On the long and winding road toward convergence with international accounting standards, the Financial Accounting Standards Board is rethinking how companies should look back at prior periods based on the adoption of new accounting rules.
In its project with the International Accounting Standards Board to achieve short-term convergence on certain rules, FASB plans to require companies to adopt “retrospective application” of new accounting rules, meaning companies must recalculate figures in prior periods as if new rules had always been in effect.
However, the Board decided recently that it would not require retrospective application when a new accounting rule creates only an indirect effect on line items. Instead, it will allow companies to book those effects cumulatively in the current period.
Retroactive application of new rules has long been viewed as confusing to readers of financial statements, said former FASB staffer Paul Bahnson. In part, that’s because retroactive application requires restatement, which often is associated with accounting errors. “Now FASB is saying they don’t think there is as much confusion as there used to be,” adds Bahnson, currently professor of accounting at Boise State University.
The Board expects to issue its final statement on accounting changes and error corrections in the second quarter, with the statement taking effect at the end of 2005.
FASB also is inching closer to issuing an exposure draft on a larger move toward convergence with international standards in accounting for business combinations, including mergers and acquisitions. That draft also is expected in the second quarter of 2005.
Ronald Bossio, senior project manager for FASB, said the core objective of the project is to create more consistency in accounting for acquisitions, with a greater movement toward fair value accounting vs. historical, cost-based accounting.
For example, the draft statement as issued will require that professional fees paid to attorneys, bankers, accounts or other outside counsel who assist in effecting a transaction should be expensed immediately. Currently, companies typically book those expenses as goodwill as if they represent part of the purchase price.
“Is payment for advice part of the fair value of the business?” Bossio said. “It’s fair value for the services received, but not part of the value of the business itself.”
Related FASB updates can be downloaded from the box above, right.