Commission staff administrative interpretations of APB Opinion No. 9 during 1975 limiting prior period adjustments for out of court settlements of litigation." The dispute between the AICPA and the SEC over the interpretation of APB Opinion No. 9 was a legitimate reason for the FASB to act.
FASB Statement No. 16 stated that items of "profit and loss related to the following shall be accounted for and reported as prior period adjustments and excluded from the determination of net income for the current period: (a) correction of an error in the financial statements of a prior period; and (b) adjustments that result from realization of income or benefits of pre acquisition operating loss carryforwards of purchased subsidiaries."
Statement No. 16 went into greater detail in relation to prior interim periods of a current fiscal year. The FASB defined such an adjustment as a "settlement of litigation or similar claims, of income taxes, of renegotiation proceedings, or of utility revenue under rate making processes provided that the adjustment or settlement meets each of the following criteria: (a) the effect of the adjustment or settlement is material in relation to income from continuing operations of the current fiscal year or in relation to the trend of income from continuing operations or is material by other appropriate criteria; (b) all or part of the adjustment or settlement can be specifically identified with and is directly related to business activities of specific prior interim periods of the current fiscal year; and (c) the amount of the adjustment or settlement could not be reasonably estimated prior to the current interim period but becomes reasonably estimable in the current interim period."
Statement No. 16 also addressed adjustments for prior periods of a current fiscal year, when "an item of profit or loss occurs in other than the final interim period of the enterprise's fiscal year and all or a part of the item o...