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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 bythis paragraph. If a change in accounting principle has no material effect in the periodof change but is reasonably certain to have a material effect in later periods, thedisclosures 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 priorperiod 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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