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Unformatted text preview: 1180 C H A P T E R 22 ACCOUNTING CHANGES AND ERROR ANALYSIS LEARNING OBJECTIVES After studying this chapter, you should be able to: Identify the types of accounting changes. Describe the accounting for changes in accounting principles. Understand how to account for retrospective accounting changes. Understand how to account for impracticable changes. Describe the accounting for changes in estimates. Identify changes in a reporting entity. Describe the accounting for correction of errors. Identify economic motives for changing accounting methods. Analyze the effect of errors. 9 8 7 6 5 4 3 2 1 The FASBs conceptual framework describes comparability (including consistency) as one of the qualitative characteristics that contribute to the usefulness of accounting in- formation. Unfortunately, companies are finding it difficult to maintain comparability and consistency due to the numerous changes in accounting principles mandated by the FASB. In addition, a number of companies have faced restatements due to errors in their financial statements. For example, the table below shows types and numbers of recent accounting changes. Stock-based compensation 437 Inventories 8 Defined-benefit pension and Goodwill and other intangibles 5 postretirement plans 305 Lease/rental costs 5 Asset retirement obligations 29 Other (including servicing rights, exchanges Prior period financial statement of nonmonetary assets, and impairments) 34 misstatements 18 Although the percentage of companies reporting material changes or errors is small, readers of financial statements still must be careful. The reason: The amounts in the financial statements may have changed due to changing accounting principles and/or restatements. The chart on the next page indicates the recent trends in restatements. In the Dark PDF Watermark Remover DEMO : Purchase from www.PDFWatermarkRemover.com to remove the watermark There is some good news in the chart. As indi- cated, the number of restatements declined in 2007 compared to the high of 2006. However, investors can be in the dark when a company has an error that requires restatement. It may take some time for com- panies to sort out the source of an error, prepare cor- rected statements, and get auditor sign-off. Recent data indicate it takes on average about 3 months to resolve a restatement. The following table reports the range of periods when investors are in the dark due to a restatement. 1181 2004 4.5% 2007 2005 2006 1,200 800 400 Number of companies that restated 8.9% 9.7% 8.7% Note : Chart includes all U.S.-listed companies. The total number of companies is based on the number of unique companies that filed at least one annual report, quarterly report, or effective registration statement with the SEC during the year. In 2007, that number was 13,540 and in 2006 it was 13,899....
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- Fall '08