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Accounting Changes and Error Corrections

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New Rules by SFAS No. 154

Statement of Financial Accounting Standards (SFAS) No. 154
        a.  Accounting Changes and Error Corrections
        b.  Issued in May 2005


SFAS No. 154 Supersedes
        a.  APB Opinion No. 20, Accounting Changes
        b.  SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements
        c.  SFAS No. 73, Reporting a Change in Accounting for Railroad Track Structures


Correction of an Error (in previously issued financial statements)
        a.  SFAS No. 154 rules are same as APB Opinion No. 20

Change in Accounting Estimate
        a.  SFAS No. 154 rules are same as APB Opinion No. 20

Change in Accounting Principle
        a.  APB Opinion No. 20
            --> Cumulative effect (of changes to new accounting principle) is reported in net income of the period of change

        b.  SFAS No. 154
            --> Retrospective application (to financial statements of prior periods) is required.

Change in depreciation (and amortization) methods
        a.  APB Opinion No. 20
            --> Change in Accounting Principle

        b.  SFAS No. 154
            --> Change in Accounting Estimate (effected by a change in accounting principle)
 
 
   
Statement of Financial Accounting Standards (SFAS) No. 154 covers

Three types of accounting changes 
        a.  Change in Accounting Principle
        b.  Change in Accounting Estimate
        c.  Change in Reporting Entity


Changes in Accounting Principle are allowed only if:
        a.  Required by new GAAP
             or
        b.  Use of alternative accounting principle can be justified to be preferable.


Retrospective application
        a.  New accounting principle is applied to all previous periods, retrospectively.

        b.  Cumulative effect of the change (to new accounting principle)
             --> reflected in the beginning balances of assets and liabilities.

        c.  Offsetting adjustment
             --> reflected in the beginning balance of retained earnings

Change in Accounting Estimate
        a.  Applied to the period of change and future periods only.
        b.  Amounts reported for prior periods will NOT be restated or retrospectively adjusted.

Change in Reporting Entity
        a.  Retrospectively applied to financial statements of all prior periods.
        b.  The effect of change on income should be disclosed for all periods (presented).

Correction of an Error
        a.  Prior-period financial statements will be restated for correction of errors (in previously issued financial statements)

        b.  Cumulative effect of errors
             --> reflected in beginning balances of assets and liabilities.

        c.  Offsetting adjustment
             --> reflected in the beginning balance of retained earnings
   







 
U.S. GAAP Codification
International Financial Reporting Standards (IFRS)
 
Accounting Topics
Inventory Valuation Methods
Depreciation Methods
Revenue Recognition Principle
Accrual Basis vs. Cash Basis Accounting
Basics of Journal Entries
Ratios for Financial Statement Analysis
Overview of Financial Statements








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