Project Pages

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

Project Description: The objective of this project is to improve the accounting and financial reporting for prior-period adjustments, accounting changes, and error corrections in Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements. The project will fully reexamine the existing standards to address issues related to (1) inconsistency in practice, (2) confusion about and difficulty applying regarding the requirements, and (3) the usefulness of the related disclosures.

Status: Initial Deliberations

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


Background: Guidance on accounting for prior-period adjustments, accounting changes, and error corrections historically has been based on several sources of accounting literature, including 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 62 and remains largely unchanged.
 
Statement 62 establishes accounting and financial reporting requirements for prior-period adjustments broadly. 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.
 
The results of the pre-agenda research and the review of relevant technical inquiries indicate that prior-period adjustments, accounting changes, and error corrections generally are widespread among governments. This issue is relevant to a broad number of governments because those changes, such as in accounting principle or estimate, occur in the regular course of accounting and financial reporting. The magnitude of prior-period adjustments, accounting changes, and error corrections vary, but they have the potential to be significant. The pre-agenda research also indicated inconsistencies in practice in the accounting and financial reporting for prior-period adjustments, accounting changes, and error corrections by preparers and auditors.
 
Information about prior-period adjustments, accounting changes, and error corrections is used by financial statement users in performing analyses and making decisions. In the pre-agenda research, user interviews were conducted to evaluate how users currently use or would use information related to this topic. Many users who were interviewed reported that this information is used to better understand and explain the nature of the changes that have occurred and to make adjustments to facilitate comparability of prior-year financial statements and comparability across governments. Some users indicated that the information is a direct input into quantitative analyses, and others reported using it for qualitative assessments of management, risk, and overall financial health. Based on the manner in which users utilize the information, the pre-agenda research indicated that users would benefit from greater comparability and consistency.

Accounting and Financial Reporting Issues. The following issues would be considered:

  • Consideration of the types of events that constitute the different types of prior-period adjustments, accounting changes, and error corrections
  • Consideration of the relationship between the existing requirements for prior-period adjustments, accounting changes, and error corrections and other GASB requirements; for example, with requirements for changes in assumptions associated with postemployment benefit measurements and with requirements in Statement No. 69, Government Combinations and Disposals of Government Operations
  • Clarification of terminology regarding reporting of accounting changes and error corrections (for example, terms including “restatement,” “reclassification,” and “prior-period adjustment”)
  • Usefulness of the disclosure requirements associated with each type of accounting change and error correction
  • Interaction between the general requirements for accounting changes and the specific transition provisions for implementation of individual pronouncements
  • Consideration of whether display requirements should be established.
Project History:
  • Pre-agenda research approved: August 2018
  • Consultative group appointed? No
  • Research results reported to the Board: November 2019
  • Added to the current technical agenda: December 2019
  • Deliberations began: February 2020
Current Developments: In September–October 2020, the Board discussed the category, including proposed accounting requirements, for changes to or within the reporting entity and proposed accounting requirements for changes in accounting principle, changes in accounting estimate, changes in measurement methodologies used to determine estimates, and corrections of errors. In December, the Board will discuss issues related to display on the face of financial statements.

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

Board Meetings

Topics to Be Considered

January 2021: First time adoption of GAAP; other issues; effective date and transition.
February 2021: Review first draft of standards section of a proposed Statement; cost-benefit considerations.
April 2021: Review preballot draft of an Exposure Draft of a proposed Statement.
May 2021: Review ballot draft of an Exposure Draft of a proposed Statement and consider for approval.
June–August 2021: Comment period.
October 2021 (VC)–
February 2022
:
Redeliberate issues based on respondent feedback.
April 2022: Review preballot draft of a final Statement.
May 2022: Review ballot draft of a final Statement and consider for approval.
 

Prior Period Adjustments, Accounting Changes, and Error Corrections—Recent Minutes

 
Minutes of Meetings, December 1–3, 2020

The Board continued deliberations of the Prior-Period Adjustments, Accounting Changes, and Error Corrections project by discussing disclosure requirements for accounting changes and error corrections. First, the Board tentatively decided to propose that the aggregated amount of adjustments to/restatements of beginning balances be separately displayed by reporting unit on the face of the basic financial statements. The Board then tentatively decided to propose that if not separately displayed on the face of the financial statements, governments disclose in the notes to financial statements a reconciliation between the beginning balances as previously reported and beginning balances as adjusted or restated by type and event (if more than one event of the same type occurs during the period) by reporting unit in a tabular format.
 
For changes in accounting principle other than the implementation of a new pronouncement, the Board tentatively decided to propose that, in addition to the quantitative effect on beginning balances that is proposed to be disclosed as part of the reconciliation disclosure discussed previously, disclosures for this category include: (a) the nature of the change in accounting principle, including a description of the line items affected and (b) the reason for the change in accounting principle, including an explanation of why the change in accounting principle is preferable. The Board also tentatively decided to propose that if the government does not restate prior periods presented because it is impracticable to do so, disclosure of the reason why the restatement was impracticable be included to the notes to financial statements. Furthermore, the Board tentatively decided to propose that in the absence of specific transition provisions, the disclosure requirements for a change in accounting principle apply to the implementation of a new pronouncement, except for the disclosure of the reason for the implementation of the new pronouncement (including the explanation of why the implementation of a new pronouncement is preferable).
 
Next, the Board tentatively decided to propose that disclosures relating to a GASB pronouncement that has been issued but is not yet effective not be required.
 
For changes to or within the reporting entity, the Board tentatively decided to propose that, in addition to the quantitative effect on beginning balances that is proposed to be disclosed as part of the reconciliation disclosure discussed previously, the nature of and reason for the change to or within the reporting entity be disclosed.
 
For correction of an error, the Board tentatively decided to propose that, in addition to the quantitative effect on beginning balances that is proposed to be disclosed as part of the reconciliation disclosure discussed previously, disclosure for this category include: (a) the nature of the error, including a description of the line items affected and the periods that the error affected and (b) the effect of the error correction on the change in net position, fund net position, or fund balance, as applicable, of the prior period.
 
Next, the Board tentatively decided to propose that disclosures be made in the period that the change occurred or, in the case of an error, in the period that the error was discovered and corrected. Additionally, the Board tentatively decided to propose that if a disclosure first appears in an interim report, the disclosure also be made in the annual report for the year in which the change was made. Furthermore, the Board tentatively decided to propose that for comparative financial statements, for changes in accounting principle and corrections of errors for which the prior period presented was restated, subsequent annual reports not repeat the disclosure.
 
Next, the Board discussed clarification regarding the change in accounting estimate and change in measurement methodology categories. The Board tentatively decided to propose that accounting estimates are amounts that are recognized or disclosed in the financial statements for which the measurement is subject to significant uncertainty. Furthermore, the Board tentatively decided to propose that data, assumptions, and measurement methodologies be described as inputs to accounting estimates (an output).
 
For all changes in accounting estimates (including those resulting from changes in measurement methodology) the Board tentatively decide to propose that disclosures be limited to those changes that have a significant effect on financial statements. Additionally, the Board tentatively decided to propose that for all changes in accounting estimate that have a significant effect on the financial statements, the nature of the change in accounting estimate, including a description of the line items affected, be disclosed. Lastly, the Board tentatively decided to propose that for changes in accounting estimates that have a significant effect on the financial statements that result from a change in measurement methodology, the reason for the change in measurement methodology, including an explanation of why the change in measurement methodology is preferable, be disclosed.

Minutes of Meetings, October 20–22, 2020

The Board continued deliberations of the Prior-Period Adjustments project by first discussing the scope of the category related to the reporting entity, hereinafter referred to as changes to or within the reporting entity. The Board tentatively decided to propose that intra-entity events or transactions with blended component units that result in the addition or removal of a fund or reporting unit be reported as changes to or within the reporting entity in the financial statements of the reporting entity. Additionally, the Board tentatively decided to propose that intra-entity events or transactions with discretely presented component units that result in the addition or removal of a fund or reporting unit be reported as events or transactions with external entities. Finally, the Board tentatively decided to propose that the adjustment to beginning balances to report a change to or within the reporting entity occur as of the beginning of the year.

The Board tentatively decided to propose that the proposed accounting requirements for all accounting changes and error corrections be applicable to governmental funds, proprietary funds, governmental activities, and business-type activities.

Then, the Board discussed accounting requirements for each category of accounting change or error correction. For a change in accounting principle, the Board tentatively decided to propose that changes be reported retroactively by restating prior periods presented, if practicable. If restatement of prior periods is not practicable, the Board tentatively decided to propose that the cumulative effect of the change be reported as an adjustment to the beginning balance of the earliest period restated. Also, the Board tentatively decided that the meaning of if practicable should not be expanded to be more specific. Additionally, the Board tentatively decided to propose that the proposed accounting requirements for changes in accounting principle apply to the implementation of a new pronouncement in the absence of specific transition provisions.

For a change in accounting estimate, the Board tentatively decided to propose that, in the absence of other literature, the effect of the change in accounting estimate be reported prospectively 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.

Similarly, for a change in measurement methodology used to determine an estimate, the Board tentatively decided to propose that a change be accounted for prospectively in the same manner as a change in estimate.

Additionally, the Board tentatively decided to propose that events that meet the descriptions of both a change to or within the reporting entity and a change in accounting principle be reported as a change to or within the reporting entity.

Next, for a correction of an error in previously issued financial statements, the Board tentatively decided to propose that a correction be accounted for retroactively by restating financial statements for all prior periods presented. If only single-period financial statements are presented, the Board tentatively decided to propose that an error correction be accounted for by restating beginning net position, fund net position or fund balance, as applicable, for the cumulative effect of the error correction. The Board also tentatively decided to propose that no practicability exceptions regarding restatement of prior periods presented be included for a correction of an error in previously issued financial statements.

Finally, the Board discussed terminology to be used related to accounting changes and error corrections. The Board tentatively decided to propose that the term retroactive (rather than retrospective) be used in the context of this project.

Minutes of Meetings, September 8–10, 2020

The Board continued deliberations on the categories of accounting changes by discussing the category of changes in reporting entity. The Board discussed the scope of the existing category and whether that scope should be expanded to address more events than are addressed by existing literature. Regarding the scope of the category, the Board first tentatively agreed to propose that a category developed by this project exclude changes resulting from acquisitions, transfers of operations, or mergers with entities that are not part of the reporting entity. To further evaluate the scope, the Board then discussed the accounting that should be applied to events addressed by a category developed by this project and tentatively agreed to propose that events addressed by this category should be reported as an adjustment to beginning balance, rather than as a restatement of prior periods presented or a flow in the period of the change. Finally, the Board discussed the specific events that should be addressed by a category developed by this project and tentatively agreed to propose that this category address additions or removals of funds, reporting units, or legally separate entities that do not result from an acquisition, transfer of operations, or merger with an entity that is not part of the reporting entity.

Minutes of Meetings, May 6–8, 2020

The Board continued deliberations by further discussing distinctions between changes in measurement methodology used to determine estimates and changes in accounting principle and changes in accounting estimate. The Board discussed the need to further clarify certain terms that are used in this project. The Board tentatively agreed to propose that a change in measurement methodology used to determine an estimate begin with an element in the financial statements that is an estimate and that accounting estimate needs to be measured by applying a methodology. Additionally, the Board tentatively agreed to propose that changes in measurement methodologies used to determine estimates be justified as preferable based on the qualitative characteristics in Concepts Statement No. 1, Objectives of Financial Reporting.

Minutes of Meetings, March 24–26, 2020

The Board continued deliberations by further discussing distinctions between changes in accounting principle and changes in accounting estimate. The Board tentatively agreed that changes in measurement methodologies that are used to determine estimates are events for which clarification regarding classification is needed. Additionally, the Board tentatively agreed to propose that changes in accounting principle generally should continue to be reported retroactively and changes in accounting estimate generally should continue to be reported prospectively. Lastly, the Board tentatively agreed to propose adding a distinct category for changes in measurement methodology used to determine estimates, separate from changes in accounting principle and changes in accounting estimate, for which separate accounting and disclosure requirements would be considered.

Minutes of Meetings, February 11–13, 2020

The Board began deliberations on this project by discussing the categories that should serve as the basis for classifying different types of events. The Board tentatively decided to propose eliminating “prior-period adjustments” as a category. Additionally, the Board tentatively agreed to propose that changes in accounting principle result from either (a) a change from one generally accepted accounting principle to another generally accepted accounting principle on the basis that the change is preferable or (b) implementation of a new pronouncement. Furthermore, the Board tentatively agreed to propose that “preferability” for a change in accounting principle consider the six qualitative characteristics. The Board also tentatively decided to propose that changes in accounting estimate result from a change in circumstance, new information, or more experience. The Board discussed distinctions between changes in accounting principle and changes in accounting estimate but did not reach any tentative decisions. In addition, the Board tentatively decided to propose that a correction of an error results from mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were issued about conditions that existed as of the financial statement date. The Board discussed that if significant, a change from an accounting principle that is not generally accepted to an accounting principle that is generally accepted should be considered a correction of an error. Additionally, the Board tentatively decided to propose that a clarification be provided to indicate that “facts that existed at the time the financial statements were issued about conditions that existed as of the financial statement date” is intended to convey that those facts could reasonably be expected to have been obtained and taken into account at that time. The Board tentatively decided to propose an additional category regarding first-time adoption of generally accepted accounting principles as an accounting framework. The Board also tentatively decided that a change in fiscal year-end should not be addressed as part of this project. Lastly, the Board tentatively decided that defining materiality is outside the scope of this project.
 

Prior Period Adjustments, Accounting Changes, and Error Corrections—Tentative Board Decisions to Date


The Board tentatively decided to propose the following:
  • The category “prior-period adjustment” should be eliminated.
  • With respect to a change in accounting principle results from either:
    • A change in accounting principle results from either (1) a change from one generally accepted accounting principle to another generally accepted accounting principle on the basis that the change is preferable or (2) implementation of a new pronouncement.
    • “Preferability” for a change in accounting principle should consider the six qualitative characteristics.
    • A change in accounting principle should be reported retroactively by restating prior periods presented, if practicable.
      • If restatement of prior periods is not practicable, then the cumulative effect of the change should be reported as an adjustment to the beginning balance of the earliest period restated.
    • In the absence of specific transition provisions, the accounting requirements for a change in accounting principle should apply to the implementation of a new pronouncement.
    • For changes in accounting principle other than the implementation of a new pronouncement, in addition to the quantitative effect on beginning balances that is disclosed via the reconciliation disclosure, disclosures for this category should include: (1) the nature of the change in accounting principle, including a description of the line items affected and (2) the reason for the change in accounting principle, including an explanation of why the change is preferable.
    • If the government does not restate prior periods presented because it is impracticable to do so, disclosure of the reason why the restatement was impracticable should be included in the notes to financial statements.
    • In the absence of specific transition provisions, the disclosure requirements for a change in accounting principle should apply to the implementation of a new pronouncement. Disclosure of the reason for the implementation of the new pronouncement (including the explanation of why the implementation of a new pronouncement is preferable) need not be included.
  • With respect to a change in accounting estimate:
    • A change in accounting estimate results from a change in circumstance, new information, or more experience.
    • Accounting estimates are amounts that are recognized or disclosed in the financial statements for which the measurement is subject to significant uncertainty.
    • Data, assumptions, and measurement methodologies should be described as inputs to accounting estimates (an output).
    • Changes in measurement methodologies used to determine estimates should be justified as preferable based on the qualitative characteristics in Concepts Statement No. 1, Objectives of Financial Reporting.
    • In the absence of other literature, a change in accounting estimate (including changes in accounting estimates that result from a change in measurement methodology) should be reported prospectively by reporting the effect of the change in (1) the period of the change if the change affects that period only or (2) the period of change and future periods if the change affects both.
    • For all changes in accounting estimate that have a significant effect on the financial statements, the nature of the change in accounting estimate, including a description of the line items affected, should be disclosed.
    • For changes in accounting estimates that have a significant effect on the financial statements that result from a change in measurement methodology, the reason for the change in measurement methodology, including an explanation of why the change in measurement methodology is preferable should be disclosed.
  • A category should be developed by this project to address additions or removals of funds, reporting units, or legally separate entities, hereinafter referred to as changes to or within the reporting entity. With respect to that category:
    • Additions or removals resulting from acquisitions, transfers of operations, or mergers with an entity that is not part of the reporting entity should be excluded from this category.
    • Events addressed by this category should be reported as an adjustment to beginning balance (rather than a restatement of prior periods presented or a flow in the period of the change).
    • Intra-entity events or transactions with blended component units that result in the addition or removal of a fund or reporting unit should be reported as changes to or within the reporting entity in the financial statements of the reporting entity.
    • Intra-entity events or transactions with discretely presented component units that result in the addition or removal of a fund or reporting unit should be reported as events or transactions with external entities.
    • The adjustment to beginning balances to report a change within this category should occur as of the beginning of the year.
    • Events or transactions that meet the descriptions of both a change in accounting principle and a change to or within the reporting entity should be reported as a change to or within the reporting entity.
    • In addition to the quantitative effect on beginning balances that is disclosed via the reconciliation disclosure, the nature of and reason for the change to or within the reporting entity should be disclosed.
  • With respect to a correction of an error:
    • A correction of an error results from mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were issued about conditions that existed as of the financial statement date.
    • A clarification should be provided to indicate that “facts that existed at the time the financial statements were issued about conditions that existed as of the financial statement date” is intended to convey that those facts could reasonably be expected to have been obtained and taken into account at that time.
    • If significant, a change from an accounting principle that is not generally accepted to an accounting principle that is generally accepted should be considered a correction of an error.
    • A correction of an error should be accounted for retroactively by restating financial statements for all prior periods presented.
    • If only single-period financial statements are presented, the error correction should be accounted for by restating beginning net position for the cumulative effect of the error correction.
      • No practicability exceptions should be included.
    • In addition to the quantitative effect on beginning balances that is disclosed via the reconciliation disclosure, disclosure for this category should include (1) the nature of the error, including a description of the line items affected and the periods that the error affected and (2) the effect of the error correction on the change in net position, fund net position, or fund balance, as applicable, of the prior period.
  • A category should be added regarding first-time adoption of generally accepted accounting principles as an accounting framework.
  • A change in fiscal year-end should not be addressed as part of this project.
  • Materiality should not be defined as part of this project.
  • With respect to terminology:
    • The term retroactive (rather than retrospective) should be used in the context of this project.
  • The proposed accounting requirements, as described within each category above, should apply to governmental funds, proprietary funds, governmental activities, and business-type activities.
  • The aggregated amount of adjustments to/restatements of beginning balances should be separately displayed by reporting unit on the face of the basic financial statements.
  • If not displayed separately on the face of the financial statements, governments should disclose in the notes to financial statements a reconciliation between the beginning balance as previously reported and beginning balances as adjusted or restated by type and event (if more than one event of the same type occurs during the period) by reporting unit in a tabular format.
  • Disclosures relating to a GASB pronouncement that has been issued but is not yet effective should not be required.
  • Disclosures should be made in the period that the change occurred or, in the case of an error, in the period that the error was discovered and corrected.
  • If a disclosure first appears in an interim report, the disclosure also should be made in the annual report for the year in which the change was made.
  • For comparative financial statements, for changes in accounting principle and corrections of errors for which the prior period presented was restated, subsequent annual reports should not repeat the disclosure.