The Financial Accounting Standards Board has taken a long look at an international standard on accounting changes, found it better than the American standard, and promptly adopted the gist of the international position.
Member Michael Crooch expressed satisfaction that the board was able to "make a meaningful improvement in U.S. generally accepted accounting principles while converging with the standards of the International Accounting Standards Board."
Statement 154, Accounting Changes and Error Correction, overturns APB Opinion No. 20, which was issued in 1971, and FASB Statement 3, which dates back to 1974. The new standard requires retrospective application to prior periods of any voluntary changes to alternative permitted accounting principles, unless impracticable.
"This change is important from the perspective of the users of financial information because it improves the comparability of financial statements," said FASB project manager Jeffrey Johnson. "In the past, if an entity produced financial statements and showed three years of balance sheets and income statements, if there was an accounting change reflected in the current period, the comparable prior periods would have been produced on a different basis. It was more difficult to make comparisons."
Opinion 20 required that most voluntary changes be recognized by including in the net income of the period of the change the cumulative effect of changing to the new accounting principle. It did not require changes to prior statements.
Johnson pointed out that the "change in principle" referred to changes between alternative permitted methods of accounting. The new statement, however, requires that a change in the method of depreciation, amortization or depletion for long-lived, nonfinancial assets be accounted for as a change in accounting estimate, rather than a change in principle.
Users of financial information supported the change, but the proposed statement met resistance from corporations, which feared confusion among investors and an added burden of accounting for preparers.
Though the standard was intended to improve the comparability of a given company's present and past financial statements, corporations feared that retrospective changes would confuse investors.
A comment letter from the Financial Executives Institute expressed a widespread concern.
"We are concerned about the reduction in perceived reliability and credibility of financial statements that would arise from a multitude of accounting changes being applied by 'retrospective application,' in addition to the correction of errors being presented as 'restatements,'" the letter stated.
The letter also warned that retrospective changes in principles would be confused with corrections of errors.
FASB assuaged this concern by redefining "restatement" to apply to changes made to correct past errors, not changes made in retrospective adjustment for changes in principles.
The FEI letter also complained that the "undue cost" of retrospective implementation would inhibit companies from making accounting changes that would be good for business or would make a current financial statement more accurate.
Despite the objections from the producers of financial statements, Johnson said, the statement moved forward smoothly. Comment letters brought no new considerations to the table, and the statement was ultimately approved by a unanimous consensus of the board.
Statement 154 is more than a new standard. It came as part of FASB's concerted effort to converge with the standards of the IASB, and in this case, Johnson said, it was a relatively easy convergence.
The statement also came as part of an effort to simplify the country's GAAP hodgepodge. It gathers elements of Opinion 20 and Statement 3, changes some as needed, and issues a new statement making it possible to eliminate, rather than amend, earlier pronouncements.
Statement 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after Dec. 15, 2005, with earlier application permitted for changes and corrections made in fiscal years beginning after June 1, 2005.
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