. |
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| Accounting Changes | |||
| Change in
Accounting Principle |
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| 4 |
A presumption exists that an
accounting principle once adopted shall not be changed in accounting for
events and
transactions of a similar type. Consistent use of the same
accounting
principle from one
accounting period to another enhances the utility of financial statements
for users by
facilitating analysis and understanding of comparative accounting data. |
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| 7 |
An entity shall report a change in
accounting principle through retrospective application of
the new accounting principle to all prior periods, unless
it is
impracticable to do
so. Retrospective application requires the following: |
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| a. The cumulative effect of the
change to the new accounting principle on periods prior to those presented
shall be
reflected in the carrying amounts of assets and
liabilities as of the beginning of the first
period presented. b. An offsetting adjustment, if any, shall be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period. c. Financial statements for each individual prior period presented shall be adjusted to reflect the period-specific effects of applying the new accounting principle. |
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| Justification
for a
Change in Accounting Principle |
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| 12 |
In the preparation of financial
statements, once an accounting principle is adopted, it
shall be used
consistently in accounting for similar events and
transactions. |
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| 13 |
An entity may change an accounting
principle only if it justifies the use of an allowable
alternative
accounting principle on the basis that it is
preferable. .
. . |
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| Disclosures |
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| 17 | General Disclosure for a Change
in
Accounting
Principle --
(a) Nature and justification
for
the change. (b) The method of applying the
change, and: (1)
A
description of the prior-period information that has
been
retrospectively
adjusted,
if any.
(2)
The
effect of the change on income from continuing
operations, net
income (or other
appropriate captions of changes in the applicable net
assets or
performance indicator),
any other
affected
financial statement line item, and any affected per-share amounts for the current
period and any prior periods retrospectively adjusted. Presentation of the
effect
on financial statement subtotals and totals other than income from continuing
operations and net income (or other appropriate
captions
of changes in the
applicable net assets or performance indicator)
is
not required.
(3)
The
cumulative effect of the change on retained earnings or
other
components of equity or net assets in the statement of
financial
position as of the
beginning of the
earliest period
presented.
(4) If retrospective application to all prior periods (paragraph 7) is impracticable, disclosure of the reasons therefor, and a description of the alternative method used to report the change (paragraphs 8 and 9). (c) If indirect effects
of a
change in accounting principle are recognized: (1)
A
description of the indirect effects of a change in
accounting
principle, including
the amounts
that have been
recognized in the current period, and the related per-share amounts, if
applicable.
(2)
Unless
impracticable, the amount of the total recognized
indirect
effects of the accounting
change and
the related
per-share amounts, if applicable, that are attributable to each prior period
presented.
Financial statements of subsequent periods need not repeat the disclosures required by this paragraph. If a change in accounting principle has no material effect in the period of change but is reasonably certain to have a material effect in later periods, the disclosures required by paragraph 17(a) shall be provided whenever the financial statements of the period of change are presented. |
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| Change
in
Accounting Estimate |
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| 19 |
A change in accounting estimate
shall be accounted for in: (a) the period of change if the change affects that period only or (b) the period of change and future periods if the change affects both. Prior periods not restated and pro forma amounts not reported. |
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| 20 |
Distinguishing
between
a
change in an accounting principle and a change in an
accounting estimate is sometimes difficult. In some
cases, a change in
accounting estimate is effected by a change in
accounting principle.
One example of this type of change is a change
in method of depreciation,
amortization, or depletion for long-lived,
nonfinancial assets
(hereinafter referred to as depreciation method).
The new
depreciation method is adopted in partial or complete
recognition of a
change in the estimated future benefits inherent in the
asset, the
pattern of consumption of those benefits, or the
information available
to the entity about those benefits. The effect of the
change in
accounting principle, or the method of applying it, may
be inseparable
from the effect of the change in accounting estimate.
Changes of that
type often are related to the continuing process of
obtaining
additional information and revising estimates and,
therefore, are considered
changes in estimates for
purposes of applying this Statement. |
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| 21 |
Like
other
changes
in accounting principle, a change in accounting estimate
that is effected by a change in accounting principle may
be made only
if the new accounting principle is justifiable
on the basis that it is preferable.
For example,
an entity that concludes that the pattern of
consumption of the expected benefits of an asset has
changed, and
determines that a new depreciation method better
reflects that pattern,
may be justified in making a change in accounting
estimate effected by
a change in accounting principle. (Refer to paragraph
13.) |
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| Disclosure | |||
| 22 | The effect on income from
continuing operations, net income (or other appropriate
captions of
changes in the applicable net assets or performance
indicator), and any
related per-share amounts of the current period shall be
disclosed for
a change in estimate that affects several future periods,
such as a
change in service lives of depreciable assets. Disclosure
of those
effects is not necessary for estimates made each period in
the ordinary
course of accounting for items such as uncollectible
accounts or
inventory obsolescence; however, disclosure is required if
the effect
of a change in the estimate is material. When an entity
effects a
change in estimate by changing an accounting principle,
the disclosures
required by paragraphs 17 and 18 of this Statement also
are required.
If a change in estimate does not have a material effect in
the period
of change but is reasonably certain to have a material
effect in later
periods, a description of that change in estimate shall be
disclosed
whenever the financial statements of the period of change
are presented. (APB No. 20)--effect on income before extraordinary items, net income and per share amounts of the current period should be disclosed for a change in estimate that affects several future periods. |
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| Change
in the
Reporting Entity |
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| 23 | When an accounting change results
in financial statements that are, in effect, the statements of a
different
reporting entity, the change shall be retrospectively
applied to the financial statements of all
prior periods presented to show financial information for
the new
reporting entity for those
periods. . . . |
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| Disclosures | |||
| 24 | When there has been
a
change in the reporting entity, the
financial statements of the period of the change shall
describe the
nature of the change and the reason for it. In
addition, the effect of
the change on income before extraordinary items, net
income (or other
appropriate captions of changes in the applicable net
assets or
performance indicator), other comprehensive income,
and any related
per-share amounts shall be disclosed for all
periods presented.
Financial statements of subsequent periods need not
repeat the
disclosures required by this paragraph. If a change in
reporting entity
does not have a material effect in the period of
change but is
reasonably certain to have a material effect in later
periods, the
nature of and reason for the change shall be disclosed
whenever the
financial statements of the period of change are
presented. . . . |
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| Correction of an Error in Previously Issued Financial Statements | |||
| 25 | Any error in the
financial statements of a prior period discovered
subsequent to their issuance shall be reported
as a prior-period adjustment by restating the prior period
financial
statements. Restatement
requires that: |
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| a. The cumulative effect of the
error on periods prior to those presented shall be reflected in the
carrying amounts
of assets and liabilities as of the beginning of the first period
presented. |
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| b. An offsetting adjustment, if
any, shall be made to the opening balance of retained earnings (or other
appropriate
components of equity or net assets in the statement of financial position)
for that
period. |
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| c. Financial statements for each
individual prior period presented shall be adjusted to reflect correction of
the
period-specific effects of the error. |
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| Disclosure | |||
| 26 | When financial statements are
restated to correct an error, the entity shall disclose
that its
previously issued financial statements have been restated,
along with a
description of the nature of the error. The entity also
shall disclose
the following: a. The effect of the correction on each financial statement line item and any per-share amounts affected for each prior period presented b. The cumulative effect of the change on retained earnings or other appropriate components of equity or net assets in the statement of financial position, as of the beginning of the earliest period presented. In addition, the entity shall make the disclosures of prior-period adjustments and restatements required by paragraph 26 of APB Opinion No. 9, Reporting the Results of Operations. Financial statements of subsequent periods need not repeat the disclosures required by this paragraph. |
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