FASB Codification Statement No. 154 & Operational Assets

     The issuance of Statement No 154 is the result of a broader effort by the FASB to improve the comparability of cross-boarder financial reporting by working with the IASB toward development of a single set of high-quality accounting standards. One of the areas identified in which financial reporting in the United States could be improved was the reporting of accounting changes as defined by APB Opinion No 20 and FASB Statement No 3. Statement No 154 replaces APB Opinion No 20, Accounting Changes, and FASB Statement No 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle to eliminate differences between Opinion 20 and IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors.

     Companies often make changes to their accounting principles because the new method is preferable to the old one. One example would be a change from FIFO to LIFO, because the change results in a more meaningful matching of costs with revenues. Another example would be a change from straight-line depreciation to sum-of-the-years'- digits depreciation, because the new method better reflects the pattern of benefits from the fixed assets.

    

     Under statements previously issued by the FASB, changes in accounting principle were recognized as a cumulative effect in the net income of the period of the change. Statement 154 requires retrospective application of changes in accounting principle and correction of errors, limited to the direct effects of the change, to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, this Statement requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings for that period rather than being reported in an income statement.When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, this Statement requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable.

     Statement 154 mandates that any changes in accounting principle be applied retrospectively to the balance of assets and liabilities instead of reporting the effects of changes on the income statement. Statement 154 improves financial reporting because its requirement to report voluntary changes in accounting principles via retrospective application, unless impracticable, enhances the consistency of financial information between periods and more closely matches FASB standards with the IASB. As stated by IAS 8.19, “If a change in accounting policy is required by a new IASB standard or interpretation, the change is accounted for as required by that new pronouncement or, if the new pronouncement does not include specific transition provisions, then the change in accounting policy is applied retrospectively.” That improved consistency enhances the usefulness of the financial data by facilitating analysis and understanding of comparative accounting information across boarders.

06/10/14 Copyright: -Nathan J. Fragala-