Reporting Corrections of Errors and Changes in Accounting Principles

Amending SFFAS No. 7, Accounting for Revenue

 and Other Financing Sources 

Statement of Federal Financial Accounting Standards No. 21

October 2001

Federal Accounting Standards Advisory Board
THE FEDERAL ACCOUNTING STANDARDS ADVISORY BOARD

The Federal Accounting Standards Advisory Board (FASAB or “the Board”) was established 

by the Secretary of the Treasury, the Director of the Office of Management and Budget 

(OMB), and the Comptroller General in October 1990. It is responsible for promulgating 

accounting standards for the United States Government.

An accounting standard is typically formulated initially as a proposal after considering the 

financial and budgetary information needs of citizens (including the news media, state and 

local legislators, analysts from private firms, academe, and elsewhere), Congress, Federal 

executives, Federal program managers, and other users of Federal financial information. The 

proposed standard is published in an Exposure Draft for public comment. A public hearing is 

sometimes held to receive oral comments in addition to written comments. The Board 

considers comments and decides whether to adopt the proposed standard with or without 

modification. The Board publishes adopted standards in a Statement of Federal Financial 

Accounting Standards.

Additional background information is available from the FASAB:

• “Memorandum of Understanding among the General Accounting Office, the 

Department of the Treasury, and the Office of Management and Budget, on Federal 

Government Accounting Standards and a Federal Accounting Standards Advisory 

Board,” Amended October 1, 1999.

• “Mission Statement: Federal Accounting Standards Advisory Board”

Federal Accounting Standards Advisory Board

441 G Street, NW, Suite 6814

Mailstop 6K17V

Washington, DC 20548

Telephone (202) 512-7350

Fax (202) 512-7366

www.financenet.gov/fasab.htm
EXECUTIVE SUMMARY 1

Federal Accounting Standards Advisory Board

Reporting Corrections of Errors and Changes in Accounting Principle

October 2001

EXECUTIVE SUMMARY

I. This Statement amends the standard on Prior Period Adjustments contained 

in Statement of Federal Financial Accounting Standards No. 7, Accounting for 

Revenue and Other Financing Sources (SFFAS No. 7), which was issued in 

April 1996. 

II. Paragraph 76 of SFFAS No. 7, entitled Prior Period Adjustments, addresses 

accounting changes and errors that affect prior period financial statements. It 

does not permit reporting entities, when presenting prior period financial 

statements for comparative purposes, to restate prior period financial 

statements to show the effect of the accounting errors. 

III. The unforeseen result is that reporting entities that have material errors in 

their prior period financial statements are unable to present them for 

comparative purposes without creating both a dilemma for auditors and 

confusion for users. The dilemma for the auditors is that they would have to 

qualify their opinion on the prior period financial statements whether or not 

they had been restated. If prior period statements were presented that 

contained a material error, auditors would have to qualify their opinion. On 

the other hand, if prior period statements were presented and balances had 

been corrected for an error, auditors would still have to qualify their opinion 

because such restatement would not be in accordance with the existing 

standard. The confusion for the user derives from the difficulty inherent in 

comparing the financial statements for two or more periods when the effect of 

the error is not shown in the prior periods’ financial statements.

IV. To correct this situation, the amendment requires that when material errors 

are discovered in prior period financial statements, all statements presented 

must be restated to correct the error. 

V. The Board has retained the current requirement that prior period financial 

statements not be restated for changes in accounting principles, unless 

otherwise specified in the transition instructions section of a new FASAB 
EXECUTIVE SUMMARY 2

Federal Accounting Standards Advisory Board

Reporting Corrections of Errors and Changes in Accounting Principle

October 2001

standard. The language addressing the requirements, however, has been 

revised to improve clarity and to require certain disclosures. 
TABLE OF CONTENTS 3

Federal Accounting Standards Advisory Board

Reporting Corrections of Errors and Changes in Accounting Principle

October 2001

TABLE OF CONTENTS

EXECUTIVE SUMMARY..................................................................................................1

INTRODUCTION............................................................................................................4

ACCOUNTING STANDARD..............................................................................................6

APPENDIX A: BASIS FOR CONCLUSIONS.........................................................................8
INTRODUCTION 4

Federal Accounting Standards Advisory Board

Reporting Corrections of Errors and Changes in Accounting Principle

October 2001

INTRODUCTION

1. Statement of Federal Financial Accounting Standards No. 7, Accounting for 

Revenue and Other Financing Sources, became effective for fiscal year 

1998. It includes a section describing how reporting entities should handle 

prior period adjustments.

2. The Section on Prior Period Adjustments states:

76. Prior period adjustments should be limited to corrections 

of errors and accounting changes with retroactive effect, 

including those occasioned by the adoption of new federal 

financial accounting standards, and should be recognized 

and measured under applicable standards. Adjustments 

should be recognized as a change in cumulative results of 

operations (rather than as an element of net results of 

operations for the period). Prior period financial statements 

should not be restated for prior period adjustments 

recognized in the current period. 

3. When SFFAS No. 7 was issued, the Board believed that having reporting 

entities restate prior period financial statements for prior period adjustments 

would create an unnecessary burden at a time when FASAB was still 

establishing a basic framework of standards. 

4. However, disallowing restatement of prior period financial statements has had 

the effect of preventing reporting entities from presenting comparative 

financial statements when the prior period financial statements contain a 

material error that is discovered in the current period.

5. The Board has amended the standard to require that reporting entities restate 

prior period financial statements for material errors discovered in the current 

period, if such statements are provided for comparative purposes, and if the 

effect of the error would be material to the financial statements in either 

period.
INTRODUCTION 5

Federal Accounting Standards Advisory Board

Reporting Corrections of Errors and Changes in Accounting Principle

October 2001

6. The Board has chosen to retain the current methodology that prior period 

financial statements not be restated for changes in accounting principles, 

unless otherwise specified in the transition instructions section of a new 

FASAB standard. The language addressing the requirements, however, has

been revised to improve clarity and to require certain disclosures. 

7. The language in the standard has also been revised to distinguish between 

corrections of errors and changes in accounting principles. A change in 

accounting principle should be identified as such and no longer reported as a 

prior period adjustment. 

Effective Date

8. This amendment would be effective for periods beginning after September 30, 

2001, with earlier implementation encouraged.
ACCOUNTING STANDARD 6

Federal Accounting Standards Advisory Board

Reporting Corrections of Errors and Changes in Accounting Principle

October 2001

ACCOUNTING STANDARD 

9. Paragraph 76 of SFFAS No. 7, Accounting for Revenue and Other Financing 

Sources, Section Prior Period Adjustments, is superceded and replaced by 

Paragraphs 10 through 14 below. 

Corrections of Errors

10. “Errors in financial statements result 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 prepared.”1 When errors 

are discovered after the issuance of financial statements, and if the financial 

statements would be materially misstated absent correction of the errors, 

corrections should be made as follows:

(a) If only the current period statements are presented, then the 

cumulative effect of correcting the error should be reported as a prior 

period adjustment. The adjustment should be made to the beginning 

balance of cumulative results of operations, in the statement of 

changes in net position.

(b) If comparative financial statements are presented, then the error 

should be corrected in the earliest affected period presented by 

correcting any individual amounts on the financial statements. If the 

earliest period presented is not the period in which the error occurred 

and the cumulative effect is attributable to prior periods, then the 

cumulative effect should be reported as a prior period adjustment. 

The adjustment should be made to the beginning balance of 

cumulative results of operations, in the statement of changes in net 

position for the earliest period presented. 

(c) The nature of an error in previously issued financial statements and 

the effect of its correction on relevant balances should be disclosed. 

 

1

 Accounting Principles Board Opinion No. 20, par. 13.
ACCOUNTING STANDARD 7

Federal Accounting Standards Advisory Board

Reporting Corrections of Errors and Changes in Accounting Principle

October 2001

Financial statements of subsequent periods need not repeat the 

disclosures.

11. Prior period financial statements should only be restated for corrections of 

errors that would have caused any statements presented to be materially 

misstated.

Changes in Accounting Principles

12. A change in accounting principle is a change from one generally accepted 

accounting principle to another one that can be justified as preferable. For 

the purposes of this standard, changes in accounting principles also include 

those occasioned by the adoption of new federal financial accounting 

standards. 

13. Unless otherwise specified in the transition instructions section of a new 

FASAB standard, for all changes in accounting principles that would have 

resulted in a change to prior period financial statements:

(a) The cumulative effect of the change on prior periods should be 

reported as a “change in accounting principle.” The adjustment 

should be made to the beginning balance of cumulative results of 

operations in the statement of changes in net position for the period 

that the change is made. 

(b) Prior period financial statements presented for comparative purposes 

should be presented as previously reported; and 

(c) The nature of the changes in accounting principle and its effect on 

relevant balances should be disclosed in the current period. Financial 

statements of subsequent periods need not repeat the disclosure.

The provisions of this statement need not 

be applied to immaterial items.
APPENDIX A: BASIS FOR CONCLUSIONS 8

Federal Accounting Standards Advisory Board

Reporting Corrections of Errors and Changes in Accounting Principle

October 2001

APPENDIX A: BASIS FOR CONCLUSIONS

14. This appendix summarizes some of the considerations deemed significant by 

the Board in reaching the conclusions in this Statement. It includes the 

reasons for accepting certain approaches and rejecting others. Individual 

members gave greater weight to some factors than to others.

15. The Board received sixteen responses to the ED. All but one respondent 

were in support of the amendment. The Board did not rely on the number in 

favor of or opposed to a given position. Information about the respondent’s 

majority view is provided only as a means of summarizing the comments. 

The Board considered the arguments in each response and weighed the 

merits of the points raised. The respondent’s comments are summarized 

below. 

Federal Non-federal

Users, academics, others 2

Auditors 2

Preparers and financial

managers

12

16. Seven respondents approved the amendment without further comment. Four 

approved the amendment but requested clarifying language, which has been 

incorporated into the standard. Two approved the amendment but would 

have preferred that the standard allow restatement for changes in accounting 

principles. 

17. One respondent disapproved of the amendment because they believe the 

amendment will create additional confusion regarding the closing of prior 

period accounts and the subsequent issuance of financial statements.
APPENDIX A: BASIS FOR CONCLUSIONS 9

Federal Accounting Standards Advisory Board

Reporting Corrections of Errors and Changes in Accounting Principle

October 2001

Corrections of Errors

18. When SFFAS No. 7 was issued, the Board believed that having reporting 

entities restate prior period financial statements for prior period adjustments 

would create an unnecessary burden at a time when FASAB was still 

establishing a basic framework of standards. Changes in the federal 

accounting environment in the ensuing years have lessened these concerns. 

With the government’s increasing ability to produce accurate and 

sophisticated financial statements, the Board is more concerned with 

encouraging reporting entities to produce financial statements that are most 

useful to managers and other users.

19. Although comparative financial statements are not required by any of the 

accounting standards setting boards, it is generally held that “the presentation 

of comparative financial statements in annual and other reports enhances the 

usefulness of such reports and brings out more clearly the nature and trends 

of current changes affecting the enterprise.”2

20. Reporting entities also recognize that presenting comparative statements 

greatly enhances the overall usefulness of financial statements. Despite the 

advantages of providing comparative statements, however, at least one 

governmental entity has been constrained from presenting its prior year 

statements because they contain a material error. 

21. The Board has deliberated on the effects of the existing standard precluding 

restatement to correct errors on presentation of comparative financial 

statements. Although it believes that the considerations in effect at the time 

the existing standard was issued were valid, it has concluded that potentially 

losing or delaying the benefit of comparative statements now outweighs these 

considerations. 

22. The Board concluded that the standard for Prior Period Adjustments should 

be amended to specifically require that prior period financial statements 

presented for comparative purposes be restated to correct material errors, 

and that restatement should be limited to only material errors.

 

2

 Accounting Research Bulletin 43, Chapter 2A, paragraph 101.
APPENDIX A: BASIS FOR CONCLUSIONS 10

Federal Accounting Standards Advisory Board

Reporting Corrections of Errors and Changes in Accounting Principle

October 2001

Changes in Accounting Principles

23. Although the Board has chosen to retain the current methodology for 

reporting changes in accounting principle, it has revised the language to 

improve clarity and to require certain disclosures. The Board may consider 

exceptions to this decision, if warranted, for accounting standards issued in 

the future. It may also further examine issues raised by respondents 

regarding changes in accounting principles. 

Other Accounting Changes

24. Although accounting estimates and changes in reporting entity are identified 

as accounting changes in other accounting literature, the Board did not 

address these issues because they require further study and were not 

addressed in paragraph 76 of SFFAS No. 7. 

Board Approval

25. This statement was approved by unanimous vote of the Board.
FASAB Board Members

David Mosso, Chairman

Barry B. Anderson

Philip T. Calder

John A. Farrell

Joseph L. Kull

James M. Patton

Robert N. Reid

Nelson E. Toye

Kenneth J. Winter

FASAB Staff

Wendy M. Comes, Executive Director

Project Staff:

Andrea Palmer

Federal Accounting Standards Advisory Board

441 G Street NW

Suite 6814

Mailstop 6K17V

Washington, DC 20548

Telephone (202) 512-7350

FAX (202) 512-7366

FASAB
FASAB

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