The Debate (Restating Prior Years’ Financial Statements)
This chapter began with an illustration of the impact that Statement No. 106 had on the earnings of several companies. Recall that General Motors reported a $33 billion decline in income in 1992. One time “hits” such as this can make comparison of financial statements and ratios over time difficult. This debate relates to the different methods for dealing with changes in accounting principle by either making a cumulative adjustment or restating the financial statements. Divide your group into two teams.
• One team will argue that when a new standard is issued, all prior years’ financial statements being disclosed with the current year’s information should be restated to comply with the new standard. That is, the financial results of previous periods should be restated to reflect the new standard. This is the approach now required under FASB Statement No. 154.
• The other team will argue that a cumulative adjustment that summarizes the new standard’s effect on prior periods is sufficient. This is the approach that was required under APB Opinion No. 20.