Academic journal article Journal of Accountancy

Changes in Accounting for Changes: Implementation Implications of FASB 154

Academic journal article Journal of Accountancy

Changes in Accounting for Changes: Implementation Implications of FASB 154

Article excerpt


* Companies have always faced a major issue of how to reflect changes in accounting methods and error corrections in financial statements. In 2005 FASB issued Statement no. 154, Accounting Changes and Error Corrections. The new rules are effective for fiscal years ending after December 15, 2006.

* Under Statement no. 154, companies must retrospectively apply all voluntary changes in accounting principle to previous-period financial statements unless doing so is impracticable or FASB mandates another approach. Impracticable means the company is unable to apply the new principle after making every reasonable effort or CPAs cannot document assumptions about management's intent in prior periods or gather necessary estimates for those periods.

* The pronouncement includes new rules for changes in depreciation, amortization or depletion methods for long-lived non-financial assets. These events are no longer accounted for as a change in accounting principle but rather as a change in accounting estimate affected by a change in accounting principle.

* Statement no. 154 has significant implications for auditors, who will have to help clients implement the pronouncement and audit the retrospective applications. This will increase the work auditors perform and in turn increase audit fees. The situation will be even more complex for successor audit firms.

* Although the effect on the numbers and on the financial statements is the same, financial statement users may have some difficulty understanding the difference between retrospective applications for changes in principle and retroactive restatements for error corrections.


Changes in accounting and financial reporting are inevitable. Most happen because in preparing periodic financial statements, companies must make estimates and judgments to allocate costs and revenues. Other changes arise from management decisions about the appropriate accounting methods for preparing these statements.

When changes are necessary, it's up to CPAs to decide how to reflect them in the financial reporting process. In 2005, FASB revisited the issue and made significant revisions to its guidance on how to treat certain changes. The result was Statement no. 154, Accounting Changes and Error Corrections, which superseded APB Opinion no. 20, Accounting Changes. Statement no. 154 is effective for fiscal years ending after December 15, 2006. This article discusses the changes Statement no. 154 brought about as well as the practical implementation issues companies and their auditors will face.


A change in accounting principle results when an entity adopts a generally accepted accounting principle different from the one it used previously Frequently the entity is able to choose from among two or more acceptable principles. Statement no. 154 adopts a "retrospective" approach to accounting principle changes. It defines retrospective application as applying a "different accounting principle to prior accounting periods as if that principle had always been used." The term also may include the restatement of previously issued financial statements to reflect a change in the reporting entity. The statement defines restatement as revising previously issued financial statements to correct an error.

Under previous guidance, the Accounting Principles Board (APB) was most concerned about a possible dilution of public confidence in financial reporting if companies applied principle changes retroactively and restated prior years' financial statements. The APB opted for a "catch-up," or cumulative effect, approach to reporting most changes; the cumulative effect of a change on prior-year financial statements was reported on the current year's income statement in a manner similar to, but not the same as, an extraordinary item. Opinion no. 20 did not require restatement of prior-year financial statements, but did require presentation of pro forma information. …

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