Restatements: Differentiating Between Bad and Necessary

Regulators are trying to help investors understand the difference between "bad restatements" and ones issued simply due to accounting policy changes.

The Securities and Exchange Commission (SEC) is undertaking a public relations effort to show that not all restatements are bad. The SEC believes that the education may be necessary in light of a possible accounting rule change that would require restatements, according to the Wall Street Journal.

The Financial Accounting Standards Board (FASB), the private-sector body that writes U.S. accounting rules, will seek public comments in the coming weeks on a proposal to bring U.S. standards in conformance with those of the International Accounting Standards Board (IASB).

One of those changes would require U.S. companies to adjust prior years’ financial statements to reflect accounting policy changes as if they had occurred at that time. Currently, U.S. companies make a one-time adjustment in the year the policy shift was made, rather than applying accounting changes retroactively.

If the proposal is adopted, companies would have to issue a restatement. Considering the negative publicity that most restatements bring these days, companies may balk at the proposal even though executives generally agree that the retroactive adjustment approach is a better way of comparing year-over-year results.

"In this unforgiving environment, it would be hard to expect investors to know which restatements are bad and which are appropriate," said Colleen A. Sayther, president of Financial Executives International.

SEC Chief Accountant Donald T. Nicolaisen said he hopes the FASB proposal will not be rejected because of fears of restatement. "We'll clarify that this type of restatement (to be proposed by FASB) is good, and so it won't be viewed with evil or as a correction of an error."

Meanwhile, political pressures could possibly derail the merger of IASB and FASB accounting rules, the Journal reported. IASB member James Leisenring told accountants at the AICPA national conference in Washington, D.C. Friday that he sees a "deadlock" between the IASB and the European Community over some accounting rules, including accounting for derivatives. He questioned whether Europe would embrace the idea of a single global accounting standard.

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