Accounting Error 2007
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REPORTING Changes in Accounting for Changes BY JACK O. HALL AND C. RICHARD ALDRIDGE Related TOPICS Accounting and Financial Reporting Accounting Compliance and Reporting (US) EXECUTIVE SUMMARY 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 accounting error correction exercises 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 nonfinancial 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, fi
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Events Jobs.Economist.com The Economist Store Timekeeper reading list My SubscriptionSubscribe to The Economist Activate my digital subscription Manage my subscription Renew Log in or register Subscribe Search http://www.economist.com/node/9724324 this site: World politicsPolitics this week United States Britain Europe China Asia Americas Middle East & Africa International Business & financeAll Business & finance Which MBA? EconomicsAll Economics Economics A-Z Markets & data Indicators Science & technologyAll Science & technology Technology Quarterly CultureAll Culture 1843 Magazine Style guide The Economist Quiz BlogsLatest updates Bagehot's notebook Buttonwood's notebook Democracy in America Erasmus Free exchange Game theory accounting error Graphic detail Gulliver Prospero The Economist explains DebateEconomist debates Letters to the editor MultimediaEconomist Films Economist Radio Multimedia library The Economist in audio Print editionCurrent issue Previous issues Special reports Politics this week Business this week Leaders KAL's cartoon Obituaries Economics focus A book-keeping error The accounting principle that is meant to capture fair value might end up distorting it Aug 30th 2007 | From accounting error correction the print edition Add this article to your reading list by clicking this button Tweet AS THE old joke goes, there are three types of accountant: those who can count and those who cannot. What and how they count is often contentious. A long-fermenting issue is how far “fair-value” accounting, which uses up-to-the-minute market information to price assets, should be pushed in banking. The bodies that set accountancy standards believe the more accurate disclosures are, the better. Regulators meanwhile have fretted that market-based accounting would increase fluctuations in banks' earnings and capital, which might increase risks to financial stability. And commercial banks are reluctant to expose the idiosyncrasies of their loan books to the glare of market scrutiny. The attractions of fair-value accounts are straightforward. By basing values on recent prices (“marking to market”), they paint a truer picture of a firm's financial health than historical-cost measures. These gauge net worth from the arbitrary dates when assets and liabilities were first booked. In principle, fair-value accounting makes a firm's viability plainer and enables shareholders and regulators to spot financial trouble more quickly. Proponents say that market-based accounting would have limited the fallout from America