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SFAS 154 : Accounting Changes and Error Corrections By Robert Bloom and Jayne Fuglister E-mail Story

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FEB2007 - Since 2002 , FASB and the International Accounting Standards Board (IASB

have had formal convergence projects in the works . The two standards-setting bodies are

actively engaged in harmonizing their accounting standards . One prominent example is the new SFAS 154 , Accounting Changes and Error Corrections , which replaces APB Opinion 20 and SFAS 3 . SFAS 154 is very similar to IAS 8 , Accounting Policies , Changes in Accounting Estimates and Errors

, which was revised in December 2003 . Both FASB and the IASB have modified their standards on changes and errors to achieve international uniformity and comparability in financial reporting changes and errors

The Exhibit presents a summary of the issues addressed by SFAS 154 and how its treatment of accounting changes and errors differs from APB 20 and SFAS 3 . The Sidebar illustrates two numerical applications of the new standard Changes in Accounting Principles APB 20 , Accounting Changes (1971 , generally required the cumulative effect of changes in accounting principle - from one GAAP to another - to be reflected in current earnings

SFAS 154 calls for retrospective application ' for voluntary changes in accounting principle . This standard uses the term restatement ' to refer to revision of previously issued financial statements to correct an error . The new standard enhances consistency for the same company across time and improves comparability with companies that use International Accounting Standards Retrospective application means that a change in accounting principle is treated by

restating comparative financial statements to reflect the new method as though it

had been applied all along . Instead of showing the cumulative effect of the difference

between the two accounting principles in the current income statement this figure will

now be reflected as a retrospective application and an adjustment to the opening retained

earnings balance . Thus , the new term retrospective application implies that the company

should apply the new standard it adopted to all periods shown unless it is impracticable

to determine the cumulative effect or the period-specific effect of the change . The

exceptional ' retroactive method required by APB 20 for a change from LIFO to another GAAP inventory method , a change in accounting for long-term construction contracts , and a change in accounting for the extractive industries will now be the norm for most accounting principle changes . The cumulative effect will no longer be used Note that SFAS 154 requires that , when practicable , retrospective application be presented with respect to the direct effects and related income tax effects of a change in principle

Indirect effects , such as changes in management compensation and certain royalties , are not to be included in the retrospective application . If indirect effects are recognized , they should be reflected in the period of the accounting change Changes in Methods or Estimates

Change in depreciation , amortization , or depletion method . In a significant change from

existing practice , SFAS 154 requires that changes in depreciation amortization , or depletion methods will now be viewed as changes in estimate that are effected...