Issues in Accounting: Accounting Changes & Error Corrections: SFAS No. 154 Has Some New Rules for Accounting Changes and Error Corrections. Briefly, It Requires Retroactive Application (Rather Than a Cumulative Change) of Such Events. However, the Revised Standard Could Lead Certain Firms to Violate Their Debt Covenants

Beginning of article

In May 2005, the Financial Accounting Standards Board (FASB) issued Statement No. 154, Accounting Changes and Error Corrections. (1) SFAS No. 154 applies to all voluntary changes in accounting principles. Entities should now retrospectively apply to prior periods' financial statements voluntary changes in an accounting principle wherever practicable.

Accounting Principles Board (APB) Opinion 20 had required entities to recognize most such changes of accounting principles in net income of the period of the change and to show the cumulative effect of such changes to the new accounting principle. SFAS No. 154, which enhances the consistency of financial information between periods, results largely from the FASB's work with the International Accounting Standards Board to develop a single set of high-quality, comparable accounting standards to help improve cross-border financial reporting.

While correcting an error in prior financial statements is not an accounting change, reporting of error corrections involves adjusting previously issued statements, which formerly were reported as retrospective accounting changes. SFAS No. 154 requires accounting for changes in methods of …