A new accounting bulletin from the Securities and Exchange Commission addresses how prior year misstatements should be considered when quantifying a current year's misstatement.

Currently, there have been two common approaches used to quantify such errors. Either the error can be quantified as the amount by which the current year income statement is misstated, or the error can be quantified as the cumulative amount by which the current year's balance sheet is misstated. Problems can result from either method.

In the bulletin, SEC staff suggest that registrants quantify errors using both a balance sheet and an income statement approach and then evaluate whether either approach results in quantifying a material misstatement.

Chief accountant Conrad Hewitt said in a statement that, in most cases, his staff would not object if a registrant records a one-time cumulative effect adjustment to correct errors existing in prior years that previously had been considered immaterial.

The statements in bulletins represent interpretations and practices followed by the Office of the Chief Accountant and the SEC divisions of Corporation Finance and Investment Management in administering the disclosure requirements of the federal securities laws.

The bulletin can be viewed at www.sec.gov/interps/account/sab108.pdf.

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