Accounting Changes and Error Corrections, written by Dr. Ralph L. Benke, Jr., Ph.D. CMA, Professor Emeritus at James Madison University, examines in detail the reporting and required disclosures of (a) changes in accounting principles, (b) changes in estimates, (c) changes in a reporting entity, and (d) correction of errors.  

This Portfolio addresses the principal authoritative pronouncements of FASB Statement of Financial Accounting Standard (FAS) No. 154, Accounting Changes and Error Corrections, and IASB International Accounting Standard (IAS) No. 8, Accounting Policies, Changes in Accounting Estimates, and Errors.  This Portfolio also references relevant pronouncements of the Securities and Exchange Commission, Public Company Accounting Oversight Board, and Emerging Issues Task Force. 

This Portfolio begins by explaining voluntary changes in accounting principles, changes in estimates, changes in reporting entities, and error corrections. It then provides practitioners with additional insight into applicable rules and requirements by briefly tracing the evolution of the principal authoritative pronouncements, including current authoritative pronouncement, FAS 154, which carries forward parts of the earlier pronouncements.  

Accounting Changes and Error Corrections accompanies the analysis with numerous examples illustrating both reporting and disclosure requirements. It explains voluntary accounting changes, discusses the reporting of the accounting changes, covers in detail the required disclosures for changes in accounting principles, and contains illustrations of required disclosures. 

Other discussions address changing depreciation methods, FAS 154 requirements for changing a reporting entity, types of errors and their affect on financial statements, example disclosures from filings by Bassett Furniture Industries and H&R Block, and international guidance for accounting changes and error corrections under IAS 8.  

Worksheets supplementing the analysis include example disclosures from SEC filings, hypothetical illustrations, and the full text of FAS 154 and IAS 8.

Accounting Changes and Error Corrections allows you to benefit from: 

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area.
• Invaluable practice documents including tables, charts and lists.
• Guidance from world-class experts.
• Real-world and in-depth analysis that lets you explore various options.
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
• Alternative approaches to both common and unique tax scenarios. 

This Portfolio is included in the Accounting Policy & Practice Series, a comprehensive series of titles which explain, explicate, and offer commentary on a wide range of accounting and financial management topics, including revenue recognition, income taxes, leasing, business combinations, debt instruments, risk management, internal controls and more. 

Detailed Analysis

I. Introduction and Key Definitions

A. Purpose of Portfolio

B. Scope of Portfolio

C. Essential Categories and Definitions

1. Changes in Accounting Principles

2. Changes in Accounting Estimates

3. Changes in the Reporting Entity

4. Correction of Errors

II. Evolution of Accounting Changes and Error Corrections

Introductory Material

A. Need for Consistent Reporting and Restatements

B. Evolution of the Principal Authoritative Pronouncements

1. APB Opinion No. 20, 1971-2005

2. APB Opinion No. 28, 1973-Present, as Amended

3. FASB Statement No. 3, 1972-2005

4. FASB Statement No. 154, 2005-Present

a. Scope of FAS 154

b. The Conceptual Framework and FAS 154

c. Why FASB Thought FAS 154 Was Necessary

d. Changes in Guidance Under FAS 154

C. Materiality

1. The 5% "Rule"

2. Defining Materiality

3. Materiality for SEC Registrants

a. Sarbanes-Oxley Act of 2002

b. SEC Staff Accounting Bulletin No. 99, 1999 - Present

(1) Rejection of 5% Rule

(2) Cannot Combine Material Error to Make Error Immaterial

(3) Intentional Errors Are Material Errors

c. SEC Staff Accounting Bulletin No. 108, 2006 - Present

4. Proposed FSP 154-a

III. Changes in Accounting Principles

A. Introduction

B. Trends for Changes in Accounting Principle

C. Reasons to Voluntarily Change Accounting Principles

D. When to Follow FAS 154 for a Change in Accounting Principle

1. When Not to Follow FAS 154

2. When to Follow FAS 154

E. Application of a Change in an Accounting Principle to Financial Statements

1. Retrospective Application

a. Carrying Amounts for Cumulative Effect

b. Offsetting Adjustment to Statement of Retained Earnings

c. Prior Period Financial Statements as if Prepared Using New Accounting Principle

2. Indirect Effects of Retrospective Application

3. Impracticability and Prospective Application

a. Impracticability Exceptions

b. Impractical to Determine the Period-Specific Effects of the Change to All Prior Periods Presented

c. Impractical to Determine the Cumulative Effect of Applying the Change to Any Prior Period

IV. Disclosures for Changes in Accounting Principles

Introductory Material

A. Required Disclosures for Accounting Changes

B. Nature and Reason for the Change

1. Example of a Disclosure Not Fulfilling the Nature and Reason Requirement

2. Example Fulfilling the Nature and Reason Requirement

C. Method of Applying the Change

1. Retrospective Adjustment for Prior Period Information

2. Effect of Change on Financial Statement Line Items

3. Cumulative Effect of Change on Equity

4. Reasons for Impracticable Retrospective Application

D. Indirect Effects

E. Repeating Disclosures

V. Changes in Accounting Estimates

Introductory Material

A. Trends in Changes in Accounting Estimates

B. Reporting Changes in Estimates

C. Disclosures for Changes in Accounting Estimates

1. Change in Estimate Affecting Several Future Periods

2. Change in Estimate in Ordinary Course of Accounting

D. Changes in Estimates Versus Changes in Accounting Principles

E. Change in Depreciation Methods

VI. Changes in the Reporting Entity

A. Types of Changes in Reporting Entities

B. Spin-offs

C. Reporting a Change in the Reporting Entity

D. Disclosures for a Change in the Reporting Entity

E. Disclosure Examples for Changes in Reporting Entity

1. Change in the Reporting Entity

a. Disclosures Describing the Nature and Reason

b. Disclosures Describing the Effect of the Change

2. Change in Reporting Entity Versus Business Combination

3. Change in Reporting Entity Within Other Disclosures

VII. Correction of Errors

Introductory Material

A. Definition of Errors in Financial Statements

B. Categories of Errors

1. Counterbalancing Errors

2. Balance Sheet Errors

3. Income Statement Errors

4. Balance Sheet and Income Statement Errors

C. Correction of Errors

1. FAS 154 Requirements for Correction of Errors

2. Requirements for Reporting of Errors Versus Requirements for Reporting Change in Accounting Principles

D. Disclosures for Correction of Errors

E. Illustration of Correction of Errors

1. Impairment Testing With Errors in Financial Statements

2. Impairment Testing Without Errors in Financial Statements

3. Summary of the Error

4. The Affect of the Error

5. Correction of the Errors

F. Errors, Fraud, and Internal Controls

1. Errors and Internal Controls

2. Frauds Versus Errors

3. Example of Failure of Internal Controls and Material Error: H& R Block

VIII. International Accounting Standard No. 8, Accounting Policies, Changes in Accounting Estimates, and Errors

Introductory Material

A. Background of IAS 8

B. IAS 8 as Compared to FAS 154 - Similarities Between the Standards

C. IAS 8 as Compared to FAS 154 - Differences Between the Standards

1. Key Terminology

a. Retrospective Application and Retrospective Restatement

b. Indirect Effect of a Change in Accounting Principle

c. Change in Reporting Entity

2. Impracticability Exemption for Correction of an Error

3. Revaluation of Property, Plant or Equipment or Intangible Assets

4. Disclosure Stating the Reasoning for a Change in Accounting Principle

5. Restatement for the Acquisition or Disposal of a Subsidiary

Working Papers

TABLE OF WORKSHEETS

Worksheet 1 Glossary

Worksheet 2 Summary of Accounting Changes and Errors

Worksheet 3 Statement of Financial Accounting Standards No. 154 Accounting Changes and Error Corrections -A Replacement of APB Opinion No. 20 and FASB Statement No. 3 (May 2005)

Worksheet 4 International Accounting Standard 8 Accounting Policies, Changes in Accounting Estimates and Errors

Worksheet 5 Financial Accounting Standards Advisory Council, International Convergence- Status and Plans

Worksheet 6 A Roadmap for Convergence Between International Financial Reporting Standards (IFRS) and U.S. GAAP-2006-2008 (Feb. 27, 2006)

Worksheet 7 Example Change in Accounting Principle ABC Company

Worksheet 8 Example Correction of Errors-ABC Company

Worksheet 9 Example Change in Estimates-ABC Company

Worksheet 10 Example of Change in Accounting Principles-LIFO to FIFO

Worksheet 11 Example of Change in Accounting Principles Completed-Contract to Percentage-of-Completion

Worksheet 12 SEC Letter Filing Restated Financial Statements for Errors in Accounting for Stock Option Grants

Worksheet 13 Disclosure Example Change in Accounting Principle Hercules Incorporated (DEC)

Worksheet 14 Disclosure Example of Error Correction Error Due to Weakness in Internal Controls H& R Block

Worksheet 15 Accounting Changes and Error Correction: Sample Disclosures

Worksheet 16 Accounting Changes and Error Correction: Sample Disclosures

Worksheet 17 Disclosure Examples, Clear Channel Communications Inc. (2006 Form 10-K)

Worksheet 18 Disclosure Examples, Dollar General Corp. (2007 Form 10-K)

Worksheet 19 Disclosure Examples, Duke Energy Corp. (2006 Form 10-K)

Worksheet 20 Disclosure Examples, First Data Corp. (2006 Form 10-K)

Worksheet 21 Disclosure Examples, Staples, Inc. and Subsidiaries (2007 Form 10-K)

Worksheet 22 Disclosure Examples, Tenet Healthcare Corp. (2006 Form 10-K)

Worksheet 23 Disclosure Examples, Viacom Inc. (2006 Form 10-K)

Worksheet 24 Disclosure Examples, Zimmer Holdings Inc. (2006 Form 10-K)

Worksheet 25 Disclosure Examples, Xcel Energy Inc. (2006 Form 10-K)

Worksheet 26 Disclosure Examples, Biogen Idec Inc. (2006 Form 10-K)

Worksheet 27 Disclosure Examples, QAD Inc. (2007 Form 10-K)

Worksheet 28 Disclosure Examples, Rockwood Holdings, Inc. (2006 Form 10-K)

Worksheet 29 Disclosure Examples, Stage Stores, Inc. (2007 Form 10-K)

Worksheet 30 Accounting Changes and Error Correction: Sample Disclosures

Worksheet 31 Disclosure Examples, General Electric Capital Corporation (2005 Form 10-K)

Bibliography

OFFICIAL

Statutes:

Cases:

Securities and Exchange Commission:

Staff Accounting Bulletins

Financial Accounting Standards Board:

FASB Statements of Financial Accounting Standards

FASB Interpretations

FASB Concepts Statements

FASB Staff Positions

Accounting Principles Board:

Accounting Principles Board Opinions

Accounting Research Bulletins

American Institute of Certified Public Accountants:

Statements of Position

Statements on Auditing Standards:

International Accounting Standards Board:

International Accounting Standards

SEC Filings:

UNOFFICIAL

Financial Accounting Standards Board:

Emerging Issues Task Force:

International Accounting Standards Board:

Textbooks, Handbooks, Articles, Miscellaneous:

BNA Portfolios:

Accounting Policy and Practice Series