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

By Reinstein, Alan | The RMA Journal, September 2005 | Go to article overview

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


Reinstein, Alan, The RMA Journal


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 depreciation, amortization, or depletion for long-lived, nonfinancial assets as a change in accounting estimate affected by a change in an accounting principle. APB 20 had required reporting such events as changes of accounting principles; to simplify this implementation, SFAS No. 154 completely replaces APB 20 and SFAS No. 3 by carrying forward (without change) many of these former provisions, including reporting changes in accounting estimates, changes in the reporting entity, corrections of an error, and justifications for changing an accounting principle on the grounds that it is preferable, as well as SFAS No. 3 provisions relating to accounting changes and error corrections in interim financial statements.

Determining Impracticability

Retrospective application is deemed impracticable if its effects cannot be determined, if it assumes (rather than independently substantiates) management's intent in a prior period, or if it assumes significant, unverifiable prior-period estimates. Entities also should make every reasonable effort to apply retrospective changes before calling such effects indeterminable.

If the cumulative effect of the change in an accounting principle is determinable but impracticable to ascertain the specific effects of an accounting change in any presented prior period, entities should apply the change in accounting policy to the balances of assets and liabilities as of the start of the earliest period for which retrospective application is practicable. They also should adjust the opening balance of that period's retained earnings or other components of equity, such as accumulated other comprehensive income. If it is impracticable to determine the cumulative effect of applying a change in an accounting principle, they should disclose the method used to report the change and show why retrospective application is impracticable.

Changes in Depreciation

Methods

SFAS No. 154 requires accounting for changes in depreciation method as a change in estimate, not as a change in accounting principle (as required under APB 20). But, since a principle is involved, changes in depreciation methods become changes in estimate "inseparable" from a change in principle whose preferability must be justified. Thus, entities should account and justify (for example, citing new economic conditions) changing from an accelerated to the straight-line method of depreciation similar to changes in estimated useful life or salvage value.

Retrospective Application

Entities should record the effects of retrospectively applying voluntary changes in accounting principles that alter current or future cash flows only in the period of the voluntary change. They should exclude interactions between changes in accounting principle and contractual obligations that can cause such "indirect effects" of retrospective application. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • A full archive of books and articles related to this one
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

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
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

    Already a member? Log in now.