Financial Accounting Series

NO.
268-A MAY 2005
Financial
Accounting Series
Statement of
Financial Accounting
Standards No. 154
Accounting Changes and Error Corrections
a replacement of APB Opinion No. 20

and FASB Statement No. 3
Financial Accounting Standards Board

of the Financial Accounting Foundation
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Summary
This Statement 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. This Statement applies to all voluntary changes in accounting principle. It also
applies to changes required by an accounting pronouncement in the unusual instance that
the pronouncement does not include specific transition provisions. When a pronounce-
ment includes specific transition provisions, those provisions should be followed.
Opinion 20 previously required that most voluntary changes in accounting principle
be recognized by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. This Statement requires retrospec-
tive application to prior periods’ financial statements of changes in accounting
principle, 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 (or other appropriate components of equity or
net assets in the statement of financial position) 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.
This Statement defines retrospective application as the application of a different
accounting principle to prior accounting periods as if that principle had always been
used or as the adjustment of previously issued financial statements to reflect a change
in the reporting entity. This Statement also redefines restatement as the revising of
previously issued financial statements to reflect the correction of an error.
This Statement requires that retrospective application of a change in accounting
principle be limited to the direct effects of the change. Indirect effects of a change in
accounting principle, such as a change in nondiscretionary profit-sharing payments
resulting from an accounting change, should be recognized in the period of the
accounting change.
This Statement also requires that a change in depreciation, amortization, or depletion
method for long-lived, nonfinancial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle.
This Statement carries forward without change the guidance contained in Opinion 20
for reporting the correction of an error in previously issued financial statements and a
change in accounting estimate. This Statement also carries forward the guidance in
Opinion 20 requiring justification of a change in accounting principle on the basis of
preferability.
Reasons for Issuing This Statement
This Statement is the result of a broader effort by the FASB to improve the
comparability of cross-border financial reporting by working with the International
Accounting Standards Board (IASB) toward development of a single set of high-quality
accounting standards. As part of that effort, the FASB and the IASB identified
opportunities to improve financial reporting by eliminating certain narrow differences
between their existing accounting standards. Reporting of accounting changes was
identified as an area in which financial reporting in the United States could be improved
by eliminating differences between Opinion 20 and IAS 8, Accounting Policies,
Changes in Accounting Estimates and Errors.
How the Changes in This Statement Improve Financial Reporting
Under the provisions of Opinion 20, most accounting changes were recognized by
including in net income of the period of the change the cumulative effect of changing
to the newly adopted accounting principle. This Statement 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. That improved consistency enhances the usefulness of
the financial information, especially by facilitating analysis and understanding of
comparative accounting data.
Also, in instances in which full retrospective application is impracticable, this
Statement improves consistency of financial information between periods by requiring
that a new accounting principle be applied as of the earliest date practicable.
This Statement requires that a change in depreciation, amortization, or depletion
method for long-lived, nonfinancial assets be accounted for as a change in accounting
estimate that is effected by a change in accounting principle. The provisions of this
Statement better reflect the fact that an entity should change its depreciation,
amortization, or depletion method only in recognition of changes in estimated future
benefits of an asset, in the pattern of consumption of those benefits, or in the
information available to the entity about those benefits.
A change in accounting principle required by the issuance of an accounting
pronouncement was not within the scope of Opinion 20. Including all changes in
accounting principle within the scope of this Statement establishes, unless impracti-
cable, retrospective application as the transition method for new accounting standards,
but only in the unusual instance that the new accounting pronouncement does not
include explicit transition provisions.
Statement of
Financial Accounting
Standards No. 154
a replacement of APB Opinion No. 20

and FASB Statement No. 3
May 2005

of the Financial Accounting Foundation
401 MERRITT 7, PO BOX 5116, NORWALK, CONNECTICUT 06856-5116
Copyright © 2005 by Financial Accounting Standards Board. All rights reserved. No
part of this publication may be reproduced, stored in a retrieval system, or transmitted, in
any form or by any means, electronic, mechanical, photocopying, recording, or other-
wise, without the prior written permission of the Financial Accounting Standards Board.
Statement of Financial Accounting Standards No. 154
a replacement of APB Opinion No. 20 and FASB Statement No. 3
May 2005
CONTENTS
Paragraph
Numbers
Introduction ............................................................................ 1
Standards of Financial Accounting and Reporting:
Definitions........................................................................... 2
Scope................................................................................. 3
Accounting Changes .............................................................. 4–24
Change in Accounting Principle............................................. 4–18
Impracticability .............................................................. 11
Justification for a Change in Accounting Principle .................. 12–14
Reporting a Change in Accounting Principle Made in an Interim
Period........................................................................ 15–16
Disclosures ................................................................... 17–18
Change in Accounting Estimate ............................................. 19–22
Disclosures ................................................................... 22
Change in the Reporting Entity ............................................. 23–24
Disclosures ................................................................... 24
Correction of an Error in Previously Issued Financial Statements ...... 25–26
Disclosures....................................................................... 26
Effective Date and Transition ................................................... 27
Appendix A: Illustrations ........................................................... A1–A8
Appendix B: Background Information and Basis for Conclusions ......... B1–B38
Appendix C: Amendments to Existing Pronouncements...................... C1–C19
Statement of Financial Accounting Standards No. 154
a replacement of APB Opinion No. 20 and FASB Statement No. 3
May 2005
INTRODUCTION
1. This Statement provides guidance on the accounting for and reporting of accounting
changes and error corrections. It establishes, unless impracticable, retrospective
application as the required method for reporting a change in accounting principle in the
absence of explicit transition requirements specific to the newly adopted accounting
principle. This Statement also provides guidance for determining whether retrospective
application of a change in accounting principle is impracticable and for reporting a
change when retrospective application is impracticable. The correction of an error in
previously issued financial statements is not an accounting change. However, the
reporting of an error correction involves adjustments to previously issued financial
statements similar to those generally applicable to reporting an accounting change
retrospectively. Therefore, the reporting of a correction of an error by restating
previously issued financial statements is also addressed by this Statement.
STANDARDS OF FINANCIAL ACCOUNTING AND REPORTING
Definitions
2. The following terms are defined as used in this Statement:
a. Accounting change—a change in (1) an accounting principle, (2) an accounting

estimate, or (3) the reporting entity. The correction of an error in previously issued
financial statements is not an accounting change.
b. Accounting pronouncement—a source of generally accepted accounting prin-
ciples (GAAP) in the United States, including FASB Statements of Financial
Accounting Standards, FASB Interpretations, FASB Staff Positions, FASB State-
ment 133 Implementation Issues, Emerging Issues Task Force Consensuses, other
pronouncements of the FASB or other designated bodies, or other forms of GAAP
as described in categories (a)–(c) of AICPA Statement on Auditing Standards (SAS)
No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted
1
Accounting Principles, as codified in the AICPA Codification of Statements on
Auditing Standards, AU Section 411, The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles.1 AICPA accounting interpretations
and implementation guides (“Q & A’s”) issued by the FASB staff, as described in
category (d) of SAS 69, also are considered accounting pronouncements for the
purpose of applying this Statement.
c. Change in accounting principle—a change from one generally accepted account-
ing principle to another generally accepted accounting principle when there are two
or more generally accepted accounting principles that apply or when the accounting
principle formerly used is no longer generally accepted. A change in the method of
applying an accounting principle also is considered a change in accounting
principle.
d. Change in accounting estimate—a change that has the effect of adjusting the
carrying amount of an existing asset or liability or altering the subsequent
accounting for existing or future assets or liabilities. A change in accounting
estimate is a necessary consequence of the assessment, in conjunction with the
periodic presentation of financial statements, of the present status and expected
future benefits and obligations associated with assets and liabilities. Changes in
accounting estimates result from new information. Examples of items for which
estimates are necessary are uncollectible receivables, inventory obsolescence,
service lives and salvage values of depreciable assets, and warranty obligations.
e. Change in accounting estimate effected by a change in accounting principle—a
change in accounting estimate that is inseparable from the effect of a related change
in accounting principle. An example of a change in estimate effected by a change in
principle is a change in the method of depreciation, amortization, or depletion for
long-lived, nonfinancial assets.
f. Change in the reporting entity—a change that results in financial statements that,
in effect, are those of a different reporting entity. A change in the reporting entity is
limited mainly to (1) presenting consolidated or combined financial statements in
place of financial statements of individual entities, (2) changing specific subsidiaries
that make up the group of entities for which consolidated financial statements are
presented, and (3) changing the entities included in combined financial statements.
Neither a business combination accounted for by the purchase method nor the
consolidation of a variable interest entity pursuant to FASB Interpretation No. 46
1
The Board’s technical agenda includes a project that could result in the issuance of a Statement of
Financial Accounting Standards that identifies the sources of accounting principles and the framework for
selecting the principles used in the preparation of financial statements of nongovernmental enterprises that
are presented in conformity with GAAP. The Board issued an Exposure Draft of that proposed Statement
in April 2005.
2
(revised December 2003), Consolidation of Variable Interest Entities, is a change in
reporting entity.
g. Direct effects of a change in accounting principle—those recognized changes in
assets or liabilities necessary to effect a change in accounting principle. An example
of a direct effect is an adjustment to an inventory balance to effect a change in
inventory valuation method. Related changes, such as an effect on deferred income
tax assets or liabilities or an impairment adjustment resulting from applying the
lower-of-cost-or-market test to the adjusted inventory balance, also are examples of
direct effects of a change in accounting principle.
h. Error in previously issued financial statements—an error in recognition, meas-
urement, presentation, or disclosure in financial statements resulting from math-
ematical mistakes, mistakes in the application of GAAP, or oversight or misuse of
facts that existed at the time the financial statements were prepared. A change from
an accounting principle that is not generally accepted to one that is generally
accepted is a correction of an error.
i. Indirect effects of a change in accounting principle—any changes to current or
future cash flows of an entity that result from making a change in accounting
principle that is applied retrospectively. An example of an indirect effect is a change
in a nondiscretionary profit sharing or royalty payment that is based on a reported
amount such as revenue or net income.
j. Restatement—the process of revising previously issued financial statements to
reflect the correction of an error in those financial statements.
k. Retrospective application—the application of a different accounting principle to
one or more previously issued financial statements, or to the statement of financial
position at the beginning of the current period, as if that principle had always been
used, or a change to financial statements of prior accounting periods to present the
financial statements of a new reporting entity as if it had existed in those prior years.
Scope
3. This Statement applies to financial statements of business enterprises and not-for-

profit organizations, both of which are referred to herein as entities. This Statement also
applies to historical summaries of information based on primary financial statements
that include an accounting period in which an accounting change or error correction is
reflected. The guidance in this Statement also may be appropriate in presenting
financial information in other forms or for special purposes.
3
Accounting Changes
Change in Accounting Principle
4. A presumption exists that an accounting principle once adopted shall not be changed
in accounting for events and transactions of a similar type. Consistent use of the same
accounting principle from one accounting period to another enhances the utility of
financial statements for users by facilitating analysis and understanding of comparative
accounting data.
5. Neither (a) initial adoption of an accounting principle in recognition of events or

transactions occurring for the first time or that previously were immaterial in their effect
nor (b) adoption or modification of an accounting principle necessitated by transactions
or events that are clearly different in substance from those previously occurring is a
change in accounting principle. A reporting entity shall change an accounting principle
only if (a) the change is required by a newly issued accounting pronouncement or
(b) the entity can justify the use of an allowable alternative accounting principle on the
basis that it is preferable.
6. It is expected that accounting pronouncements normally will provide specific

transition requirements. However, in the unusual instance that there are no transition
requirements specific to a particular accounting pronouncement, a change in accounting
principle effected to adopt the requirements of that accounting pronouncement shall be
reported in accordance with paragraphs 7–10 of this Statement.2 Early adoption of an
accounting pronouncement, when permitted, shall be effected in a manner consistent
with the transition requirements of that pronouncement.
7. An entity shall report a change in accounting principle through retrospective

application of the new accounting principle to all prior periods, unless it is impracti-
cable to do so. Retrospective application requires the following:
a. The cumulative effect of the change to the new accounting principle on periods prior
to those presented shall be reflected in the carrying amounts of assets and liabilities
as of the beginning of the first period presented.
b. An offsetting adjustment, if any, shall be made to the opening balance of retained
earnings (or other appropriate components of equity or net assets in the statement of
financial position) for that period.
2This requirement is not limited to newly issued accounting pronouncements. For example, if an existing
pronouncement permits a choice between two or more alternative accounting principles, and provides
requirements for changing from one to another, those requirements shall be followed.
4
c. Financial statements for each individual prior period presented shall be adjusted to
reflect the period-specific effects of applying the new accounting principle.
8. If the cumulative effect of applying a change in accounting principle to all prior

periods can be determined, but it is impracticable to determine the period-specific
effects of that change on all prior periods presented, the cumulative effect of the change
to the new accounting principle shall be applied to the carrying amounts of assets and
liabilities as of the beginning of the earliest period to which the new accounting
principle can be applied. An offsetting adjustment, if any, shall be made to the opening
balance of retained earnings (or other appropriate components of equity or net assets in
the statement of financial position) for that period.
9. If it is impracticable to determine the cumulative effect of applying a change in

accounting principle to any prior period, the new accounting principle shall be applied
as if the change was made prospectively as of the earliest date practicable. APB
Opinion No. 20, Accounting Changes, illustrated that type of change with a change
from the first-in, first-out (FIFO) method of inventory valuation to the last-in, first-out
(LIFO) method. This Statement carries forward that example (as Illustration 2 in
Appendix A) for illustrative purposes without implying that such a change would be
considered preferable as required by paragraph 13 of this Statement.
10. Retrospective application shall include only the direct effects of a change in
accounting principle, including any related income tax effects. Indirect effects that
would have been recognized if the newly adopted accounting principle had been
followed in prior periods shall not be included in the retrospective application. If
indirect effects are actually incurred and recognized, they shall be reported in the period
in which the accounting change is made.
Impracticability
11. It shall be deemed impracticable to apply the effects of a change in accounting

principle retrospectively only if any of the following conditions exist:
a. After making every reasonable effort to do so, the entity is unable to apply the
requirement.
b. Retrospective application requires assumptions about management’s intent in a prior
period that cannot be independently substantiated.
5
c. Retrospective application requires significant estimates of amounts, and it is
impossible to distinguish objectively information about those estimates that:
(1) Provides evidence of circumstances that existed on the date(s) at which those
amounts would be recognized, measured, or disclosed under retrospective
application, and
(2) Would have been available when the financial statements for that prior period
were issued.3
Justification for a Change in Accounting Principle
12. In the preparation of financial statements, once an accounting principle is adopted,

it shall be used consistently in accounting for similar events and transactions.
13. An entity may change an accounting principle only if it justifies the use of an
allowable alternative accounting principle on the basis that it is preferable. However, a
method of accounting that was previously adopted for a type of transaction or event that
is being terminated or that was a single, nonrecurring event in the past shall not be
changed. For example, the method of accounting shall not be changed for a tax or tax
credit that is being discontinued. Additionally, the method of transition elected at the
time of adoption of an accounting pronouncement shall not be subsequently changed.
However, a change in the estimated period to be benefited by an asset, if justified by the
facts, shall be recognized as a change in accounting estimate.
14. The issuance of an accounting pronouncement that requires use of a new

accounting principle, interprets an existing principle, expresses a preference for an
accounting principle, or rejects a specific principle may require an entity to change an
accounting principle. The issuance of such a pronouncement constitutes sufficient
support for making such a change provided that the hierarchy established for GAAP is
followed. The burden of justifying other changes in accounting principle rests with the
entity making the change.
Reporting a Change in Accounting Principle Made in an Interim Period
15. A change in accounting principle made in an interim period shall be reported by

retrospective application in accordance with paragraphs 7–10 of this Statement.
3This Statement requires a determination of whether information currently available to develop significant
estimates would have been available when the affected transactions or events would have been recognized
in the financial statements. However, it is not necessary to maintain documentation from the time that an
affected transaction or event would have been recognized to determine whether information to develop the
estimates would have been available at that time.
6
However, the impracticability exception in paragraph 11 may not be applied to
prechange interim periods of the fiscal year in which the change is made. When
retrospective application to prechange interim periods is impracticable, the desired
change may only be made as of the beginning of a subsequent fiscal year.
16. If a public company that regularly reports interim information makes an account-
ing change during the fourth quarter of its fiscal year and does not report the data
specified by paragraph 30 of APB Opinion No. 28, Interim Financial Reporting (as
amended), in a separate fourth-quarter report or in its annual report, that entity shall
include disclosure of the effects of the accounting change on interim-period results, as
required by paragraph 17 of this Statement, in a note to the annual financial statements
for the fiscal year in which the change is made.
Disclosures
17. An entity shall disclose the following in the fiscal period in which a change in
accounting principle is made:
a. The nature of and reason for the change in accounting principle, including an
explanation of why the newly adopted accounting principle is preferable.
b. The method of applying the change, and:
(1) A description of the prior-period information that has been retrospectively
adjusted, if any.
(2) The effect of the change on income from continuing operations, net income (or
other appropriate captions of changes in the applicable net assets or performance
indicator), any other affected financial statement line item, and any affected
per-share amounts for the current period and any prior periods retrospectively
adjusted. Presentation of the effect on financial statement subtotals and totals
other than income from continuing operations and net income (or other
appropriate captions of changes in the applicable net assets or performance
indicator) is not required.
(3) The cumulative effect of the change on retained earnings or other components
of equity or net assets in the statement of financial position as of the beginning
of the earliest period presented.
(4) If retrospective application to all prior periods (paragraph 7) is impracticable,
disclosure of the reasons therefor, and a description of the alternative method
used to report the change (paragraphs 8 and 9).
c. If indirect effects of a change in accounting principle are recognized:
(1) A description of the indirect effects of a change in accounting principle,
including the amounts that have been recognized in the current period, and the
related per-share amounts, if applicable.
7
(2) Unless impracticable,4 the amount of the total recognized indirect effects of the
accounting change and the related per-share amounts, if applicable, that are
attributable to each prior period presented.
Financial statements of subsequent periods5 need not repeat the disclosures required by
this paragraph. If a change in accounting principle has no material effect in the period
of change but is reasonably certain to have a material effect in later periods, the
disclosures required by paragraph 17(a) shall be provided whenever the financial
statements of the period of change are presented.
18. In the fiscal year in which a new accounting principle is adopted, financial
information reported for interim periods after the date of adoption shall disclose the
effect of the change on income from continuing operations, net income (or other
appropriate captions of changes in the applicable net assets or performance indicator),
and related per-share amounts, if applicable, for those post-change interim periods.
Change in Accounting Estimate
19. A change in accounting estimate shall be accounted for in (a) the period of change
if the change affects that period only or (b) the period of change and future periods if
the change affects both. A change in accounting estimate shall not be accounted for by
restating or retrospectively adjusting amounts reported in financial statements of prior
periods or by reporting pro forma amounts for prior periods.
20. Distinguishing between a change in an accounting principle and a change in an

accounting estimate is sometimes difficult. In some cases, a change in accounting
estimate is effected by a change in accounting principle. One example of this type of
change is a change in method of depreciation, amortization, or depletion for long-lived,
nonfinancial assets (hereinafter referred to as depreciation method). The new depre-
ciation method is adopted in partial or complete recognition of a change in the
estimated future benefits inherent in the asset, the pattern of consumption of those
benefits, or the information available to the entity about those benefits. The effect of the
change in accounting principle, or the method of applying it, may be inseparable from
the effect of the change in accounting estimate. Changes of that type often are related
4
Compliance with this disclosure requirement is practicable unless an entity cannot comply with it after
making every reasonable effort to do so.
5
An entity that issues interim financial statements shall provide the required disclosures in the financial
statements of both the interim period of the change and the annual period of the change.
8
to the continuing process of obtaining additional information and revising estimates
and, therefore, are considered changes in estimates for purposes of applying this
Statement.
21. Like other changes in accounting principle, a change in accounting estimate that is
effected by a change in accounting principle may be made only if the new accounting
principle is justifiable on the basis that it is preferable. For example, an entity that
concludes that the pattern of consumption of the expected benefits of an asset has
changed, and determines that a new depreciation method better reflects that pattern,
may be justified in making a change in accounting estimate effected by a change in
accounting principle.6 (Refer to paragraph 13.)
Disclosures
22. The effect on income from continuing operations, net income (or other appropriate
captions of changes in the applicable net assets or performance indicator), and any
related per-share amounts of the current period shall be disclosed for a change in
estimate that affects several future periods, such as a change in service lives of
depreciable assets. Disclosure of those effects is not necessary for estimates made each
period in the ordinary course of accounting for items such as uncollectible accounts or
inventory obsolescence; however, disclosure is required if the effect of a change in the
estimate is material.7 When an entity effects a change in estimate by changing an
accounting principle, the disclosures required by paragraphs 17 and 18 of this
Statement also are required. If a change in estimate does not have a material effect in
the period of change but is reasonably certain to have a material effect in later periods,
a description of that change in estimate shall be disclosed whenever the financial
statements of the period of change are presented.
6
However, a change to the straight-line method at a specific point in the service life of an asset may be
planned at the time some depreciation methods, such as the modified accelerated cost recovery system, are
adopted to fully depreciate the cost over the estimated life of the asset. Consistent application of such a
policy does not constitute a change in accounting principle for purposes of applying this Statement.
7The requirement to disclose the effects if a change in estimate is material is carried forward from
Opinion 20. The Board did not reconsider the need for that requirement in the project that led to issuance
of this Statement. Numerous Statements have been issued by the Board subsequent to Opinion 20 that
address required changes in estimates. Those Statements also include various disclosure requirements.
This Statement is not intended to impose new disclosure requirements or change the existing disclosures
that GAAP requires for specific changes in estimate.
9
Change in the Reporting Entity
23. When an accounting change results in financial statements that are, in effect, the
statements of a different reporting entity, the change shall be retrospectively applied to
the financial statements of all prior periods presented to show financial information for
the new reporting entity for those periods. Previously issued interim financial
information shall be presented on a retrospective basis. However, the amount of interest
cost previously capitalized through application of FASB Statement No. 58, Capitali-
zation of Interest Cost in Financial Statements That Include Investments Accounted for
by the Equity Method, shall not be changed when retrospectively applying the
accounting change to the financial statements of prior periods.
Disclosures
24. When there has been a change in the reporting entity, the financial statements of the
period of the change shall describe the nature of the change and the reason for it. In
addition, the effect of the change on income before extraordinary items, net income (or
other appropriate captions of changes in the applicable net assets or performance
indicator), other comprehensive income, and any related per-share amounts shall be
disclosed for all periods presented. Financial statements of subsequent periods need not
repeat the disclosures required by this paragraph. If a change in reporting entity does
not have a material effect in the period of change but is reasonably certain to have a
material effect in later periods, the nature of and reason for the change shall be disclosed
whenever the financial statements of the period of change are presented. (Paragraphs
51–58 of FASB Statement No. 141, Business Combinations, describe the manner of
reporting and the disclosures required for a business combination.)
Correction of an Error in Previously Issued Financial Statements
25. Any error in the financial statements of a prior period discovered subsequent to
their issuance shall be reported as a prior-period adjustment by restating the prior-
period financial statements. Restatement requires that:
a. The cumulative effect of the error on periods prior to those presented shall be
reflected in the carrying amounts of assets and liabilities as of the beginning of the
first period presented.
b. An offsetting adjustment, if any, shall be made to the opening balance of retained
earnings (or other appropriate components of equity or net assets in the statement of
financial position) for that period.
c. Financial statements for each individual prior period presented shall be adjusted to
reflect correction of the period-specific effects of the error.
10
Disclosures
26. When financial statements are restated to correct an error, the entity shall disclose
that its previously issued financial statements have been restated, along with a
description of the nature of the error. The entity also shall disclose the following:
a. The effect of the correction on each financial statement line item and any per-share
amounts affected for each prior period presented
b. The cumulative effect of the change on retained earnings or other appropriate
components of equity or net assets in the statement of financial position, as of the
beginning of the earliest period presented.
In addition, the entity shall make the disclosures of prior-period adjustments and
restatements required by paragraph 26 of APB Opinion No. 9, Reporting the Results of
Operations. Financial statements of subsequent periods8 need not repeat the disclosures
required by this paragraph.
Effective Date and Transition
27. This Statement shall be effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. Early adoption is permitted for
accounting changes and corrections of errors made in fiscal years beginning after the
date this Statement is issued. This Statement does not change the transition provisions
of any existing accounting pronouncements, including those that are in a transition
phase as of the effective date of this Statement.
The provisions of this Statement need

not be applied to immaterial items.
8
Refer to footnote 5.
11
This Statement was adopted by the unanimous vote of the seven members of the
Financial Accounting Standards Board:
Robert H. Herz, Chairman

George J. Batavick
G. Michael Crooch
Katherine Schipper
Leslie F. Seidman
Edward W. Trott
Donald M. Young
12
Appendix A
ILLUSTRATIONS
A1. This appendix presents generalized examples intended to illustrate how to apply
certain provisions of this Statement. The examples do not address all possible situations
or applications of this Statement, nor do they establish additional requirements.
Illustration 1—Retrospective Application of a Change in Accounting Principle
A2. ABC Company decides at the beginning of 20X7 to adopt the FIFO method of
inventory valuation. ABC Company had used the LIFO method for financial and tax
reporting since its inception on January 1, 20X5, and had maintained records that are
adequate to apply the FIFO method retrospectively. ABC Company concluded that the
FIFO method is the preferable inventory valuation method for its inventory. The change
in accounting principle is reported through retrospective application as described in
paragraph 7 of this Statement.
A3. The effects of the change in accounting principle on inventory and cost of sales are
presented in the following table:
Inventory Determined by Cost of Sales Determined by
Date LIFO Method FIFO Method LIFO Method FIFO Method
1/1/20X5 $ 0 $ 0 $ 0 $ 0
12/31/20X5 100 80 800 820
12/31/20X6 200 240 1,000 940
12/31/20X7 320 390 1,130 1,100
A4. This illustration is based on the following assumptions:
a. For each year presented, sales are $3,000 and selling, general, and administrative
costs are $1,000. ABC Company’s effective income tax rate for all years is 40
percent, and there are no permanent or temporary differences under FASB Statement
No. 109, Accounting for Income Taxes, prior to the change.
b. ABC Company has a nondiscretionary profit-sharing agreement in place for all
years. Under that agreement, ABC Company is required to contribute 10 percent of
its reported income before tax and profit sharing to a profit-sharing pool to be
distributed to employees. For simplicity, it is assumed that the profit-sharing
contribution is not an inventoriable cost.
13
c. ABC Company determined that its profit-sharing expense would have decreased by
$2 in 20X5 and increased by $6 in 20X6 if it had used the FIFO method to compute
its inventory cost since inception. The terms of the profit-sharing agreement do not
address whether ABC Company is required to adjust its profit-sharing accrual for the
incremental amounts.9 At the time of the accounting change, ABC Company
decides to contribute the additional $6 attributable to 20X6 profit and to make no
adjustment related to 20X5 profit. The $6 payment is made in 20X7.
d. Profit sharing and income taxes accrued at each year-end under the LIFO method are
paid in cash at the beginning of each following year.
e. ABC Company’s annual report to shareholders provides two years of financial
results, and ABC Company is not subject to the requirements of FASB Statement
No. 128, Earnings per Share.
A5. ABC Company’s income statements as originally reported under the LIFO method
are presented below.
Income Statement
20X6 20X5
Sales $3,000 $3,000
Cost of goods sold 1,000 800
Selling, general, and administrative expenses 1,000 1,000
Income before profit sharing and income taxes 1,000 1,200
Profit sharing 100 120
Income before income taxes 900 1,080
Income taxes 360 432
Net income $ 540 $ 648
9In accordance with paragraph 10 of this Statement, recognized indirect effects of a change in accounting
principle are recorded in the period of change. That provision applies even if recognition of the indirect
effect is explicitly required by the terms of the profit-sharing contract.
14
A6. ABC Company’s income statements reflecting the retrospective application of the
accounting change from the LIFO method to the FIFO method are presented below.
Income Statement
20X7 20X6
As Adjusted
(Note A)
Sales $3,000 $3,000
Cost of goods sold 1,100 940
Selling, general, and administrative expenses 1,000 1,000
Income before profit sharing and income taxes 900 1,060
Profit sharing 96 100
Income before income taxes 804 960
Income taxes 322 384
Net income $ 482 $ 576
A7. ABC Company’s disclosure related to the accounting change is presented below.
NOTE A:
Change in Method of Accounting for Inventory Valuation
On January 1, 20X7, ABC Company elected to change its method of valuing its
inventory to the FIFO method, whereas in all prior years inventory was valued using
the LIFO method. The new method of accounting for inventory was adopted (state
justification for change in accounting principle) and comparative financial statements of
prior years have been adjusted to apply the new method retrospectively. The following
financial statement line items for fiscal years 20X7 and 20X6 were affected by the
change in accounting principle.
15
Income Statement
20X7
As Computed As Reported Effect of
under LIFO under FIFO Change
Sales $3,000 $3,000 $ 0
Cost of goods sold 1,130 1,100 (30)
Selling, general, and administrative expenses 1,000 1,000 0
Income before profit sharing and income taxes 870 900 30
Profit sharing 87 96* 9
Income before income taxes 783 804 21
Income taxes 313 322 9
Net income $ 470 $ 482 $ 12
*This amount includes a $90 profit-sharing payment attributable to 20X7 profits and $6 profit-sharing
payment attributable to 20X6 profits, which is an indirect effect of the change in accounting principle. The
incremental payment attributable to 20X6 would have been recognized in 20X6 if ABC Company’s
inventory had originally been accounted for using the FIFO method.
20X6
As Originally As Effect of
Reported Adjusted Change
Sales $3,000 $3,000 $ 0
Cost of goods sold 1,000 940 (60)
Selling, general, and administrative expenses 1,000 1,000 0
Income before profit sharing and income taxes 1,000 1,060 60
Profit sharing 100 100 0
Income before income taxes 900 960 60
Income taxes 360 384 24
Net income $ 540 $ 576 $ 36
16
Balance Sheet
12/31/X7
Cash $2,738 $2,732 $ (6)
Inventory 320 390 70
Total assets $3,058 $3,122 $64
Accrued profit sharing 87 90 3
Income tax liability 313 338 25
Total liabilities 400 428 28
Paid-in capital 1,000 1,000 0
Retained earnings 1,658 1,694 36
Total stockholders’ equity 2,658 2,694 36
Total liabilities and stockholders’
equity $3,058 $3,122 $64
12/31/X6
Cash $2,448 $2,448 $ 0
Inventory 200 240 40
Total assets $2,648 $2,688 $40
Accrued profit sharing 100 100 0
Income tax liability 360 376 16
Total liabilities 460 476 16
Paid-in capital 1,000 1,000 0
Retained earnings 1,188 1,212 24
Total stockholders’ equity 2,188 2,212 24
Total liabilities and stockholders’
equity $2,648 $2,688 $40
As a result of the accounting change, retained earnings as of January 1, 20X6, decreased

from $648, as originally reported using the LIFO method, to $636 using the FIFO
method.
17
Statement of Cash Flows
20X7
Net income $ 470 $ 482 $ 12
Adjustments to reconcile net income
to net cash provided by operating
activities
Increase in inventory (120) (150) (30)
Decrease in accrued profit sharing (13) (10) 3
Decrease in income tax liability (47) (38) 9
Net cash provided by operating
activities 290 284 (6)
Net increase in cash 290 284 (6)
Cash, January 1, 20X7 2,448 2,448 0
Cash, December 31, 20X7 $2,738 $2,732 $ (6)
20X6
Net income $ 540 $ 576 $ 36
Adjustments to reconcile net income
to net cash provided by operating
activities
Increase in inventory (100) (160) (60)
Decrease in accrued profit sharing (20) (20) 0
Decrease in income tax liability (72) (48) 24
Net cash provided by operating
activities 348 348 0
Net increase in cash 348 348 0
Cash, January 1, 20X6 2,100 2,100 0
Cash, December 31, 20X6 $2,448 $2,448 $ 0
18
Illustration 2—Reporting an Accounting Change When Determining
Cumulative Effect for All Prior Years Is Not Practicable
A8. Assume ABC Company changed its accounting principle for inventory measure-
ment from FIFO to LIFO effective January 1, 20X4. ABC Company reports its financial
statements on a calendar year-end basis and had used the FIFO method since its
inception. ABC Company determined that it is impracticable to determine the
cumulative effect of applying this change retrospectively because records of inventory
purchases and sales are no longer available for all prior years. However, ABC Company
has all of the information necessary to apply the LIFO method on a prospective basis
beginning in 20X1. Therefore, ABC Company should present prior periods as if it had
(a) carried forward the 20X0 ending balance in inventory (measured on a FIFO basis)
and (b) begun applying the LIFO method to its inventory beginning January 1, 20X1.
(The example assumes that ABC Company established that the LIFO method was
preferable for ABC Company’s inventory. No particular inventory measurement
method is necessarily preferable in all instances.)
19
Appendix B
BACKGROUND INFORMATION AND BASIS FOR CONCLUSIONS
CONTENTS
Paragraph
Numbers
Introduction ............................................................................ B1–B4

Scope .................................................................................... B5–B6
Change in Accounting Principle ................................................... B7–B10
Exceptions from the General Principle of Retrospective Application ...... B11–B18
Indirect Effects......................................................................... B19–B20
Disclosures ............................................................................. B21–B22
Change in Accounting Estimate.................................................... B23–B26
Change in the Reporting Entity .................................................... B27
Accounting Change in Interim-Period Information ............................ B28–B29
Correction of an Error ............................................................... B30
Convergence of U.S. GAAP and International Financial Reporting
Standards ............................................................................. B31–B34
Effective Date and Transition....................................................... B35–B36
Benefits and Costs .................................................................... B37–B38
21
Appendix B
BACKGROUND INFORMATION AND BASIS FOR CONCLUSIONS
Introduction
B1. This appendix summarizes considerations that Board members deemed significant
in reaching the conclusions in this Statement. It includes reasons for accepting certain
approaches and rejecting others. Individual Board members gave greater weight to
some factors than to others.
B2. In September 2002, the FASB and the International Accounting Standards Board
(IASB) (collectively, the Boards) committed to a broad effort to improve international
comparability of financial reporting by working toward development of a single set of
high-quality accounting standards. As part of that effort, the Boards jointly undertook
a project to eliminate certain narrow differences between the accounting pronounce-
ments issued by the IASB and the accounting pronouncements issued by the FASB and
its predecessors. Both Boards agreed to limit the scope of the short-term project to
issues for which (a) the Boards’ respective accounting pronouncements were different;
(b) convergence to a high-quality solution would appear to be achievable in the short
term, usually by selecting between the existing standards of either the FASB or the
IASB; and (c) the issue was not within the scope of other projects on the current agenda
of either Board. The reporting of accounting changes is one such difference that the
FASB decided should be addressed in the short-term convergence project.
B3. In May 2002, the IASB issued its Exposure Draft, Improvements to International
Accounting Standards (Improvements Exposure Draft), which, among other things,
proposed changing the accounting for certain changes in accounting principles to
require that those changes be reported through retrospective application to prior
periods. The Improvements Exposure Draft also proposed classifying a change in
depreciation method for a previously recorded asset as a change in estimate and
accounting for it prospectively. The IASB affirmed those changes during its redelib-
erations of the proposed standard. In December 2003, the IASB issued IAS 8,
Accounting Policies, Changes in Accounting Estimates and Errors (Revised 2003).
B4. In December 2003, the Board issued an Exposure Draft, Accounting Changes and
Error Corrections, for a 120-day comment period. That Exposure Draft proposed
retrospective application for voluntary changes in accounting principle and for changes
in accounting principle required by a new accounting pronouncement that does not
provide specific transition provisions. The Board received 66 comment letters on the
23
Exposure Draft. In late 2004 and early 2005, the Board redeliberated the issues
identified in the Exposure Draft and concluded that on the basis of existing information,
it could reach an informed decision on the matters addressed in this Statement without
a public hearing or roundtable meeting.
Scope
B5. The Board decided to incorporate the guidance for all accounting changes and
error corrections, including changes made in interim periods, into this Statement to
facilitate its objective of codification and simplification of U.S. GAAP. Thus, this
Statement supersedes FASB Statement No. 3, Reporting Accounting Changes in
Interim Financial Statements, as well as Opinion 20. The Board noted that FASB
Statement No. 117, Financial Statements of Not-for-Profit Organizations, requires that
not-for-profit organizations apply the disclosure and display provisions required by
GAAP for accounting changes; therefore, the Board decided to include not-for-profit
financial statements within the scope of this Statement.
B6. Under International Financial Reporting Standards (IFRS), entities are required to
apply the general guidance for a change in accounting principle when applying a new
standard, unless that standard has other specific transition guidance. The Board
concluded that including transition for new accounting pronouncements in the scope of
this Statement would establish retrospective application as the presumed transition
method for new accounting pronouncements. However, the Board noted that this
Statement does not preclude the Board or other standard setters from establishing
specific transition provisions in future pronouncements that may differ from the
provisions of this Statement. The Board expects to establish transition guidance on a
standard-by-standard basis by selecting the transition requirements appropriate for
those specific circumstances.
Change in Accounting Principle
B7. During the deliberations that led to the Exposure Draft, the Board concluded that
use of the retrospective application approach described in IAS 8 would enhance the
interperiod comparability of financial information. Accordingly, the Board proposed
converging with the requirements of IAS 8 for reporting a change in an accounting
principle. The Board noted that, in addition to the benefit of convergence, retrospective
application as if a newly adopted accounting principle had always been used results in
greater consistency across periods. The FASB’s conceptual framework describes
comparability (including consistency) as one of the qualitative characteristics of
accounting information. The Board concluded that retrospective application improves
financial reporting because it enhances the consistency of financial information
24
between periods. That improved consistency enhances the usefulness of the financial
statements, especially by facilitating analysis and understanding of comparative
accounting data.
B8. During initial deliberations, the Board noted that in some cases the IASB and the
FASB use different terms to describe the same principle. For example, the term
retrospective application as used by the IASB is synonymous with the term retroactive
restatement as used in Opinion 20. The Boards believe that whenever possible, it is
preferable to use the same terms to reduce the potential for inconsistent application of
accounting pronouncements. Thus, the Board proposed using the term retrospective
application to describe the manner of reporting a change in accounting principle or a
change in reporting entity and to use the term restatement only to refer to the correction
of an error. That change reflects the Board’s conclusion that a terminology change
would better distinguish changes in amounts reported for prior periods related to a
change in accounting principle or a change in the reporting entity from those related to
the correction of an error. Most respondents to the Exposure Draft agreed with the
Board’s decision and it was affirmed in redeliberations.
B9. Many respondents to the Exposure Draft, including many users of financial
statements, supported the Board’s proposal for requiring retrospective application for
voluntary changes and mandated changes in accounting principle in instances where
specific transition provisions are not provided in accounting pronouncements. Others
disagreed with the Board’s proposal generally for the reasons that were cited in Opinion
20, such as a disincentive to change to a preferable accounting principle or the dilution
of public confidence in financial reporting. During redeliberations, the Board again
considered those reasons and affirmed the retrospective approach because that approach
improves consistency of information across fiscal periods and converges with the
requirements of IAS 8.
B10. Some respondents to the Exposure Draft expressed concern that the proposed
requirements did not adequately differentiate between the terms retrospective applica-
tion, for changes in accounting principle and changes in the reporting entity, and
restatement, for corrections of errors. Those respondents were concerned that numerous
reissuances of financial statements to reflect retrospective application might dilute
investor confidence in those financial statements. The Board believes that this
Statement adequately differentiates between the two terms and the requirements for
each. In addition, the Board will consider transition requirements in new accounting
standards on a standard-by-standard basis. The Board believes this should mitigate the
concerns raised by respondents. Thus, during redeliberations, the Board decided to
retain the terminology as originally proposed.
25
Exceptions from the General Principle of Retrospective Application
B11. The Board believes that under certain circumstances it would be impracticable for
an entity to determine (a) the period-specific effects of an accounting change on all
prior periods presented or (b) the cumulative effect of applying a change in accounting
principle to all prior periods. In those instances, the Board decided to require a limited
form of retrospective application to provide financial statement users with the most
consistent financial information practicable. The Board decided that if it is impracti-
cable for an entity to determine the period-specific effects of a change in accounting
principle for all prior periods, the cumulative effect of the change to the new accounting
principle should be applied to the carrying amounts of assets and liabilities as of the
beginning of the earliest period to which the new principle is applied, and an offsetting
adjustment should be made to the opening balance of retained earnings (or other
appropriate components of equity or net assets in the statement of financial position) for
that period. The Board believes that method maximizes consistency across accounting
periods for which the necessary information is available, and it also provides better
information than a cumulative-effect adjustment in the period of change.
B12. This Statement requires that the cumulative effect of the change in accounting
principle be recorded directly in the opening retained earnings balance (or other
appropriate components of equity or net assets in the statement of financial position)
when it is impracticable to determine the period-specific effects of a change in
accounting principle. The Board also considered requiring the cumulative effect of the
change to be included in the net income (or other appropriate captions of changes in the
applicable net assets or performance indicator) of the period in which the change was
made, as was required by Opinion 20. However, the Board rejected that alternative on
the basis that the cumulative effect of the change in accounting principle does not relate
to the period in which the change was made. Therefore, it would be inappropriate to
record the cumulative effects on prior periods in net income of the period of change,
since none of the effects relate to that period. The Board believes that the requirements
of this Statement recast prior-period financial statements to the extent practicable and
therefore affirmed that decision in its redeliberations.
B13. For circumstances for which it is impracticable to determine the cumulative effect
of applying a change in accounting principle to all prior periods, this Statement requires
that the entity apply the new accounting principle as if it was made prospectively as of
the earliest date practicable. The Board decided that adjustment of one or more prior
periods provides more consistency across periods than the prospective approach
required by Opinion 20 for that type of change.
26
B14. To enhance consistency of application, the Board decided to provide guidance
limiting the use of the impracticability exception. The Exposure Draft contained an
exception to retrospective application for circumstances in which the effects of
retrospective application are not determinable. Many respondents to the Exposure Draft
noted that it might be possible to determine the effects of retrospective application but
only at unreasonable cost and effort. Those respondents requested that the Board adopt
an exception for cases in which retrospective application would involve “undue cost or
effort.” Other respondents noted that an impracticability exception similar to “undue
cost or effort” appears in certain other FASB Statements. During redeliberations, the
Board considered those comments and revised its proposed guidance to indicate that
retrospective application is impracticable if an entity cannot apply it after making every
reasonable effort to do so. The Board also noted that such language was consistent with
a similar exception in IAS 8.
B15. The Board noted that retrospective application also would be impracticable if it
would require assumptions about management’s intent in a prior period that cannot be
independently substantiated. The Board was concerned that retrospective application in
that case might require an inappropriate use of hindsight and decided to provide an
exception from the general principle of retrospective application in those circumstances.
B16. The Board also discussed whether retrospective application involving significant
estimates made as of a prior period would be impracticable. The Board notes that it is
frequently necessary to make estimates in order to apply an accounting principle.
Estimation is inherently subjective, and estimates are frequently developed for the
purpose of preparing financial statements after the close of a fiscal period. The use of
estimates in retrospective application of an accounting principle is potentially more
difficult because a longer period of time may have passed since a transaction or event
occurred. However, in the context of retrospective application, the objective of
estimates related to prior periods is the same as the objective of estimates related to
current periods. That objective is to make an estimate that reflects the conditions that
existed at the date the transaction or event would have been recognized in the financial
statements had the newly adopted accounting principle been applied as of that earlier
date. Achieving that objective requires differentiating between information that
provides additional evidence about conditions that existed when an event or transaction
occurred and information about conditions that arose subsequently. For some types of
estimates (for example, an estimate of fair value based on inputs that are not derived
from observable market sources), it may not be practicable to distinguish the
information that would have been available about conditions that previously existed
from all other types of information. Therefore, the Board decided, and affirmed its
decision during redeliberations, that prospective application from the date of change
should be required when retrospective application would involve making a significant
27
estimate for which it is not possible to objectively distinguish information that provides
additional evidence about conditions that previously existed from other types of
information.
B17. A number of respondents to the Exposure Draft stated that the proposed
provisions were unclear as to whether contemporaneous documentation was required to
objectively determine whether information used to develop significant estimates would
have been available at the time the affected transactions or events would have been
recognized in the financial statements. The Board does not believe that contempora-
neous documentation is necessary. Therefore, the Board added a footnote to paragraph
11 of this Statement to clarify that point.
B18. The Board agrees with the Accounting Principles Board’s conclusion that an
entity should not change an accounting principle unless the entity can justify the newly
adopted accounting principle on the basis that it is preferable. Thus, the Board decided
to retain the requirement of Opinion 20 that the nature and justification for a change in
accounting principle be disclosed. Similarly, the Board decided that a change in
estimate effected by a change in accounting principle must be justified on the basis that
the new method is preferable.
Indirect Effects
B19. Some respondents asked that the Board clarify how to report the indirect effects
of a change in accounting principle that is accounted for by retrospective application.
The Board considered requiring that the indirect effects of an accounting change be
included in the retrospective application. Some Board members draw no distinction
between indirect effects and other consequential effects of an accounting change and,
therefore, believe that indirect effects should be included as part of the retrospective
application of the change that gives rise to them. In addition, they believe that including
indirect effects in retrospective application may, in some cases, provide better
information to users by showing more consistent trend information related to the items
indirectly affected by an accounting change. Other Board members believe that an
effect on the cash flows of the entity that is caused by the adoption of an accounting
change should be recognized in the period in which that adoption occurs. They believe
the accounting change is the necessary “past event” in the definition of an asset or a
liability that gives rise to accounting recognition of the indirect effect. They also believe
that certain practical issues are more easily resolved by recognizing all such effects in
the period the accounting change is adopted. The Board considered the various views
and ultimately decided to adopt the latter view. The Board also decided to require
28
disclosure of any indirect effects of an accounting change that have been recognized,
and the amount of those effects attributable to each prior period presented unless
impracticable.
B20. Some Board members expressed concern about circumstances in which the
indirect effects of an accounting change are explicitly governed by a contractual
agreement. For example, a royalty agreement may require that the amount due to the
counterparty be subsequently adjusted, or “trued up,” if the reported reference amount
(for example, revenues) is subsequently adjusted to reflect an accounting change.
However, the Board believes that such cases are rare and that in those cases, the
accounting change is still the necessary past event that gives rise to the indirect effect.
Therefore, the Board decided that even when the indirect effect is explicitly required to
be recognized, it should be recognized in the period of the accounting change.
Disclosures
B21. The Board noted that it is important to provide financial statement users with
information that allows them to distinguish between the effect of a change in
accounting principle and other income statement changes. Therefore, the Board
proposed continuing to require disclosure of the effects of a change in accounting
principle. Generally, those disclosure requirements are consistent with those required
by Opinion 20.
B22. Some respondents to the Exposure Draft suggested eliminating certain proposed
disclosures, such as the requirement to disclose the impact of retrospective application
on each line of the financial statements. Other respondents suggested expanding the
disclosures to include, for example, a requirement for those entities that use the
impracticability exception to specify the information that is missing and which
therefore makes retrospective application impracticable. The Board considered those
suggestions in its redeliberations and modified or clarified some of the required
disclosures. For example, the Board clarified that the requirement to disclose the effect
on each financial statement line item applies only to line items actually affected by the
change and that presentation of the effect on financial statement subtotals, other than
income from continuing operations and net income, is not required. The Board also
decided to add an illustration of the application of this Statement as an appendix to the
Statement.
Change in Accounting Estimate
B23. Paragraph 21 of FASB Concepts Statement No. 1, Objectives of Financial

Reporting by Business Enterprises, states that “estimates resting on expectations of the
29
future are often needed in financial reporting, but their major use, especially of those
formally incorporated in financial statements, is to measure financial effects of past
transactions or events or the present status of an asset or liability.”
B24. The Board carried forward without reconsideration the general provisions in
Opinion 20 related to a change in accounting estimate. Those provisions are consistent
with the requirements of IFRS, with the exception that IFRS requires a change in the
method of depreciation or amortization for a long-lived, nonfinancial asset to be
reported as a change in estimate. The Board noted that the information an entity would
need to establish a basis for changing the depreciation, amortization, or depletion
method for a long-lived, nonfinancial asset (hereinafter described as a change in
depreciation method) would be obtained by continued observation of actual use of the
expected benefits of the asset as compared to previous estimations of the pattern of
consumption that formed the basis for the initial method. Thus, during initial
deliberations, the Board concluded that a change in depreciation method is a change in
estimate effected by a change in accounting principle. That decision was affirmed in
redeliberations.
B25. The Board noted that because it is a change in estimate, a change in depreciation
method should not be accounted for by retrospective application to prior periods.
However, appropriate disclosures should be required for the change in accounting
principle that effected the change in estimate. Thus, the Board decided that a change in
estimate effected by a change in accounting principle should be subject to the same
requirement to justify the change in principle on the basis that the new principle is
preferable. Most respondents to the Exposure Draft agreed with the Board’s initial
decision. The Board affirmed the disclosure requirements related to a change in
estimate during redeliberations.
B26. Several respondents to the Exposure Draft stated that there may be valid reasons
unrelated to the available information about the pattern of consumption of future
benefits for deciding that a depreciation method other than the one currently used is
preferable. Some respondents stated that a change from one method of depreciation to
another can be justified as preferable if the new method is more prevalent in the
industry in which the reporting entity operates. The Board noted that the objective of
depreciation accounting is to allocate the cost of a capital asset over its expected useful
life in a manner that best represents the pattern of consumption of the expected benefits.
Therefore, in redeliberations, the Board affirmed that better reflecting the pattern of
consumption of the asset being depreciated should be the sole basis in determining the
preferable depreciation method.
30
Change in the Reporting Entity
B27. The Board carried forward without reconsideration the guidance in paragraphs
12, 34, and 35 of Opinion 20 on changes in the reporting entity. Editorial changes have
been made to the guidance carried forward to make it easier to read within the context
of this Statement. In addition, this Statement classifies the recasting of financial
statements for a change in the reporting entity as a retrospective application rather than
as a restatement.
Accounting Change in Interim-Period Information
B28. During initial deliberations, the Board decided not to permit voluntary accounting
changes made in interim periods if it is impracticable to distinguish between the
cumulative effects on prior years and the effects on prior interim periods of the year of
change. Statement 3 required an entity to report an accounting change made during an
interim period as if it had been adopted at the beginning of the fiscal year. Therefore,
an entity making an accounting change in other than the first interim period must have
been able to distinguish between the effects on the year of change and the effects on
prior years to have met the requirements of Statement 3. The Board expects that
accounting changes for which it is impracticable to distinguish between the cumulative
effects on prior years and the effects on prior interim periods of the year of change will
be rare. Also, the benefit of intraperiod consistency of annual reporting outweighs the
hardship placed on enterprises that are unable to make that distinction for a given
change. Respondents to the Exposure Draft did not disagree with the Board’s initial
decision. Therefore, that decision was affirmed during redeliberations.
B29. The Board decided to carry forward the disclosure requirements contained in
paragraphs 11(e) and 14 of Statement 3 to this Statement.
Correction of an Error
B30. The Board carried forward without substantive change the provisions for
correction of an error from paragraphs 13, 36, and 37 of Opinion 20. Editorial changes
have been made to the sections carried forward to make those sections easier to read
within the context of this Statement. Also, the Board concluded that when an entity
restates its financial statements to correct an error, it should disclose that fact so as to
distinguish corrections of errors from accounting changes. In response to concerns of
the respondents to the Exposure Draft, the Board decided to limit the use of the term
restatement in this Statement to refer only to the revising of financial statements to
correct an error in those previously reported financial statements.
31
Convergence of U.S. GAAP and International Financial Reporting Standards
B31. This Statement is the result of a broader effort by the FASB to improve the
comparability of cross-border financial reporting by working with the IASB toward
development of a single set of high-quality accounting standards. Although conver-
gence is an important objective in this Statement, this Statement and IAS 8 differ in
some areas. Those areas include the correction of an error, indirect effects of a change
in accounting principle, and certain elements of disclosure.
B32. This Statement and IAS 8 both require restatement to correct an error that exists
in previously issued financial statements. However, in this Statement that requirement
is absolute, while IAS 8 permits an exception to the restatement requirement in
instances in which it is not practicable to determine the effect of the error on any or all
prior periods. Under IAS 8, if restatement is impracticable, the correction of an error is
effected by restating the opening balances of assets, liabilities, and equity or net assets
for the earliest period for which retrospective restatement is practicable (which may be
the current interim or annual period). The Board considered permitting a similar
exception; however, it rejected that proposal because it would be inconsistent for a
reporting entity to state that its financial statements for a prior period are prepared in
accordance with GAAP if an error had been discovered that affected those financial
statements but was not corrected because it was impracticable to do so.
B33. This Statement explicitly requires that the indirect effects of a change in
accounting principle be reported in the period in which those effects are actually
incurred. This Statement also requires specific disclosures related to the indirect effects
of a change in accounting principle. IAS 8 does not specifically address the accounting
for or disclosure of indirect effects of a change in accounting principle.
B34. IAS 8 includes some disclosure requirements that differ from the disclosures
required by this Statement. The FASB considered each of the disclosure requirements
of IAS 8 as well as other potential requirements and concluded that the requirements
in this Statement are appropriate and sufficient.
Effective Date and Transition
B35. The Board decided that the provisions of this Statement should be effective for
accounting changes made in fiscal years beginning after December 15, 2005. The Board
decided to require prospective application of this Statement because it does not believe
the benefits of adjusting previously issued financial statements to retrospectively apply
accounting changes that were made before this Statement was issued outweigh the costs
of doing so.
32
B36. The Board noted that there may be some accounting pronouncements that are in
the transition phase on the effective date of this Statement and that might require
transition provisions that are inconsistent with this Statement. The Board decided that
changing the transition provisions of existing pronouncements would not be cost-
beneficial. Thus, the Board decided to exclude from the provisions of this Statement
transition provisions of any existing pronouncements.
Benefits and Costs
B37. The mission of the FASB is to establish and improve standards of financial
accounting and reporting for the guidance and education of the public, including
preparers, auditors, and users of financial information. In fulfilling that mission, the
Board endeavors to determine that a proposed standard will fill a significant need and
that the costs imposed to meet that standard, as compared with other alternatives, are
justified in relation to the overall benefits of the resulting information. Although the
costs to implement a new standard may not be borne evenly, investors and creditors—
both present and potential—and other users of financial information benefit from
improvements in financial reporting, thereby facilitating the functioning of markets for
capital and credit and the efficient allocation of resources in the economy.
B38. The Board acknowledges that there will be costs involved in retrospective
application related to accounting changes beyond those previously required to develop
pro forma disclosures of the effects of accounting changes on prior periods. However,
the Board believes that the benefits to users of more comparable information in
comparative financial statements will outweigh the effort that will be required on the
part of preparers. Further, the Board notes that this Statement will reduce the number
of reconciling items between U.S. GAAP and IFRS, which should reduce the costs
borne by an entity that is required to prepare a reconciliation of its balance sheet and
statement of financial performance determined under IFRS to U.S. GAAP.
33
Appendix C
AMENDMENTS TO EXISTING PRONOUNCEMENTS
C1. This Statement supersedes the following pronouncements:
a. APB Opinion No. 20, Accounting Changes

b. FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements
c. FASB Statement No. 73, Reporting a Change in Accounting for Railroad Track
Structures
d. FASB Interpretation No. 20, Reporting Accounting Changes under AICPA State-
ments of Position.
C2. ARB No. 43, Chapter 2A, “Form of Statements—Comparative Financial State-
ments,” is amended as follows:
a. Paragraph 3, as amended by Opinion 20:
It is necessary that prior-year figures shown for comparative purposes be in fact

comparable with those shown for the most recent period, or that any exceptions
to comparability be clearly brought out as described in FASB Statement No. 154,
Accounting Changes and Error CorrectionsAPB Opinion No. 20, Accounting
Changes.
C3. APB Opinion No. 22, Disclosure of Accounting Policies, is amended as follows:
a. Paragraph 14:
Financial statement disclosure of accounting policies should not duplicate details

(e.g., composition of inventories or of plant assets) presented elsewhere as part
of the financial statements. In some cases, the disclosure of accounting policies
should refer to related details presented elsewhere as part of the financial
statements; for example, changes in accounting policies during the period should
be described with cross-reference to the disclosure required by FASB Statement
No. 154, Accounting Changes and Error Corrections.APB Opinion No. 20,
Accounting Changes, of the current effect of the change and of the pro forma
effect of retroactive application.
35
C4. APB Opinion No. 25, Accounting for Stock Issued to Employees, is amended as
follows:
a. Paragraph 15:
Accruing compensation expense may require estimates, and adjustment of those

estimates in later periods may be necessary (FASB Statement No. 154,
Accounting Changes and Error Corrections, paragraphs 19–22)APB Opinion
No. 20, Accounting Changes, paragraphs 31 to 33. For example, if a stock option
is not exercised (or awarded stock is returned to the corporation) because an
employee fails to fulfill an obligation, the estimate of compensation expense
recorded in previous periods should be adjusted by decreasing compensation
expense in the period of forfeiture.
C5. APB Opinion No. 28, Interim Financial Reporting, is amended as follows:
a. Paragraph 24:
Changes in an interim or annual accounting practice or policyprinciple made in

an interim period should be reported in the period in which the change is made,
in accordance with the provisions of FASB Statement No. 154, Accounting
Changes and Error CorrectionsAPB Opinion No. 20, Accounting Changes.
b. Paragraph 25:
Certain changes in accounting principle, such as those described in paragraphs 4

and 27 of APB Opinion 20, require retroactive restatement of previously issued
financial statements. Paragraph 26 of APB Opinion No. 9, Reporting the Results
of Operations, requires similar treatment for prior period adjustments. Previously
issued financial statements must also be restated for a change in the reporting
entity (see paragraphs 34-35 of APB Opinion No. 20) and for correction of an
error (see paragraphs 36-37 of APB Opinion No. 20). Previously issued interim
financial information should be similarly restated. APB Opinion Nos. 9 and 20
specify the required disclosures.
c. Paragraph 26:
The effect of a change in an accounting estimate, including a change in the

estimated effective annual tax rate, should be accounted for in the period in
which the change in estimate is made. No restatement of previously reported
interim information should be made for changes in estimates, but the effect on
36
earnings of a change in estimate made in a current interim period should be
reported in the current and subsequent interim periods, if material in relation to
any period presented and should continue to be reported in the interim financial
information of the subsequent year for as many periods as necessary to avoid
misleading comparisons. Such disclosure should conform with paragraph 22 of
Statement 154.paragraph 33 of APB Opinion No. 20.
d. Paragraphs 27–27D, footnote 5 to paragraph 27C, and the related headings:
Cumulative Effect Type Accounting Changes Other Than Changes to LIFO
27. If a cumulative effect type accounting change is made during the first interim
period of an enterprise’s fiscal year, the cumulative effect of the change on
retained earnings at the beginning of that fiscal year shall be included in net
income of the first interim period (and in last-twelve-months-to-date financial
reports that include that first interim period).
27A. If a cumulative effect type accounting change is made in other than the
first interim period of an enterprise’s fiscal year, no cumulative effect of the
change shall be included in net income of the period of change. Instead, financial
information for the pre-change interim periods of the fiscal year in which the
change is made shall be restated by applying the newly adopted accounting
principle to those pre-change interim periods. The cumulative effect of the
change on retained earnings at the beginning of that fiscal year shall be included
in restated net income of the first interim period of the fiscal year in which the
change is made (and in any year-to-date or last-twelve-months-to-date financial
reports that include the first interim period). Whenever financial information that
includes those pre-change interim periods is presented, it shall be presented on
the restated basis.
27B. The following disclosures about a cumulative effect type accounting

change shall be made in interim financial reports:
a. In financial reports for the interim period in which the new accounting
principle is adopted, disclosure shall be made of the nature of and justification
for the change.
b. In financial reports for the interim period in which the new accounting
principle is adopted, disclosure shall be made of the effect of the change on
income from continuing operations, net income, and related per share
amounts for the interim period in which the change is made. In addition, when
the change is made in other than the first interim period of a fiscal year,
37
financial reports for the period of change shall also disclose (i) the effect of the
change on income from continuing operations, net income, and related per
share amounts for each pre-change interim period of that fiscal year and (ii)
income from continuing operations, net income, and related per share
amounts for each pre-change interim period restated in accordance with
paragraph 27A of this Opinion.
c. In financial reports for the interim period in which the new accounting
principle is adopted, disclosure shall be made of income from continuing
operations, net income, and related per share amounts computed on a pro
forma basis for (i) the interim period in which the change is made and (ii) any
interim periods of prior fiscal years for which financial information is being
presented. If no financial information for interim periods of prior fiscal years
is being presented, disclosure shall be made, in the period of change, of the
actual and pro forma amounts of income from continuing operations, net
income, and related per share amounts for the interim period of the
immediately preceding fiscal year that corresponds to the interim period in
which the change is made. In all cases, the pro forma amounts shall be
computed and presented in conformity with paragraphs 19, 21, 22, and 25 of
APB Opinion No. 20.
d. In year-to-date and last-twelve-months-to-date financial reports that include
the interim period in which the new accounting principle is adopted, the
disclosures specified in the first sentence of subparagraph (b) above and in
subparagraph (c) above shall be made.
e. In financial reports for a subsequent (post-change) interim period of the fiscal
year in which the new accounting principle is adopted, disclosure shall be
made of the effect of the change on income from continuing operations, net
income, and related per share amounts for that post-change interim period.
Changes to the LIFO Method of Inventory Pricing and Similar Situations
27C. Paragraph 26 of APB Opinion No. 20 indicates that in rare situations—

principally a change to the LIFO method of inventory pricing5—neither the
cumulative effect of the change on retained earnings at the beginning of the fiscal
year in which the change is made nor the pro forma amounts can be computed.
In those situations, that paragraph requires an explanation of the reasons for
omitting (a) accounting for a cumulative effect and (b) disclosure of pro forma
amounts for prior years. If a change of that type is made in the first interim period
of an enterprise’s fiscal year, the disclosures specified in paragraph 27B of this
Opinion shall be made (except the pro forma amounts for interim periods of prior
fiscal years called for by paragraph 27B(c) of this Opinion will not be disclosed).
38
27D. If the change is made in other than the first interim period of an
enterprise’s fiscal year, the disclosure specified in paragraph 27B of this Opinion
shall be made (except the pro forma amounts for interim periods of prior fiscal
years called for by paragraph 27B(c) of this Opinion will not be disclosed) and
in addition, financial information for the pre-change interim periods of that fiscal
year shall be restated by applying the newly adopted accounting principle to
those pre-change interim periods. Whenever financial information that includes
those pre-change interim periods is presented, it shall be presented on the restated
basis.
5
In making disclosures about changes to the LIFO method, enterprises should be aware of the
limitations the Internal Revenue Service has placed on such disclosures.
C6. APB Opinion No. 30, Reporting the Results of Operations—Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, is amended as follows:
a. Paragraph 25, as amended by FASB Statements No. 16, Prior Period Adjustments,
and No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets:
Circumstances attendant to extraordinary items frequently require estimates, for

example, of associated costs and occasionally of associated revenue, based on
judgment and evaluation of the facts known at the time of first accounting for the
event. Each adjustment in the current period of an element of an extraordinary
item that was reported in a prior period should be separately disclosed as to year
of origin, nature, and amount and classified separately in the current period in the
same manner as the original item. If the adjustment is the correction of an error,
the provisions of FASB Statement No. 154, Accounting Changes and Error
Corrections, paragraphs 25 and 26 APB Opinion No. 20, Accounting Changes,
paragraphs 36 and 37 should be applied.
C7. FASB Statement No. 16, Prior Period Adjustments, is amended as follows:
a. Footnote 3, as amended by FASB Statements No. 96, Accounting for Income Taxes,
and No. 109, Accounting for Income Taxes:
As defined in paragraph 2 of FASB Statement No. 154, Accounting Changes and

Error Correctionsparagraph 13 of APB Opinion No. 20. That paragraph also
describes the distinction between a correction of an error and a change in
accounting estimate.
39
b. Footnote 6, as amended by FASB Statement No. 141, Business Combinations:
In addition to transition requirements of these pronouncements, accounting

changes resulting in restatement of previously issued financial statements of prior
periods include a change in the reporting entity described in paragraph 34 of APB
Opinion No. 20, and special changes in accounting principle described in
paragraphs 27 and 29 of APB Opinion No. 20. See also footnote 5 to APB
Opinion No. 20.
C8. FASB Statement No. 19, Financial Accounting and Reporting by Oil and Gas
Producing Companies, is amended as follows:
a. Paragraph 30, as effectively amended by FASB Statement No. 69, Disclosures about
Oil and Gas Producing Activities:
Capitalized acquisition costs of proved properties shall be amortized (depleted)

by the unit-of-production method so that each unit produced is assigned a pro
rata portion of the unamortized acquisition costs. Under the unit-of-production
method, amortization (depletion) may be computed either on a property-by-
property basis or on the basis of some reasonable aggregation of properties with
a common geological structural feature or stratigraphic condition, such as a
reservoir or field. When an enterprise has a relatively large number of royalty
interests whose acquisition costs are not individually significant, they may be
aggregated, for the purpose of computing amortization, without regard to
commonality of geological structural features or stratigraphic conditions; if
information is not available to estimate reserve quantities applicable to royalty
interests owned (paragraph 59E), a method other than the unit-of-production
method may be used to amortize their acquisition costs. The unit cost shall be
computed on the basis of the total estimated units of proved oil and gas reserves.
(Joint production of both oil and gas is discussed in paragraph 38.) Unit-of-
production amortization rates shall be revised whenever there is an indication of
the need for revision but at least once a year; those revisions shall be accounted
for prospectively as changes in accounting estimates—see paragraphs 19–22 of
FASB Statement No. 154, Accounting Changes and Error Corrections.para-
graphs 31-33 of APB Opinion No. 20, “Accounting Changes.”
b. Paragraph 35:
Capitalized costs of exploratory wells and exploratory-type stratigraphic test

wells that have found proved reserves and capitalized development costs shall be
amortized (depreciated) by the unit-of-production method so that each unit
40
produced is assigned a pro rata portion of the unamortized costs. It may be more
appropriate, in some cases, to depreciate natural gas cycling and processing
plants by a method other than the unit-of-production method. Under the
unit-of-production method, amortization (depreciation) may be computed either
on a property-by-property basis or on the basis of some reasonable aggregation
of properties with a common geological structural feature or stratigraphic
condition, such as a reservoir or field. The unit cost shall be computed on the
basis of the total estimated units of proved developed reserves, rather than on the
basis of all proved reserves, which is the basis for amortizing acquisition costs
of proved properties. If significant development costs (such as the cost of an
off-shore production platform) are incurred in connection with a planned group
of development wells before all of the planned wells have been drilled, it will be
necessary to exclude a portion of those development costs in determining the
unit-of-production amortization rate until the additional development wells are
drilled. Similarly it will be necessary to exclude, in computing the amortization
rate, those proved developed reserves that will be produced only after significant
additional development costs are incurred, such as for improved recovery
systems. However, in no case should future development costs be anticipated in
computing the amortization rate. (Joint production of both oil and gas is
discussed in paragraph 38.) Unit-of-production amortization rates shall be
revised whenever there is an indication of the need for revision but at least once
a year; those revisions shall be accounted for prospectively as changes in
accounting estimates—see paragraphs 19–22 of Statement 154.paragraphs 31-33
of APB Opinion No. 20.
C9. FASB Statement No. 25, Suspension of Certain Accounting Requirements for Oil
and Gas Producing Companies, is amended as follows:
a. Paragraph 4 and its related footnote 1, as effectively amended by Statement 69:
The effective date for application of paragraphs 11–41, 44–47, and 60 of FASB
Statement No. 19 is suspended insofar as those paragraphs pertain to a required
form of successful efforts accounting. Those paragraphs are not suspended
insofar as they provide definitions of terms in paragraph 11 or provide direction
and guidance for financial statement disclosures required by paragraphs
59M–59R. Statement No. 19, including paragraphs 11–47, continues in effect as
an accounting pronouncementa Statement issued by the FASB for the purpose of
applying paragraphs 12–14 of FASB Statement No. 154, Accounting Changes
41
and Error Corrections.paragraph 16 of APB Opinion No. 20, “Accounting
Changes.”1
1
Paragraph 16 of APB Opinion No. 20 states in part: “The presumption that an entity should not
change an accounting principle may be overcome only if the enterprise justifies the use of an
alternative acceptable accounting principle on the basis that it is preferable. . . . The issuance of [a
Statement of Financial Accounting Standards] that creates a new accounting principle, that
expresses a preference for an accounting principle, or that rejects a specific accounting principle
is sufficient support for a change in accounting principle. The burden of justifying other changes
rests with the entity proposing the change.”
C10. FASB Statement No. 52, Foreign Currency Translation, is amended as follows:
a. Paragraph 45:
Once a determination of the functional currency is made, that decision shall be

consistently used for each foreign entity unless significant changes in economic
facts and circumstances indicate clearly that the functional currency has changed.
(FASB Statement No. 154, Accounting Changes and Error Corrections, para-
graph 5APB Opinion No. 20, Accounting Changes, paragraph 8, states that
“adoption or modification of an accounting principle necessitated by transactions
or events that are clearly different in substance from those previously occurring”
is not a change in accounting principles.)
C11. FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of
Real Estate Projects, is amended as follows:
a. Paragraph 12:
Estimates and cost allocations shall be reviewed at the end of each financial
reporting period until a project is substantially completed and available for sale.
Costs shall be revised and reallocated as necessary for material changes on the
basis of current estimates.8 Changes in estimates shall be reported in accordance
with paragraphs 19–22 of FASB Statement No. 154, Accounting Changes and
Error Correctionsparagraph 31 of APB Opinion No. 20, Accounting Changes.
C12. FASB Statement No. 71, Accounting for the Effects of Certain Types of
Regulation, is amended as follows:
a. Paragraph 31:
Opinion 20FASB Statement No. 154, Accounting Changes and Error Correc-
tions, defines various types of accounting changes and establishes guidelines for
42
reporting each type. Other authoritative pronouncements specify the manner of
reporting initial application of those pronouncements.
C13. FASB Statement No. 123 (revised December 2004), Share-Based Payment, is
amended as follows:
a. Paragraph 38:
A nonpublic entity shall make a policy decision of whether to measure all of its
liabilities incurred under share-based payment arrangements at fair value or to
measure all such liabilities at intrinsic value.23 Regardless of the method
selected, a nonpublic entity shall remeasure its liabilities under share-based
payment arrangements at each reporting date until the date of settlement. The
fair-value-based method is preferable for purposes of justifying a change in
accounting principle under FASB Statement No. 154, Accounting Changes and
Error CorrectionsAPB Opinion No. 20, Accounting Changes. Illustration 10
(paragraphs A127–A133) provides an example of accounting for an instrument
classified as a liability using the fair-value-based method. Illustration 11(c)
(paragraphs A143–A148) provides an example of accounting for an instrument
classified as a liability using the intrinsic value method.
b. Paragraph A23:
Assumptions used to estimate the fair value of equity and liability instruments
granted to employees should be determined in a consistent manner from period
to period. For example, an entity might use the closing share price or the share
price at another specified time as the “current” share price on the grant date in
estimating fair value, but whichever method is selected, it should be used
consistently. The valuation technique an entity selects to estimate fair value for
a particular type of instrument also should be used consistently and should not be
changed unless a different valuation technique is expected to produce a better
estimate of fair value. A change in either the valuation technique or the method
of determining appropriate assumptions used in a valuation technique is a change
in accounting estimate for purposes of applying FASB Statement No. 154,
Accounting Changes and Error CorrectionsAPB Opinion No. 20, Accounting
Changes, and should be applied prospectively to new awards.
43
C14. FASB Statement No. 143, Accounting for Asset Retirement Obligations, is
amended as follows:
a. Paragraph 15:
Changes resulting from revisions to the timing or the amount of the original
estimate of undiscounted cash flows shall be recognized as an increase or a
decrease in (a) the carrying amount of the liability for an asset retirement
obligation and (b) the related asset retirement cost capitalized as part of the
carrying amount of the related long-lived asset. Upward revisions in the amount
of undiscounted estimated cash flows shall be discounted using the current
credit-adjusted risk-free rate. Downward revisions in the amount of undiscounted
estimated cash flows shall be discounted using the credit-adjusted risk-free rate
that existed when the original liability was recognized. If an entity cannot
identify the prior period to which the downward revision relates, it may use a
weighted-average credit-adjusted risk-free rate to discount the downward revi-
sion to estimated future cash flows. When asset retirement costs change as a
result of a revision to estimated cash flows, an entity shall adjust the amount of
asset retirement cost allocated to expense in the period of change if the change
affects that period only or in the period of change and future periods if the change
affects more than one period as required by FASB Statement No. 154,
Accounting Changes and Error Corrections (paragraphs 19–22)APB
Opinion No. 20, Accounting Changes (paragraph 31), for a change in estimate.
C15. FASB Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, is amended as follows:
a. Paragraph 9 and its related footnote 7:
When a long-lived asset (asset group) is tested for recoverability, it also may be
necessary to review depreciation estimates and method as required by FASB
Statement No. 154, Accounting Changes and Error CorrectionsAPB Opinion
No. 20, Accounting Changes, or the amortization period as required by FASB
Statement No. 142, Goodwill and Other Intangible Assets.7 Any revision to the
remaining useful life of a long-lived asset resulting from that review also shall be
considered in developing estimates of future cash flows used to test the asset
(asset group) for recoverability (paragraph 18). However, any change in the
44
accounting method for the asset resulting from that review shall be made only
after applying this Statement.
7
Paragraphs 19–22 of Statement 154 address the accounting for changes in estimates, including
changes in the method of depreciation, amortization, and depletion.Paragraphs 10 and 31–33 of
Opinion 20 address the accounting for changes in estimates; paragraphs 23 and 24 of Opinion 20
address the accounting for changes in the method of depreciation. Paragraph 11 of Statement 142
addresses the determination of the useful life of an intangible asset.
b. Paragraph 28:
For purposes of this Statement, a long-lived asset to be abandoned is disposed of

when it ceases to be used. If an entity commits to a plan to abandon a long-lived
asset before the end of its previously estimated useful life, depreciation estimates
shall be revised in accordance with paragraphs 19–22 of Statement 154Opin-
ion 20 to reflect the use of the asset over its shortened useful life (refer to
paragraph 9).16 A long-lived asset that has been temporarily idled shall not be
accounted for as if abandoned.
c. Footnote 24:
This caption shall be modified appropriately when an entity reports an extraor-

dinary item or the cumulative effect of a change in accounting principle or bothin
accordance with Opinion 20. If applicable, the presentation of per-share data will
need similar modification.
C16. FASB Interpretation No. 1, Accounting Changes Related to the Cost of Inventory,
is amended as follows:
a. Paragraph 1:
Accounting Principles Board (APB) Opinion No. 20FASB Statement No. 154,
Accounting Changes and Error Corrections, specifies how changes in account-
ing principles should be reported in financial statements and what is required to
justify such changes. Under that OpinionStatement, the term accounting prin-
ciple includes “not only accounting principles and practices but also the methods
of applying them.”
45
b. Paragraph 5:
A change in composition of the elements of cost included in inventory is an

accounting change. A company which makes such a change for financial
reporting shall conform to the requirements of FASB Statement No. 154,
Accounting Changes and Error CorrectionsAPB Opinion No. 20, including
justifying the change on the basis of preferability as specified by paragraphs
12–14 of that Statementparagraph 16 of APB Opinion No. 20. In applying
Statement 154APB Opinion No. 20, preferability among accounting principles
shall be determined on the basis of whether the new principle constitutes an
improvement in financial reporting and not on the basis of the income tax effect
alone.
C17. FASB Interpretation No. 7, Applying FASB Statement No. 7 in Financial

Statements of Established Operating Enterprises, is amended as follows:
a. Paragraph 5:
Except in the circumstances described in the preceding paragraph, the effect of

a development stage subsidiary’s change in accounting principle to conform its
accounting to the requirements of Statement No. 7 generally would be reflected
in an established operating enterprise’s consolidated financial statements that
include that subsidiary. When a development stage subsidiary adopts a new
accounting principle to conform its accounting to the requirements of Statement
No. 7 and the effect of that subsidiary’s accounting change is also reflected in an
established operating enterprise’s consolidated financial statements that include
that subsidiary, the provisions of paragraph 14 of Statement No. 7 apply. In that
situation, the established operating enterprise’s consolidated financial statements
for periods prior to the period in which the subsidiary’s accounting change is
made and financial summaries and other data derived therefrom shall be restated
by prior period adjustment. It should be noted that Statement No. 7 does not
address the question of how an established operating enterprise should report
accounting changes adopted with respect to the revenue and costs related to
activities of the parent company or any subsidiaries that are not in the
development stage; that question is covered by FASB Statement No. 154,
Accounting Changes and Error Corrections.APB Opinion No. 20, “Accounting
Changes.”
46
C18. FASB Interpretation No. 18, Accounting for Income Taxes in Interim Periods, is
amended as follows:
a. Footnote 1, as replaced by Statement 144:
The terms used in this definition are described in APB Opinion No. 20,
Accounting Changes, in APB Opinion No. 30, Reporting the Results of
Operations—Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
and in FASB Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, and in FASB Statement No. 154, Accounting Changes and
Error Corrections. See paragraph 10 of Opinion 30 for extraordinary items and
paragraph 26 for unusual items and infrequently occurring items. See paragraph
7(a) of Statement 15420 of Opinion 20 for cumulative effects of changes in
accounting principles. See paragraphs 41–44 of Statement 144 for discontinued
operations.
b. Paragraph 21 and the heading preceding it:
Cumulative Effects of Changes in Accounting Principles
FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial

Statements,” specifies that the cumulative effect of a change in accounting
principle on retained earnings at the beginning of the year shall be reported in the
first interim period of the fiscal year. APB Opinion No. 20, “Accounting
Changes,” specifies that the related income tax effect of a cumulative effect type
accounting change shall be computed as though the new accounting principle
had been applied retroactively for all prior periods that would have been affected.
c. Paragraph 64:
When an enterprise makes an cumulative effect type accounting change in other

than the first interim period of the enterprise’s fiscal year, paragraph 15 of FASB
Statement No. 154, Accounting Changes and Error Corrections, paragraph 10 of
FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial
Statements,” requires that financial information for the pre-change interim
periods of the fiscal year shall be reported by retrospectivelyrestated by applying
the newly adopted accounting principle to those pre-change interim periods. The
tax (or benefit) applicable to those pre-change interim periods shall be recom-
puted. The revisedrestated tax (or benefit) shall reflect the year-to-date amounts
47
and annual estimates originally used for the pre-change interim periods, modified
only for the effect of the change in accounting principle on those year-to-date and
estimated annual amounts.
C19. Many pronouncements issued by the Accounting Principles Board and the FASB
contain references to the cumulative effect of a change in accounting principle.
All such references appearing in paragraphs that establish standards or illustrate their
application are hereby amended to include the following footnote:
After the effective date of FASB Statement No. 154, Accounting Changes and
Error Corrections, voluntary changes in accounting principle will no longer be
reported via a cumulative-effect adjustment through the income statement of the
period of change.
That conclusion requires amendments to the following existing pronouncements:
a. Opinion 28
b. Opinion 30
c. FASB Statement No. 128, Earnings per Share
d. FASB Statement No. 130, Reporting Comprehensive Income
e. FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related
Information
f. Statement 141
g. Statement 144
h. Interpretation 18.
48

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NO.

268-A MAY 2005

a replacement of APB Opinion No. 20

Financial Accounting Standards Board

Please ask for our Product Code No. S154.

FINANCIAL ACCOUNTING SERIES (ISSN 0885-9051) is published monthly by the

Reasons for Issuing This Statement

How the Changes in This Statement Improve Financial Reporting

a replacement of APB Opinion No. 20

Financial Accounting Standards Board

Accounting Changes and Error Corrections

a replacement of APB Opinion No. 20 and FASB Statement No. 3

Accounting Changes and Error Corrections

a replacement of APB Opinion No. 20 and FASB Statement No. 3

STANDARDS OF FINANCIAL ACCOUNTING AND REPORTING

2. The following terms are defined as used in this Statement:

a. Accounting change—a change in (1) an accounting principle, (2) an accounting

3. This Statement applies to financial statements of business enterprises and not-for-

Change in Accounting Principle

5. Neither (a) initial adoption of an accounting principle in recognition of events or

6. It is expected that accounting pronouncements normally will provide specific

7. An entity shall report a change in accounting principle through retrospective

8. If the cumulative effect of applying a change in accounting principle to all prior

9. If it is impracticable to determine the cumulative effect of applying a change in

11. It shall be deemed impracticable to apply the effects of a change in accounting

Justification for a Change in Accounting Principle

12. In the preparation of financial statements, once an accounting principle is adopted,

14. The issuance of an accounting pronouncement that requires use of a new

Reporting a Change in Accounting Principle Made in an Interim Period

15. A change in accounting principle made in an interim period shall be reported by

Change in Accounting Estimate

20. Distinguishing between a change in an accounting principle and a change in an

Correction of an Error in Previously Issued Financial Statements

Effective Date and Transition

The provisions of this Statement need

Robert H. Herz, Chairman

Illustration 1—Retrospective Application of a Change in Accounting Principle

A4. This illustration is based on the following assumptions:

Change in Method of Accounting for Inventory Valuation

As a result of the accounting change, retained earnings as of January 1, 20X6, decreased

BACKGROUND INFORMATION AND BASIS FOR CONCLUSIONS

Introduction ............................................................................ B1–B4

BACKGROUND INFORMATION AND BASIS FOR CONCLUSIONS

Change in Accounting Principle

Change in Accounting Estimate

B23. Paragraph 21 of FASB Concepts Statement No. 1, Objectives of Financial

Accounting Change in Interim-Period Information

Effective Date and Transition

Benefits and Costs

AMENDMENTS TO EXISTING PRONOUNCEMENTS

C1. This Statement supersedes the following pronouncements:

a. APB Opinion No. 20, Accounting Changes

a. Paragraph 3, as amended by Opinion 20:

It is necessary that prior-year figures shown for comparative purposes be in fact

Financial statement disclosure of accounting policies should not duplicate details

Accruing compensation expense may require estimates, and adjustment of those

Changes in an interim or annual accounting practice or policyprinciple made in

Certain changes in accounting principle, such as those described in paragraphs 4

The effect of a change in an accounting estimate, including a change in the