This research examines Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 16, Prior Period Adjustments. Of particular interest in this examination are the reasons prompting the development of Statement No. 16, the provisions of Statement No. 16, and the key issues addressed by the FASB in the development of Statement No. 16, including a consideration of arguments pro and con on the issues addressed.
In the mid-1970s, the American Institute of Certified Public Accountants (AICPA) Committee on SEC Regulations requested that the FASB consider the criteria for prior period adjustments, as those criteria were stated in APB Opinion No. 9, Reporting the Results of Operations, and provide further guidelines for the application of such criteria.1 APB Opinion No. 9 stated, among other things, that prior period adjustments were limited to the following:
those material adjustments which (a) can be specifically identified with and directly related to the business activities of particular prior periods, (b) are not attributable to economic events occurring subsequent to the date of the financial statements for the prior period, and (c) depend entirely on determinations of persons other than management and (d) were not susceptible of reasonable estimation prior to such determination.2
APB Opinion No. 9 stated that such "adjustments are rare in modern financial accounting."3
The AICPA request to the FASB was "prompted by Securities and Exchange Commission staff administrative interpretations of APB Opinion No. 9 during 1975 limiting prior period adjustments for out-of-court settlements of litigation."4 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, and the action to clarify standards of financial accounting practice was consistent with the concept of financial accounting.
The FASB, in Statement of Financial A...