Project Pages

Prior-Period Adjustments, Accounting Changes, and Error Corrections—Reexamination of Statement 62

Research Description: The initial objectives of this pre-agenda research are (1) to study (a) the prevalence of prior-period adjustments, accounting changes, and error corrections by state and local governments, (b) the consistency with which existing guidance is applied, and (c) the effectiveness of that guidance, and (2) to consider the need for revisions to existing standards. If additional guidance is determined to be needed, another objective will be to consider the development of revised accounting and financial reporting standards.

Status:
Added to Current Agenda: August 2018

Prior-Period Adjustments, Accounting Changes, and Error Corrections—Project Plan


Background: Adjustments to the financial statements of prior periods are required when there is a change in accounting principle (for instance, a shift from the consumption method to the purchases method of inventory accounting, or the implementation of a new GASB Statement) or a change in a government’s financial reporting entity. The former requires a government to adjust beginning net position or fund balance, as appropriate. The latter requires a restatement of the prior period’s financial statements as if the new structure of the financial reporting entity had been in place in that period.
 
Guidance on accounting for prior-period adjustments, accounting changes, and error corrections historically has been based on several sources of accounting literature, many of which are superseded. Those sources include APB Opinion No. 9, Reporting the Results of Operations, Part 1—Net Income and the Treatment of Extraordinary Items and Prior Period Adjustments; FASB Statement No. 16, Prior Period Adjustments; APB Opinion No. 20, Accounting Changes; and FASB Interpretation No. 20, Reporting Accounting Changes under AICPA Statements of Position—an interpretation of APB Opinion No. 20. That disparate guidance was brought into the GASB literature by Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements.
 
Statement 62, as amended, requires disclosure of the effects of prior-period adjustments on the change in net position of prior periods. Statement 62 also stipulates the treatment of changes in (1) accounting principle, (2) accounting estimate, and (3) the reporting entity. Lastly, Statement 62 requires that corrections of errors in previously issued financial statements should be reported as prior-period adjustments.
 
Prior-period adjustments, accounting changes, and error corrections are common events that impact many stakeholders. They are the subject of about 10 technical inquiries per year. Further, the various accounting literature used to develop those requirements has been in place for many years. APB Opinion 20, for instance, was issued in 1971. The FASB reexamined some of that literature, replacing APB Opinion 20 and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, with FASB Statement No. 154, Accounting Changes and Error Corrections. However, because those changes were made subsequent to November 30, 1989, they were not considered for incorporation into the GASB’s literature through Statement 62.

A Gil Crain Memorial Research Grant was awarded to study the prevalence of prior-period adjustments, accounting changes, and error corrections and the state of current practice with regard to the relevant standards. The study examined a sample of 425 large and medium-sized state and local governments that prepare GAAP-based financial statements.

Major Research Issues: The following issues would be considered:

  • How prevalent are prior-period adjustments, accounting changes, and error corrections in state and local government financial statements?
  • What is the nature of the prior-period adjustments, accounting changes, and error corrections that are being reported? How large are the amounts involved?
  • Are users aware of the reporting of prior-period adjustments, accounting changes, and error corrections? Do users understand what they mean?
  • Is information about prior-period adjustments, accounting changes, and error corrections valuable to users for making decisions and assessing accountability? How is it used?
  • Statement 62 requires governments to present financial statements of prior periods as previously reported, even though an accounting change has occurred. How frequently do governments include prior-period financial statements after an accounting change? Are the financial statements presented as previously reported or are they adjusted for the accounting change?
History:
  • Pre-agenda research approved: August 2018
Current Developments: Staff began the evaluation of the Crain Grant study and supplementary research.

Research Work Plan: The plan for the pre-agenda research includes the following activities:
 

Board Meetings

Research Activities

January–April 2019:
 
Continue to develop, pretest, and administer auditor survey instrument and analyze results.
January–June 2019: Develop, pretest, and administer preparer survey instrument and analyze results.
May–August 2019: Develop advance materials and interview protocol and conduct user interviews.
September–November 2019: Conclude analysis of research results and draft research memorandum.
November 2019:
 
Discuss research memorandum with the Board.