Prior Period Adjustments
Prior period adjustments- APB 9 Review Questions
Prior period adjustments- FAS 16
International Standards:(IAS 1, IAS 8) Generally accounting policy changes and corrections of prior period errors are accounted for retrospectively by adjusting opening equity and comparatives, unless impracticable
 This is essentially the same as GAAP, except GAAP has  with no impracticality exemption. 

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Criteria for Prior Period Adjustments
APB Opinion No. 9
(Modified by FASB No. 16)
23 Material adjustments which:

  1. can be specifically identified with and directly related to the business activities of particular prior periods

    2.  
  2. are not attributable to economic events occurring subsequent to the date of the financial statements for the prior period

    3.  
  3. depend on determinations by someone other than management

    4.  
  4. were not susceptible of reasonable estimations prior to such determination

Relate to events or transactions which occurred in a prior period, the accounting effects of which could not be determined with reasonable assurance at that time, usually because of some major uncertainty then existing

 Such adjustments are rare in modern accounting

Examples:

Material, nonrecurring adjustments or settlements of income taxes, of renegotiation proceedings, or utility revenue under rate processes.

Settlements of significant amounts resulting from litigation or similar claims as may also constitute prior period adjustments
24 Should not be applied to the normal recurring corrections and adjustments which are the natural result of the use of estimates inherent in the accounting process. 

Change in estimated lives of fixed assets, for example, should be applied prospectively, not treated as prior period adjustments. (See APB Opinion No. 20, Accounting Changes)
25 Change in application of accounting principles may create a situation in which retroactive application is appropriate. In such situations, these changes should receive the same treatment as that for prior period adjustments. (Limited in APB Opinion No. 20, Accounting Changes)
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Prior Period Adjustments
FASB NO. 16
1 Prior period adjustment criteria of APB No. 9

Material adjustments which:

(a) Can be specifically identified with and directly related to the business activities of particular prior periods.

(b) Not attributable to economic events occurring subsequent to the date of the financial statements of the prior period.

(c) Depend primarily on determinations by persons other than management.

(d) Were not susceptible of reasonable estimation prior to such determination.

Occurrence would be rare in modern accounting.

Major uncertainty at the time of the prior period financial statement probably would have a qualified opinion because of the uncertainty.

Examples: Material, nonrecurring adjustments or settlements of income taxes, of renegotiation proceedings or of utility revenue under rate making processes. Also settlements of significant amounts resulting from litigation or similar claims may constitute prior period adjustments.
2 Consideration of prior period adjustments was prompted by SEC staff administrative interpretations of APB Opinion No. 9 during 1975 limiting prior period adjustments for out of court settlements
3 Citing paragraph 24 of Opinion NO. 9--things not constituting prior period adjustments:

Normal, recurring corrections and adjustments which are the result of using estimates inherent in the accounting process; e.g., change in the estimate of useful lives and salvage values should be handled prospectively.
4 APB Opinion No. 20, " Accounting Changes" affirmed the conclusion of paragraph 24 of Opinion No. 9.
10 Standard of Financial Accounting and Reporting

All items of profit and loss recognized during a period, including accruals of estimated losses from loss contingencies, shall be included in the determination of net income for that period, except for the following items in paragraph 11.
11 Items of profit and loss related to the following shall be accounted for and reported as prior period adjustments and excluded from the determination of net income for the current period:

(a) Correction of an error in the financial statements of a prior period.

(b) Adjustments that result from realization of income tax benefits of pre-acquisition operating loss carry forward of purchased subsidiaries.
12 This statement does not affect the manner of reporting accounting changes required or permitted by an FASB Statement, an FASB Interpretation, or an APB Opinion.
13 Interim reporting regarding certain adjustments relating to prior interim periods fo the current year including an adjustment or settlement of: 

(1) Litigation or similar claims.

(2) Income taxes.

(3) Renegotiation proceedings.

(4) Utility revenue under rate making processes.

Following criteria must be met:

(a) Effect must be material in relation to income from continuing operations, or in relation to the trend of continuing operations or is material by other appropriate criteria.

(b) All or part of settlement can be specifically identified with and is directly related to business activities of specific prior interim periods of the current fiscal year end.

(c) Amount of adjustment could not be reasonably estimated prior to the current interim period but becomes reasonably estimable in the current interim period.
14 When adjustments occur after the first interim period and affect prior interim periods of the current year:

(a) The portion of the adjustment related to the current interim period, if any, shall be included in the net income for that period.

(b) Restate prior interim periods to include in income that portion of adjustment related to the activities of such periods.

(c) Include that portion of the adjustment that is directly related to business activities of the enterprise during prior fiscal year, if any, in the determination of net income of the first interim period of the current fiscal year.
15 Disclosures -- in financial reports for the interim period in which the adjustment occurs: 

(a) Effect on income from continuing operations, net income and the related per share amounts for each prior interim period of the current fiscal period.

(b) Income from continuing operations, net income and related per share amounts for each prior interim period restated in accordance with paragraph 14.

Effective date -- for fiscal years beginning after October 15, 1977. Application in Financial Statements for fiscal years beginning before October 16, 1977, that have not been previously issued is encouraged but not required.

Retroactive application to previously issued financial statements prohibited.
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