Financial Reporting Developments: Accounting changes and error corrections

Transcript

1 Financial reporting developments A comprehensive guide Accounting changes and error corrections Revised May 2019

2 To our clients and other friends This guide is designed to summarize the accounting literature related to accounting changes and corrections. error Accounting Standards Codification (ASC) Topic 250 includes financial accounting and reporting guidance for changes in accounting . Changes in accounting include changes in accounting principle , changes in ASC 250 also provides financial accounting and r estimates and changes in reporting entity. eporting guidance for error corrections. T he guidance in ASC 250 is codified from Statement 154 which superseded Statement 3, A ccounting Principles Board 20 and other statements issued by the Financial Accounting Standards Board (FASB) . This publication is designed to assist professionals in understanding the financial reporting issues associated with accounting changes as well as error corrections. This publication includes excerpts from and references to ASC 250, interpretive guidance and examples. It als o provides insights from the S ecurities and E xchange Commission (SEC) staff and our interpretive guidance. We hope this publication will help you understand and apply the accounting and reporting guidance for accounting changes and error corrections . EY pr ofessionals are prepared to assist you in your understanding and are ready to discuss your particular concerns and questions. May 2019

3 Contents Introduction 1 ... 1 ... Scope 3 2 ... 4 3 Change in accounting principle ... 6 Accounting for a change in accounting principle 3.1 Financial statement presentation ... 9 3.1.1 Impracticability provisions 3.2 9 ... Direct and indirect effects of retrospective application 13 ... 3.3 Justification for a change in accounting principle ... 14 3.4 Voluntary change in accounting principle — preferability considerations 3.4.1 (updated May 2019) ... 14 SEC considerations for a voluntary change in accounting principle 3.4.2 ... 18 3.4.3 Assessing reclassifications for a voluntary change in accounting principle ... 20 Accounting changes in interim periods 21 3.5 ... Fourth quarter accounting changes 22 3.5.1 ... ... 23 3.5.2 Interim periods after a change in accounting principle Changes in accounting principle — materiality considerations ... 23 3.6 3.6.1 Materiality of an interim change in accounting principle ... 24 25 ting changes in comprehensive income ... 3.7 Inclusion of cumulative effect of accoun 3.8 ... 27 Disclosures for a change in accounting principle 3.8.1 Disclosures during the exposure period of a proposed amendment to the codification or before the effective date of a final codification update (updated October 2018) ... 32 3.9 Preferability letter ... 36 3.10 ... 39 Internal control over financial reporting considerations Change in accounting estimate 40 4 ... Disclosures for a change in accounting estimate 41 4.1 ... ... 43 4.2 Internal control over financial reporting considerations Change in reporting entity ... 44 5 5.1 ... 45 Disclosures for a change in reporting entity ... 45 5.2 Internal control over financial reporting considerations Correction of an error in previously iss ued financial statements 6 46 ... 6.1 Determining whether an error exists ... 46 6.1.1 Error correction versus a change in accounting estimate ... 47 6.1.2 ... 47 Error correction versus a reclassification ... 48 6.1.3 Error correction and a change in accounting principle Error corrections and industry practice ... 6.1.4 49 6.1.5 Pre -filing communications with the SEC staff ... 49 6.2 Assessing the materiality of an error ... 50 6.2.1 Assessing materiality in annual financial reporting periods ... 52 6.2.2 Qualitative analysis ... 55 6.2.2.1 Qualitative analysis — small intentional misstatements ... 58 ... 58 6.2.2.2 Qualitative analysis — segments Accounting changes and error corrections | i Financial reporting developments

4 Contents ... 59 6.2.3 Aggregation and netting 6.2.4 Intentional misstatements, including considerations of the books and records provision ... 62 6.2.5 Quantitative analyses — Rollover and iron curtain ... 65 6.2.6 Correcting an error ... 69 6.2.7 Considerations for error analysis conclusions ... 74 6.2.8 Internal control over financial reporting considerations ... 75 ... Reporting an error in previously issued financial statements 77 6.3 Presentation requirements for restatem ents ... 77 6.3.1 Disclosures for restatements 6.3.2 ... 78 6.3.3 Reporting retrospective accounting changes in a Form 10 -K/A filed to 80 correct an error (updated October 2018) ... 6.3.3.1 81 ... Evaluating prior -period errors when adopting a new accounting standard Initial public offering restatement reporting requirements ... 82 6.3.4 6.4 Interim reporting considerations ... 82 ... 85 7 Glossary Accounting changes and error corrections Financial reporting developm ents | ii

5 Contents Notice to readers: This publication includes excerpts from and references to the FASB Accounting Standards Codification (the Codification or ASC). The Codification uses a hierarchy that includes Topics, Subtopics, Sections and Paragraphs. Each Topic includes an Overall Subtopic that generally includes pervasive guidance for the topic and additional Subtopics, as needed, with incremental or unique guidance. Each Subtopic includes Sections tha t in turn includ e numbered Paragraphs. Thus, a C odification reference includes the Topic (XXX), Subtopic (YY ), Section (ZZ) and Paragraph (PP). Throughout this publication references to guidance in the codification are shown using these reference sections or -codification standards (and specific made to certain pre also numbers. References are -Codification standards) in situations in which the content being discussed is excluded paragraphs of pre from the Codification. This publication has been carefully prepared but it necessarily contains information in summary form and is therefore intended for general guidance only; it is not intended to be a substitute for detailed research or the exercise of professional judgment. The information presented in this pu blication should not be construed as legal, tax, accounting, or any other professional advice or service. Ernst & Young LLP can accept no responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. You should consult with Ernst & Young LLP or other professional advisors familiar with your particular factual situation for advice concerning specific audit, tax or other matters before making any decisions. Portions of FASB publications rep rinted with permission. Copyright Financial Accounting Standards Board, 401 Merritt 7, P.O. Box 5116, Norwalk, CT 06856 -5116, U.S.A. Portions of AICPA Statements of Position, Technical Practice Aids, and other AICPA Americas, publications reprinted with permission. Copyright American Institute of Certified Public Accountants, 1211 Avenue of the New York, NY 10036- 8775, USA. Copies of complete documents are available from the FASB and the AICPA. Accounting changes and error corrections Financial reporting developm ents | iii

6 1 Introduction xcerpt from Accounting Standards Codification E — Overall Accounting Changes and Error Corrections Overview and Background General 250- 10 -05 -1 This Subtopic provides guidance on the accounting for and reporting of accounting changes and error corrections. An accounting change can be a change in an accounting principle, an accounting estimate, or the reporting entity. Guidance for each of these types of changes is presented in separate headings within each Section. Guidance for error corrections is also pres ented under a separate heading within each Section. Accounting Changes 250- 10 -05 -2 This Subtopic establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit t ransition requirements specific to a newly adopted accounting principle. -05 250- 10 -3 This Subtopic provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for ospective application is reporting a change when retr impracticable. Error Corrections 10 -05 -4 250- The correction of an error in previously issued financial statements is not an accounting change. However, the reporting of an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively. Therefore, the reporting of a correction of an error by restating previously issued financial statements is also addressed by this Subtopic. 250- 10-05 -5 This Subtopic also: a. Specifies the method of treating error corrections in comparative statements for two or more periods b. Specifies the disclosures required when previously issued statements of income are restated c. Recommends methods of presentation of historical, statistical -type financial summaries that are affected by error corrections. ASC 250 provides guidance on the accounting for and reporting of accounting changes, including a change in accounting principle, a change in accountin g estimate and a change in reporting entity. ASC 250 provides that a change in accounting estimate that is effected by a change in accounting principle a change in depreciation method for long -lived assets) is accounted for as a change in estimate. (e.g., Accounting changes and error corrections | 1 Financial reporting developments

7 1 Introduction ASC 250 also applies to changes required by an Accounting Standards Update (ASU) in the rare case that the ASU does not include specific transition provisions. When an ASU includes specific transition provisions, those provisions are followed. ASC 250 also addresses the correction of an error in previously issued financial statements. A correction of an error in previously issued financial statements is not an accounting change. However, similar to retrospectively reporting changes in accounting, the report ing of an error correction involves adjustments to previously issued financial statements. There is a general presumption that an accounting principle, including methods of applying a principle, once adopted should not be changed. That presumption may be o vercome only if the company justifies the use of an alternative acceptable accounting principle on the basis that it is preferable in accordance 3, Change in accounting principle, for additional detail. 250. See Chapter with ASC ASC ’ financial statements of changes in accounting retrospective application to prior periods 250 requires principle, unless it is impracticable to determine either the period -specific effects or the cumulative effect When it is impracticable to determine th e period -specific effects of an accounting change of the change. on one or more individual prior periods presented, ASC 250 requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for whic h retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior 250 requires that the new accounting principle be applied as if it were adopted prospe periods, ASC ctively from the earliest date practicable. Accounting changes and error corrections Financial reporting developments | 2

8 2 Scope Excerpt from Accounting Standards Codification — Overall Accounting Changes and Error Corrections Scope and Scope Exceptions Other Considerations 250- 10 -15 -3 The guidance in this Subtopic applies to each of the following items for business entities and not - -for profit entities (NFPs): a. Financial statements b. Historical summaries of information based on primary financial statements t hat include an accounting period in which an accounting change or error correction is reflected 10 250- -15 -4 This Topic does not change the transition provisions of any existing guidance. ASC applies to financial statements of business entities and not -for -profit organizations (collectively 250 entities ”). ASC 250 also applies to historical summaries of information based on the referred to herein as “ primary financial statements that include an accounting period in which an accounting change or erro r correction is reflected, such as the selected financial data required in public filings of SEC registrants. For example, if the company presents a table with five years of selected financial data, the table should be presented using the adjusted to reflect the accounting change or error correction so that all periods are same basis of accounting, not just the years included in the basic financial statements. While its application is not required, the ASC 250 guidance also may be appropriate in presenting financial information in other forms or for other special purposes. Generally, the provisions of ASC 250 will not be applicable to the initial application of new ASUs. In most instances, specific transition guidance is included in an ASU. However, in the rare case that specific transition guidance is not included in an ASU, the provisions of ASC 250 would be applicable. Accounting changes and error corrections | 3 Financial reporting developments

9 3 Change in accounting principle Excerpt from Accounting Standards Codification Corrections — Overall Accounting Changes and Error Other Presentation Matters Change in Accounting Principle 250- 10 -45 -1 A presumption exists that an accounting principle once adopted shall not be changed in accounting for events and transactions of a similar type. Consistent use of t he same accounting principle from one accounting period to another enhances the utility of financial statements for users by facilitating analysis and understanding of comparative accounting data. Neither of the following is considered to be a change in ac counting principle: a. Initial adoption of an accounting principle in recognition of events or transactions occurring for the first time or that previously were immaterial in their effect b. Adoption or modification of an accounting principle necessitated by transactions or events that are clearly different in substance from those previously occurring. 250- 10 -45 -2 A reporting entity shall change an accounting principle only if either of the following apply: a. The change is required by a newly issued Codification update. b. The entity can justify the use of an allowable alternative accounting principle on the basis that it is preferable. 250- 10 -45 -3 It is expected that Codification updates normally will provide specific transition requirements. However, in the unusual instance that there are no transition requirements specific to a particular Codification update, a change in accounting principle effected to adopt the requirements of that Codification update 250- 10 -45- 5 through 45 -8. Early adoption of a shall be reported in accordance with paragraphs Codification update, when permitted, shall be effected in a manner consistent with the transition requirements of that update. 250- -45 -4 10 This requirement is not limited to newly issued Codification updates. For example, if existing Codification guidance permits a choice between two or more alternative accounting principles, and provides requirements for changing from one to another, those requirements shall be followed. 250- 10 -45 -5 An entity shall report a ch ange in accounting principle through retrospective application of the new accounting principle to all prior periods, unless it is impracticable to do so. Retrospective application requires all of the following: new accounting principle on periods prior to those a. The cumulative effect of the change to the presented shall be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented. Accounting changes and error corrections | 4 Financial reporting developments

10 3 Change in accounting principle An offsetting adjustment, if any, shall be made to the opening balance b. of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period. Financial statements for each individual prior period presented shall be adjusted to reflect the c. period -specific effec ts of applying the new accounting principle. 250- -6 10 -45 If the cumulative effect of applying a change in accounting principle to all prior periods can be determined, but it is impracticable to determine the period -specific effects of that change on all pr ior periods presented, the cumulative effect of the change to the new accounting principle shall be applied to the carrying amounts of assets and liabilities as of the beginning of the earliest period to which the new accounting principle can be applied. A n offsetting adjustment, if any, shall be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period. 250- 10 -45 -7 If it is impracticable to determine the cumulative effect of applying a change in accounting principle to any prior period, the new accounting principle shall be applied as if the change was made prospectively as of the earliest date practicable. See Example 1 (paragraphs 250 55- 3 through 55 -11) for an -10- illustration of a change from the first -in, first -out (FIFO) method of inventory valuation to the last -in, first -out (LIFO) method. That Example does not imply that such a change would be considered 45 preferable as required by paragraph 250 -12. -10- 250- -45 -8 10 Retrospective application shall include only the direct effects of a change in accounting principle, including any related income tax effects. Indirect effects that would have been recognized if the newly adopted accounting principle had been followed in prior periods shall not be included in the retrospective application. If indirect effects are actually incurred and recognized, they shall be reported in the period in which the accounting change is made. ASC 250 presumes that, once adopted, an accounting principle (including the method of applying that principle) shall not be changed in accounting for events or transactions of a similar type. ASC 250- 10- 45 -1 the following are provides that s in accounting principle: not change a. The initial adoption of an accounting principle in recognition of events or transactions occurring for . the first time or that previously were immaterial in their effect And b. The adoption or modification of an accounting prin ciple necessitated by transactions or events that are clearly different in substance from those previously occurring . ASC 250- 10 -45- 2 requires that an entity change an accounting principle only if (a) the change is required by a newly issued Codification update or (b) the entity can justify the use of an allowable alternative accounting principle on the basis that it is preferable. For further discussion of preferability considerations, 3.4, . Justification for a change in accounting principle see section Accounting changes and error corrections Financial reporting developments | 5

11 3 Change in accounting principle e transition provisions for newly issued Codification updates that do not provide specific transition Th ASC 250 ( i.e., retrospective application of the new principle requirements would follow the guidance in ASC 250- 10 -45- to prior periods). Although 1 establishes the default transition provisions for all newly issued ASUs, the FASB expects that new ASUs will normally provide specific transition requirements and, ASC 250 to newly issued ASUs is expected to be rare. therefore, application of Some examples of voluntary changes in accounting principle include, but are not limited to, the following: 1. Change in inventory valuation method ( i.e., from LIFO to FIFO, retail inventory method to weighted - average cost) 2. Change in method of amortizing actuarial ga ins and losses pursuant to ASC 715- 30, Defined Benefit Plans — Pension , and/or ASC 715- 60, Defined Benefit Plans — Other Postretirement 3. Change in measurement date for conducting annual goodwill impairment test Changes in the method of applying an accounting principle ( e.g., changing the method of applying a significant estimation process such as changing the number of LIFO pools used in a LIFO calculation) also would be subject to the accounting described in section 3.1, Accounting for a change in accounting and the preferability requirements described in s Justification for a change in 3.4, ection principle, accounting principle . or correction of an error A change that is not a change in accounting principle should not be applied on a basis. For example, an entity may apply an accounting method because it does not have retrospective obtain the information necessary to apply an alternative accounting method. the requisite processes to The entity may subsequently develop the processes and controls that allow it to apply the alternative method. In this case, we believe the change to the method is driven by a change in the underlying alternative facts and circumstance s and should not be treated as a change in accounting principle. Rather, the change shoul d be applied prospectively to those contracts that qualify as it represents the adoption of a new principle or modification of the existing principle based on “ new ” underlying facts and circumstances. Accounting for a change in accounting principle 3.1 Exc erpt from Accounting Standards Codification Overall Accounting Changes and Error Corrections — Glossary 250- 10 -20 Retrospective Application The application of a different accounting principle to one or more previously issued financial statements, or to the statement of financial position at the beginning of the current period, as if that principle had always been used, or a change to financial statements of prior accounting periods to present the financial statements of a new reporting entity as i f it had existed in those prior years. Restatement The process of revising previously issued financial statements to reflect the correction of an error in those financial statements. requires entities to report a change in accounting principle through retrospective application of ASC 250 the new principle to all prior periods , unless it is impracticable to do so. corrections Financial reporting developments Accounting changes and error | 6

12 3 Change in accounting principle 250- 10 draws a distinction between retrospective application and restatement. This distinction ASC -20 nternational at a) it is preferable to use the same terms as I is intended to reflect the conclusion th Standards (IFRS) whenever possible to reduce the potential for inconsistent application Financial Reporting of accounting principles and b) a terminology change would better distinguish changes in amounts good ” reported for prior periods related to a voluntary change in accounting principle (presumed to be “ changes based on preferability) from those changes related to the correction of an error. It is anticipated gy will help eliminate the negative connotation associated with all changes that the distinction in terminolo restatement to prior period financial statements, and reserve the term “ ” for those changes required by the correction of an error. Retrospective application of a change in accounting principle requires the following: a. The cumulative effect of the change to the new accounting principle on periods prior to those is reflected in the carrying amounts of assets and liabilities as of the beginning of the first presented period presented . b. An offsetting adjustment, if any, is made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period. c. Financial statements for each individual prior period presented are - adjusted to reflect the period specific effects of applying the new accounting principle. 250 also requires a change in accounting principle made in an interim As discussed further below, ASC period to be reported by retrospective application. Use of the retrospective application approach, as if a newly adopted accounting principle had always been used, results in greater consistency of financial information reported across periods. Further , with regard to recognizing the cumulative effect of a change in accounting principle in opening retained earnings, the FASB concluded that it would be inappropriate to record the cumulative effects on prior periods in net income of the period of change b ecause none of the effects relate to that period. Accordingly, while new ASUs may, under certain circumstances, require recognizing a cumulative effect as of a specific date as the transition method, that cumulative effect will be recognized in retained ea rnings as opposed to net income in the period of the change. Illustration 3-1: Retrospective application of a change in accounting principle ABC Company decides at the beginning of 20X7 to adopt the FIFO method of inventory valuation. ABC Company had used the LIFO method for financial and tax reporting since its inception on 1 January 20X5, and had maintained records that are adequate to apply the FIFO method retrospectively. ABC Company concluded that the FIFO method is the preferable inventory valuation method for its inventory. The change in accounting principle is reported through retrospective application. The effects of the change in accounting principle on inventory and cost of sales are presented in the following table: Cost of sales determined by Inventory determined by LIFO method Date FIFO method LIFO method FIFO method $ $ 0 $ 0 1-1-20X5 0 $ 0 820 12 -31 -20X5 100* 80* 800 - 31 12 940 - 20X6 200 240 1,000 390 -31 -20X7 320 12 1,130 1,100 Accounting changes and error corrections Financial reporting developments | 7

13 3 Change in accounting principle This example is based on the following assumptions: a. For each year presented, sales are $3,000 and selling, general and administrative costs are $1,000. ABC Company ’s effective income tax rate for all years is 40 percent, and there are no permanent Income Taxes or temporary differences under ASC 740- prior to the change. 10, — Overall, -sharing agreement in place for all years. Under that b. ABC Company has a nondiscretionary profit re tax agreement, ABC Company is required to contribute ten percent of its reported income befo -sharing pool to be distributed to employees. For simplicity, it is and profit sharing to a profit -sharing contribution is not an inventoriable cost. assumed that the profit c. ABC Company determined that its profit -sharing expense would have decreas ed by $2 in 20X5 and increased by $6 in 20X6 if it had used the FIFO method to compute its inventory cost since inception. The terms of the profit -sharing agreement do not address whether ABC Company is 1 required to adjust its profit -sharing accrual for the incremental amounts. At the time of the accounting change, ABC Company decides to contribute the additional $6 attributable to 20X6 profits and to make no adjustment related to 20X5 profit. The $6 payment is made in 20X7. d. Profit sharing and income taxes accrued at each year -end under the LIFO method are paid in cash at the beginning of each following year. ’s annual report to shareholders provides two years of financial results, and ABC e. ABC Company ASC 260- 10, Company is not subject to the requirements of - Overall . Earnings Per Share * For the purposes of this example, which is re- produced from Illustration 1 of Appendix A to ASC 250, assume that the LIFO and FIFO inventory at 31 December 20 X5 was carried at the lower of cost or market. ABC Company’ s income statements as originally reported under the LIFO method are presented below. Income statement 20X6 20X5 3,000 $ Sales $ 3,000 Cost of goods sold 1,000 800 1,000 1,000 Selling, general, and administrative expenses Income before profit sharing and income taxes 1,000 1,200 Profit sharing 100 120 Income before income taxes 900 1,080 360 432 Income taxes $ 540 $ Net income 648 1 In accordance with ASC 250 -10- 45- 8, recognized indirect effects of a change in accounting principle are recorded in the period of change. That provision applies even if recognition of the indirect effect is explicitly required by the terms of th e for a discussion of direct and profit -sharing contract. See section 3.3 , Direct and indirect effects of retrospective application, indirect effects of a change in accounting principle. Accounting changes and error corrections Financial reporting developments | 8

14 3 Change in accounting principle ’s income statements reflecting the retrospective application of the accounting change ABC Company from the LIFO method to the FIFO method are presented below. Income statement 20X6 20X7 as adjusted Sales 3,000 $ 3,000 $ Cost of goods sold 1,100 940 Selling, general, and administrative expenses 1,000 1,000 Income before profit sharing 900 1,060 and income taxes Profit sharing 96 100 Income before income taxes 804 960 322 384 Income taxes 576 Net income $ 482 $ .1 3.1 Financial statement presentation We often receive inquiries about how to label column headings in financial statements when periods have n accounting principle (e.g., a voluntary change in been adjusted to reflect the retroactive application of a . We believe the prior period column headings are labeled “ As Adjusted ” and such accounting principle) labeling should be encouraged as the most appropriate financial reporting. However, it is not required for the retrospective application of a change in accounting principle pursuant to ASC 250. ASC 250- 10- 45 -5(c) and 250- 10- 50 -1 require, among ot her things, that the financial statements of each individual prior ASC period presented be adjusted to reflect the change in accounting principle. However, ASC 250 is silent as to whether each prior period ’s column headings in the financial statements should b e labeled “As Adjusted. ” Although the example in ASC 250- 10- 55 -10, which illustrates a change in accounting principle, does in 250- fact label the prior period income statement “As Adjusted (Note A), ” ASC 10- 2 states that the 55- examples in the appendix do not establish additional requirements. This issue was discussed at the September 26, 2006 joint meeting of the AICPA SEC Regulations Committee and the SEC staff. At that As Adjusted ” upon ot explicitly required, labeling of columns “ meeting the SEC staff agreed that, while n retrospective application of a change in accounting principle is considered a best practice to facilitate as much transparency as possible. Regardless of whether the column headings are labeled “As Adjusted, ” we believe a financial statement user should be provided the most relevant information to understand that a change in accounting See secti on 3.8, Disclosures for a change in accounting principle has occurred and its resulting effect. principle , for discussion of disclosures required for changes in accounting principle. Impracticability provisions 3.2 Excerpt from Accounting Standards Codification Accounting Changes and Error Corrections — Overall Other Presentation Matters Impracticability 250- 10 -45 -9 It shall be deemed impracticable to apply the effects of a change in accounting principle retrospectively only if any of the following conditions exist: a. After making every reasonable effort to do so, the entity is unable to apply the requirement. ’s intent in a prior period that b. Retrospective application requires assumptions about management cannot be independently substantiated. Accounting changes and error corrections Financial reporting developments | 9

15 3 Change in accounting p rinciple c. Retrospective application requires significant esti mates of amounts, and it is impossible to distinguish objectively information about those estimates that both: 1. Provides evidence of circumstances that existed on the date(s) at which those amounts would be recognized, measured, or disclosed under retros pective application 2. Would have been available when the financial statements for that prior period were issued. 250- 10 -45 -10 This Subtopic requires a determination of whether information currently available to develop significant estimates would have been available when the affected transactions or events would have been recognized in the financial statements. However, it is not necessary to maintain documentation from the time that an affected transaction or event would have been recognized to determine whether information to develop the estimates would have been available at that time. ASC 250 provides an impracticability exception to the retrospective application requirement that may result in limited, or in some cases no, retrospective application of the accounting change to prior periods. Specifically, there are two situations described in ASC 250- 10 -45- 6 and 45- 7 that affect an entity ’s ability to retrospectively apply a change in accounting principle as follows: 1. The cumulative effect of applying a change in accounting principle to all prior periods can be determined, but it is impracticable to determine the period -specific effects of that change on all prior periods presented (Scenario 1), and; 2. It is impracticable to determine the cumulative ef fect of applying a change in accounting principle to any prior period (Scenario 2). In the case of Scenario 1, ASC 250- 10- 45 -6 requires that the change to the new accounting principle be applied to the carrying amounts of assets and liabilities as of the b eginning of the earliest period to which the new accounting principle can be applied. The cumulative effect of applying the new principle, if any, shall be recognized as an adjustment to the opening balance of retained earnings (or other appropriate compon ents of equity or net assets in the statement of financial position) for that period. Under Scenario 2, ASC 250- 10 -45- 7 requires that the new accounting principle be applied as if the change was made prospectively as of the earliest date practicable. The p aragraph illustrates the type of change encompassed in Scenario 2 with a change from the FIFO method of inventory valuation to the LIFO 1 method (see Illustration 3 -1). s guidance 250 provide To enhance consistency in applying the retrospective application method, ASC limiting the use of the impracticability exception. Accordingly, an entity shall deem it impracticable to apply t: the effects of a change in accounting principle retrospectively only if any of the following conditions exis a. After making every reasonable effort to do so, the entity is unable to apply the requirement. b. Retrospective application requires assumptions about management ’s intent in a prior period that cannot be independently substantiated. 1 250’s requirement that voluntary changes The paragraph does not imply that such a change is preferable and does not alter ASC in accounting must be preferable. Accounting changes and error corrections Financial reporting developments | 10

16 3 Change in accounting principle ficant estimates of amounts, and it is impossible to c. Retrospective application requires signi both : distinguish objectively information about those estimates that 1. Provides evidence of circumstances that existed on the date(s) at which those amounts would be der retrospective application, recognized, measured or disclosed un And 2 2. Would have been available when the financial statements for that prior period were issued. Given the potentially significant effort required to retrospectively apply some changes in accounting principle, the application of the impracticability provisions of the standard can be the most contentious aspect of applying ASC 250. Determining whether “ every reasonable effort ” has been made to apply a change in accounting principle retrospectively will require judgment on the part of management and the n. independent auditors, after considering all relevant facts and circumstances of each specific situatio We believe the following factors should be considered in assessing whether it is impracticable to apply an accounting change retrospectively: a. Whether data was collected in prior periods in a way that allows retrospective application . If not, whether it is impracticable to recreate the data/information in a manner that supports retrospective application ( e.g., whether raw data were embedded in historical operating or accounting records and can be re- created in a manner that allows retrospective applica tion) . b. Whether applying the new accounting principle retrospectively requires the use of hindsight on the part of management, either in making assumptions about what management ’s intentions would have e.g., ognized, measured, or disclosed ( an been in a prior period or estimating the amounts rec estimate of fair value based on inputs that are not derived from observable market sources and were not used for other accounting measurements at that time). c. Whether , in light of the expected costs and perceived benefits, retrospective application would involve undue cost and effort. We believe that the impracticability exceptions are truly exceptions and, therefore, entities should avail themselves of these exceptions only in limited circumstances. Accordingly, if an entity concludes that applying a change in accounting principle retrospectively is impracticable, we would expect that this conclusion be supported by a thoroughly documented analysis of the provisions of ASC 250 providing for the impracticability exception, as well as the additional factors outlined above. As required by ASC 250, an entity reaching this conclusion would be required to disclose in its financial statements the reasons for concluding that it is impracticable to report a change in accoun ting principle via retrospective application to prior periods. The ASC 250- 10- 45- 9 cannot be applied to the interim periods of impracticability exception provided in the fiscal year in which the accounting change is made. When an entity determines that retrospective application to the pre- change interim periods of the fiscal year of the change is impracticable, the desired change may only be made as of the beginning of the subsequent fiscal year. See further discussion in section 3.5, Accounting changes in interim periods . 2 ntemporaneous documentation An entity is not precluded from retrospectively applying a change in accounting simply because co supporting the new accounting method was not maintained for the prior years. Accounting changes and error corrections Financial reporting developments | 11

17 3 Change in accounting principle We frequently receive questions regarding whether a voluntary change in accounting principle related to the date selected for the annual goodwill impairment testing should be applied retrospectively. We believe that applying such a change retrospectively would require making assumptions and estimations with the use of hindsight. As such, a voluntary change in goodwill impairment testing date is applied prospectively. Illustration 3-2: Reporting an accounting change when determining t he cumulative effect for all prior years is not practicable Assume ABC Company changed its accounting principle for inventory valuation from FIFO to LIFO -end basis effective 1 January 20X4. ABC Company reports its financial statements on a calendar year and had used the FIFO method since its inception. ABC Company determined that it is impracticable to determine the cumulative effect of applying this change retrospectively because records of inventory purchases and sales are no longer available for all prior years. However, ABC Company has all of the information necessary to apply the LIFO method on a prospective basis beginning in 20X1. Therefore, ABC Company should present prior periods as if it had (a) carried forward the 31 December 20X0 ending balance in inventory (measured on a FIFO basis) and (b) begun applying the LIFO method to its inventory beginning 1 January 20X1. ( The example assumes that ABC Company established that the LIFO method was preferable for ABC Company ’s inventory. No particular inven tory measurement method is necessarily preferable in all instances. ) ABC Company ’s disclosure related to the accounting change is presented below: Note 1: Change in method of accounting for inventory valuation On 1 January 20X4, ABC Company elected to change its method of valuing inventory to the LIFO method, whereas in all prior years inventory was valued using the FIFO method. The Company believes that the LIFO method of inventory valuation is preferable under the current economic environment of high inflation as the LIFO costing method provides a better matching of current costs with current revenues, which the company believes is preferable in these circumstances. The Company determined mulative effect of applying this change retrospectively that it is impracticable to determine the cu because records of inventory purchases and sales are no longer available for all prior periods. Accordingly, the Company did not recognize a cumulative effect adjustment in retained earnings related t o this change. Sufficient information exists to apply the LIFO method beginning 1 January 20X1. As such, the new method has been applied prospectively to the Company ’s inventory balances beginning 1 January 20X1 and comparative financial statements of prio r years have been adjusted to give effect to the new method. The following financial statement line items for fiscal years 20X2, 20X3 and 20X4 were affected by the change in accounting principle. Note: Detailed disclosures of the affected financial statement line items have not been included for purposes of this illustration. ABC Company would present information consistent with that presented in Illustration 3 -7 to disclose the impact on the affected income statement and statement of cash flow line items f or 20X2, 20X3 and 20X4 and the affected balance sheet line items for 20X3 and 20X4. Assuming that ABC Company is a public entity, the impact of this change on earnings per share for all periods presented also would be disclosed. In addition, the ABC Compan y’s selected financial data for adjusted to give effect to the change in method effective 1 January 20X1. would be 20X1 Accounting changes and error corrections Financial reporting developments | 12

18 3 Change in accounting principle 3.3 Direct and indirect effects of retrospective application Excerpt from Accounting Standards Codification Accounting Changes and Error Corrections — Overall Glossary -20 10 250- Direct Effects of a Change in Accounting Principle Those recognized changes in assets or liabilities necessary to effect a change in accounting principle. An example of a direct effect is an adjustment to an inventory balance to effect a change in inventory valuation method. Related changes, such as an eff ect on deferred income tax assets or liabilities or an impairment adjustment resulting from applying the subsequent measurement guidance in Subtopic 330 -10 to the adjusted inventory balance, also are examples of direct effects of a change in accounting principle. Indirect Effects of a Change in Accounting Principle Any changes to current or future cash flows of an entity that result from making a change in accounting principle that is applied retrospectively. An example of an indirect effect is a change in a nondiscretionary profit sharing or royalty payment that is based on a reported amount such as revenue or net income. requires that retrospective application only include the direct effects of a change in accounting ASC 250 principle, including any relat ed income tax effects, in prior period financial statements. Any indirect effects that would have been recognized if the newly adopted accounting principle had been followed in prior periods are t of retrospective application, not included in the retrospective application. If, as a resul indirect effects of a change in accounting principle result, those indirect effects are incurred, and shall be recognized , in the period in which the accounting change is made. That is, any indirect effects would be recognized in the period of the accounting change and not in the prior period that is affected by the retrospective application. Illustration 3-3: Direct and indirect effects of retrospective application Assume that Company XYZ had a nondiscretionary profit sharing plan that required a profit sharing payout to the plan ’s participants equal to 10% of net income before consideration of the profit sharing contribution for a given year. Assume further that the provisions of the plan require that the company additional payments to the participants in the event that prior period financial statements are make changed for any reason, within a period of two years, and the retroactive change retroactively would n 20X5, Company XYZ makes a voluntary have resulted in an increased payout to the participants. I change in accounting principle that, upon retrospective application, results in additional net income in each of the years 20X4 and 20X3 of $1,000,000 (the direct effect). As a result of this change, e plan are owed $200,000 (the indirect effect), before income taxes, for the incremental participants in th profit sharing payments for those years. The $1,000,000 direct effect of the change in accounting pplication to the respective years. principle in each of the prior years is recognized by retrospective a The indirect effect of the change ($200,000 incremental profit sharing obligation) is recognized in the year of the change in accounting principle, or 20X5 in this example. 45 -8, recognized indirect effects of a change in accounting Note: In accordance with ASC 250- 10- principle are recorded in the period of change. That provision applies even if recognition of the indirect effect is not explicitly required by the terms of the profit sharing plan but the entity elects to make the additional payments as a result of the voluntary change in accounting principle. or corrections Financial reporting developments Accounting changes and err | 13

19 3 Change in accounting principle 3.4 Justification for a change in accounting principle Excerpt from Accounting Standards Codification — Overall Accounting Changes and Error Corrections Other Presentation Matters Justification for a Change in Accounting Principle 250- 10 -45 -11 In the preparation of financial statements, once an accounting principle is adopted, it shall be used consistently in accounting for similar events and trans actions. 250- 10 -12 -45 An entity may change an accounting principle only if it justifies the use of an allowable alternative accounting principle on the basis that it is preferable. However, a method of accounting that was ransaction or event that is being terminated or that was a single, previously adopted for a type of t nonrecurring event in the past shall not be changed. For example, the method of accounting shall not be changed for a tax or tax credit that is being discontinued. Additionally, the method of transition elected at the time of adoption of a Codification update shall not be subsequently changed. However, a change in the estimated period to be benefited by an asset, if justified by the facts, shall be recognized as a change in accounting estimate. 250- -45 -13 10 The issuance of a Codification update that requires use of a new accounting principle, interprets an existing principle, expresses a preference for an accounting principle, or rejects a specific principle may require an entity to change an accounting principle. The issuance of such an update constitutes sufficient support for making such a change. ASC is used consistently in accounting for 250 presumes that once an accounting policy is adopted it similar events or transactions. Further, ASC 250 requires that an entity may voluntarily change an accounting principle only if it justifies the use of an allowable alternative accounting principle on the basis a type of transaction that it is preferable. However, a method of accounting that was previously adopted for or event that is being terminated or that was a single, non -recurring event in the past shall not be changed. Similarly, a change in accounting method necessitated by a change in the underlying facts and circumstances ransaction or a type of transaction is not an accounting change that should be applied on surrounding a t a retrospective basis, see section 3.1, Accounting for a change in accounting principle, for further details. ASC 250 -10- 45 -13 also provides that the issuance of a new Codification update that requires use of a new accounting principle, interprets an existing principle, expresses a preference for an accounting principle or rejects a specific principle constitutes sufficient suppo rt to justify making a change in accounting principle. Voluntary change in accounting principle — preferability considerations 3.4.1 (updated May 2019) A voluntary change in accounting principle can be a change from one generally accepted accounting principle to another generally accepted accounting principle when there are two or more generally accepted accounting principles that apply. An example of this type of change is a change from LIFO to FIFO for inventory valuation purposes. In addition, a voluntar y change may result from a change from an acceptable accounting method to a different acceptable accounting method ( e.g., change in depreciation method, the method of e in the number of pools used in the application of LIFO or chang e in chang ). from dollar -value LIFO to specific goods LIFO applying LIFO Accounting changes and error corrections Financial reporting developments | 14

20 3 Change in accounting principle accounting principle to conform with a proposed amendment Some companies may consider changing an to the Codification. A proposed amendment to the Codification does not provide authoritative support for an ac counting principle not currently acceptable. Therefore, such a proposed amendment to the Codification should not be used as the basis for a voluntary change in accounting principle. In addition, proposed amendments to the Codification that would adopt one existing generally accepted accounting principle to the exclusion of other currently accepted principles remain subject to change in the process of developing le to and approving a Codification update, including the exposure process. Therefore, it is not advisab make a change solely to conform to such a proposed amendment to the Codification. This view would also apply for companies considering a change in accounting principle solely based upon an anticipated, but not required, adoption of IFRS. Nevertheless , if a company decides to change to an accounting principle (presumably a currently generally accepted principle) proposed to be adopted in a proposed amendment change to the Codification, the change would be made in accordance with the provisions for a voluntary in an accounting principle of ASC 250 rather than in accordance with the transition provisions of the proposed amendment to the Codification. The proposed amendment is not authority for deviating from the provisions of ASC 250. Companies that make a voluntary change in accounting principle that aligns with a proposed amendment should be aware that further changes in the financial statements may be required if the final Codification update (1) differs from that exposed or (2) plying specifies a method of ap the adopted principle that differs from the method used by the company. When filing an IPO registration statement, a company is required to change its accounting principles to blic companies . Because this type of change is not voluntary , a company is not those required for pu required to evaluate whether the change is preferable. However, s ome companies may consider changing an to one required for public companies before filing an IPO registration statement . accounting principle If a c in anticipation of filing an IPO registration voluntarily changes an accounting principle ompany , it is required to evaluate whether the change is preferable. in the future statement A decision by a company to make a voluntary change of an accounting prin ciple imposes a special obligation on ’s auditors with regard to establishing the preferability of the change. The P ublic management and the company Company Oversight Board (PCAOB) Auditing Standard No. 6, Evaluating Consistency of Financial Accounting Stat ements , states “ the auditor should evaluate a change in accounting principle to determine whether: a. The newly adopted accounting principle is a generally accepted accounting principle, b. The method of accounting for the effect of the change is in conformity with generally accepted accounting principles, c. The disclosures related to the accounting change are adequate, and d. The company has justified that the alternative accounting principle is preferable. ” However, very little guidance in the acco unting literature exists for evaluating the reasonableness of management ’s justification for a voluntary change in accounting principle. In one of the few examples, 330- 10 -30- ASC 14, discussing methods of costing inventory, offers some general guidance on preferability, as follows: “ although selection of the method should be made on the basis of the individual circumstances, it is obvious that financial statements will be more useful if uniform methods of inventory pricing are adopted by all companies withi n a given industry. ” Further, ASC 250- 10- 55- 1 states “...preferability among accounting principles shall be determined on the basis of whether the new principle constitutes an improvement in financial reporting and not on the basis of the income tax effect alone. ” In other cases, accounting standards describe alternative methods that are acceptable but rarely note which is preferable. However, when they do (such as the presentation of the statement of cash flows under the direct versus statements are determinative. indirect method) such Accounting changes and error corrections Financial reporting developments | 15

21 3 Change in accounting principle 250 requires that a voluntary change in accounting principle be preferable. Although guidance on ASC determining the preferability of voluntary changes is limited and although we have not considered all possible circumstances in which an accounting principle might be changed, we generally find a voluntary change to be preferable if the following three criteria are met: 1. Authoritative and non -authoritative support The new accounting method is specifically supported by one of the following items: a. FASB Accounting Standards Codification b. FASB Concepts Statements (non- authoritative) c. AICPA Issues Papers (non- authoritative) d. International Financial Reporting Standards (non -authoritative) e. GASB Statements, Interpretations of Governmental Accounting Standards, and Technical Bulletins (only applicable to an entity that is not otherwise required to apply Governmental Accounting Standards as promulgated by the GASB) f. Pronouncements of other professional associations and regu latory agencies (non- authoritative) g. AICPA Technical Practice Aids (non- authoritative) h. Accounting textbooks, handbooks and articles (non -authoritative) 2. Rationality Management ’s justification for the change is rational, both in general and in the particular circumstances, in terms of presenting financial position and results of operations (as distinguished from other considerations, such as reducing taxes). Among the factors that may be considered in evaluating a re the following: change in terms of this criterion a a. Conformity with broad concepts of accounting. Some accounting principles may be justified as being preferable because they accord better with certain broad concepts of accounting, such as: (i) More accurate reflection of assets and liabilities Better matching of costs and revenues (ii) (iii) Better correspondence with the substance of the event being recognized (iv) More accurate allocation of costs of physical assets to periods in which the assets are consumed (v) Extension of accrual accounting or refinement of accrual methods In most circumstances, it is necessary for criterion “a.” to be met in order to consider that a change is preferable. b. Consistency among components of an entity. Some accounting changes are made to conform acco unting methods used by various components of a single business entity. This is common, for example, following a business combination. Such changes usually increase the usefulness of financial reporting and may be justified as preferable on that basis. Refe r to section 8.6 , Conforming accounting policies, of our Financial reporting developments (FRD) publication , Business combinations , for additional discussion of conforming accounting policies in a business combination. Accounting changes and error corrections Financial reporting developments | 16

22 3 Change in accoun ting principle c. Suitability in light of business circumstances, plans and policies. Business circumstances and management ’s plans and policies may affect accounting principles in a number of ways. For example, the actual pattern of decline in the economic value of depreciable assets may more nearly approximate an accelerated depreciation pattern than a -line depreciation pattern; an internally developed index usually will mor e closely reflect straight the composition of a company ’s inventory for LIFO costing purposes than a publicly available index. Considerations such as these may help to justify an accounting change as preferable. d. Practicability. In some circumstances, it may not be practical to continue using an accounting method; continuing it may result in substantial measurement, realization, or administrative problems. However, this factor alone would not establish preferability. 3. Industry practice. is a widely recognized or prevalent practice in the industry in which the The new accounting method 3 company operates. A proposed change in accounting principle in situations where there are no established principles may meet the first and second criteria but fails to meet the third (i.e., a change that is justified in terms of ). Such a change authoritative support and rationality but not in terms of accepted industry practice merits particularly careful consideration. Justification for such changes might be reasonable in some, but not in all, circumstances. Often a great deal of judgment based on the facts and circumstances is involved in determining whether a voluntary change in accounting principle is preferable in these circumstances. The following are some examples of changes in accounting principles that are often considered preferable (however, as facts and circumstances vary , so will such conclusions). - -line method of depreciation. Straight accelerated method to the straight • Change was made from the line was the predominant method used in the industry and change was considered rational for the company; in the company -line method appeared more appropriate ’s circumstances the straight ’s usage. based on the asset • Change was made from using a U.S. Bureau of Labor Statistics index t o an internally developed index in costing LIFO inventories. The internally developed index more closely reflected the composition of ’s inventory. the company • Change was made from determining lower of cost or market for inventories from an aggregate approach to several smaller groups. Management no longer believed offsetting by aggregation best presented the carrying amount of inventory at the lower of cost or market. • Change was made from LIFO to FIFO. The p referability decision was based on declining inventory prices. However, it should be noted that there have been many other instances where we have concluded that such a change is not preferable, particularly where we had previously issued a preferability letter for that client ’s initial change from FIFO to LIFO. (See s ection I5, Inventory , of the EY Accounting Manual . ) 3 Industry practice does not provide significant support for some types of accounting changes, such as changes in a company’s goodwill impairment asse ssment date. Such changes do not improve or otherwise change the comparability of financial statements among companies in an industry. Accounting changes and error corrections Financial reporting developments | 17

23 3 Change in accounting principle 3.4.2 SEC considerations for a voluntary change in accounting principle Excerpt from Accounting Standards Codification Accounting Changes and Error Corrections Overall — SEC Materials SAB Topic 6.G(2)(b)1, Reporting Requirements for Accounting Changes 250- 10 -S99- 4 The following is the text of SAB Topic 6.G.2.b, Reporting Requirements for Accounting Changes. b. Reporting requirements for accounting changes. 1. Preferability. Facts: Rule 10 -01(b)(6) of Regulation S -X requires that a registrant who makes a material change in its method of accounting shall indicate the date of and the reason for the change. The r egistrant also must include as an exhibit in the first Form 10 -Q filed subsequent to the date of an accounting change, a letter from the registrant ’s independent accountants indicating whether or not the change is to an alternative principle which in his judgment is preferable under the circumstances. A letter from the independent accountant is not required when the change is made in response to a standard adopted by the Financial Accounting Standards Board which requires such a change. Question 1: For some alternative accounting principles, authoritative bodies have specified when one alternative is preferable to another. However, for other alternative accounting principles, no authoritative body has specified criteria for determining the preferability of o ne alternative over another. In such situations, how should preferability be determined? Interpretive Response: In such cases, where objective criteria for determining the preferability among alternative accounting principles have not been established by a uthoritative bodies, the determination of preferability should be based on the particular circumstances described by and discussed with the registrant. In addition, the independent accountant should consider other significant information of FN5 which he is awa re. Question 2: Management may offer, as justification for a change in accounting principle, circumstances such as: their expectation as to the effect of general economic trends on their business (e.g., the impact of inflation), their expectation regar ding expanding consumer demand for the company ’s products, or plans for change in marketing methods. Are these circumstances which enter into the determination of preferability? Interpretive Response: Yes. Those circumstances are examples of business judgm ent and planning and should be evaluated in determining preferability. In the case of changes for which objective criteria for determining preferability have not been established by authoritative bodies, business judgment and business planning often are ma jor considerations in determining that the change is to a preferable method because the change results in improved financial reporting. Question 3: What responsibility does the independent accountant have for evaluating the business judgment and business planning of the registrant? Interpretive Response: Business judgment and business planning are within the province of the registrant. Thus, the independent accountant may accept the registrant’s business judgment and business planning and express reliance t hereon in his letter. However, if either the plans or judgment appear to be unreasonable to the independent accountant, he should not accept them as justification. For example, an independent accountant should not accept a registrant’s plans for a major ex pansion if he believes sary for the expansion program. the registrant does not have the means of obtaining the funds neces Accounting changes and error corrections Financial reporting developments | 18

24 3 Change in accounting principle Question 4: If a registrant, who has changed to an accounting method which was preferable under the circumstances, later finds that i t must abandon its business plans or change its business judgment because of economic or other factors, is the registrant ’s justification nullified? Interpretive Response: No. A registrant must in good faith justify a change in its method of accounting und er the circumstances which exist at the time of the change. The existence of different circumstances at a later time does not nullify the previous justification for the change. Question 5: If a registrant justified a change in accounting method as preferab le under the circumstances, and the circumstances change, may the registrant revert to the method of accounting used before the change? Interpretive Response: Any time a registrant makes a change in accounting method, the change must able under the circumstances. Thus, a registrant may not change back to a be justified as prefer principle previously used unless it can justify that the previously used principle is preferable in the circumstances as they currently exist. Question 6: If one client of an indepen dent accounting firm changes its method of accounting and the accountant submits the required letter stating his view of the preferability of the principle in the circumstances, does this mean that all clients of that firm are constrained from making the c onverse change in accounting ( e.g., if one client changes from FIFO to LIFO, can no other client change from LIFO to FIFO)? Interpretive Response: No. Each registrant must justify a change in accounting method on the basis that the method is preferable under the circumstances of that registrant. In addition, a registrant must furnish a letter from its independent accountant stating that in the judgment of the independent accountant the change in method is preferable under the circumstances of that regist rant. If registrants in apparently similar circumstances make changes in opposite directions, the staff has a responsibility to inquire as to the factors which were considered in arriving at the determination by nt that the change was preferable under the each registrant and its independent accounta circumstances because it resulted in improved financial reporting. The staff recognizes the importance, in many circumstances, of the judgments and plans of management and recognizes that such management judgment s may, in good faith, differ. As indicated above, the concern relates to registrants in apparently similar circumstances, no matter who their independent accountants may be. specifically approved by the Question 7: If a registrant changes its accounting to one of two methods FASB in the Accounting Standards Codification, need the independent accountant express his view as to the preferability of the method selected? Interpretive Response: If a registrant was formerly using a method of accounting no longer deemed acceptable, a change to either method approved by the FASB may be presumed to be a change to a preferable method and no letter will be required from the independent accountant. If, however, the registrant was formerly using one of the method s approved by the FASB for current use and wishes to change to an alternative approved method, then the registrant must justify its change as being one to a preferable method in the circumstances and the independent accountant must submit a letter stating that in his view the change is to a principle that is preferable in the circumstances. 2. Filing of a letter from the accountants. Facts: The registrant makes an accounting change in the fourth quarter of its fiscal year. Rule 10 -01(b)(6) of Regulation S -X requires that the registrant file a letter from its independent accountants stating whether or not the change is preferable in the circumstances in the next Form 10 -Q. Item 601(b)(18) of Regulation S -K provides that the independent accountant ’s preferability letter be filed as an exhibit ms 10 -K or 10 -Q. to reports on For Accounting changes and error corrections Financial reporting developments | 19

25 3 Change in accounting principle ’ s letter is filed with the Form 10 K, must another letter Question: When the independent accountant - ’s Form 10- also be filed with the first quarter Q in the following year? Interpretive Response: No. A letter is not required to be filed with Form 10 -Q if it has been previously -K. filed as an exhibit to the Form 10 __________________________ FN5 1 (Accounting Changes and Error C Registrants also are reminded that FASB paragraph 250 -10 ASC orrections Topic) -50- requires that companies disclose the nature of and justification for the change as well as the effects of the change on net income for the period in which the change is made. Furthermore, the justification for the change should explain cl early why the newly adopted principle is preferable to the previously -applied principle . SAB Topic 6.G(2)(b)1 , Reporting Requirements for Accounting Changes 250 -10 -S99 -4) (codified in ASC provides additional information to help assess management ’s obligation in evaluating whether a proposed accounting change is preferable. The SAB indicates that management ’s plans and judgments that are made in good faith are major considerations in determining whether a change is to a preferable accounting principle. The SAB goes on to state that the following circumstances could have a bearing on determining preferability: • Management ’s expectations about the effect of general economic trends on its business ( e.g., the impact of inflation); • Management ’s expectations about expanding consumer demand for the company ’s products; or Plans for a change in marketing methods. • SAB Topic 6.G also provides guidance on the following situations involving an accounting change: • Change in management ’s plans and judgments that were u sed as the basis for justifying the accounting change: A registrant makes a preferable accounting change based on certain plans and judgments but later discovers that it must abandon its plans or change its business judgments due to economic or other facto rs. As long as the registrant ’s justification for the accounting change was based on the facts and circumstances at the time of the change, a subsequent change in circumstances does not nullify the previous justification for the accounting change. • Ability of a registrant to revert to the original accounting method: Any time a registrant changes its accounting method, the change must be justified as preferable under the existing circumstances. Therefore, a registrant is not allowed to revert to a previous ac counting method unless the change would be preferable under the existing circumstances. • Ramification of preferability letters issued by accounting firms: If a registrant makes an accounting change and files a preferability letter from the independent accou ntant, this would not preclude other clients of that accounting firm from making the opposite accounting change ( one client justifies a e.g., change from FIFO to LIFO and another client justifies a change from LIFO to FIFO). Each registrant must justify a change based on its own facts and circumstances. However, if registrants in apparently similar circumstances make changes in opposite directions, the SEC staff will inquire about the factors that each registrant and independent accountant considered in det ermining why the change was preferable. However, the SEC staff understands that the justification for the accounting change is based on management ’s business plans and judgments and may, in good faith, differ among similar section registrants (see 3.9 , Preferability letter, for further preferability letter discussion). 3.4.3 Assessing reclassifications for a voluntary change in accounting principle ASC 250 does not provide specific discussion on determining whether a reclassification would be considered a change in accounting principle. However, while PCAOB Auditing Standard No. 6, Evaluating Consistency of Financial Statements (AS No. 6), is applicable to auditors, it may provide constructive information for entities to consider. Under AS No. 6, changes in classification in previously issued ’s report unless the change represents the financial statements do not require recognition in the auditor nd error corrections Financial reporting developments Accounting changes a | 20

26 3 Change in accounting principle material change in financial correction of a material misstatement or a change in accounting principle. A ent classification and the related disclosure should be evaluated to determine whether the change statem is a permissible reclassification (see s ection 6.1.2, Error correction versus a reclassification ), a change in see section 3.4, Justific ation for a change in accounting principle ) or a correction of accounting principle ( see a material misstatement ( 6, Correction of an error in previously issued financial statements ). Chapter An example of a correctio from the operating n of a misstatement may be a reclassification of cash flows activity category to the financing activity category if the initial inclusion in the operating category was not in accordance with US GAAP . Entities should also determine whether the applicable ASC Topic addresses the accounting for clas sifications. -10- 45- 25 states that penalties associated with an uncertain tax For example, ASC 740 position may be classified as income tax expense or another expense classification based on an If the entity changes the classific ation from the accounting policy decision, accounting policy election. that would be considered a change in accounting principle. 3.5 Accounting changes in interim periods Excerpt from Accounting Standards Codification Accounting Changes and Error Corrections — Overall Other Presentation Matters Reporting a Change in Accounting Principle Made in an Interim Period -45 -14 250- 10 A change in accounting principle made in an interim period shall be reported by retrospective application in accordance with paragraphs 45- 5 throu gh 45- 8. However, the impracticability 250- 10- 45- 9 may not be applied to prechange interim periods of the fiscal exception in paragraph 250 -10- year in which the change is made. When retrospective application to prechange interim periods is impracticable, the desired change may only be made as of the beginning of a subsequent fiscal year. 10 -45 -15 250- If a public entity that regularly reports interim information makes an accounting change during the fourth quarter of its fiscal year and does not report the data specified by paragraph 270- 10- 50 -1 in a separate fourth -quarter report or in its annual report, that entity shall include disclosure of the effects 50- -period results, as required by paragraph 250 -10- 1, in a note of the accounting change on interim to the annu al financial statements for the fiscal year in which the change is made. 10 -16 250- -45 270- As indicated in paragraph 45 -15, whenever possible, entities should adopt any accounting 10- changes during the first interim period of a fiscal year. Changes in accounting principles and practices adopted after the first interim period in a fiscal year tend to obscure operating results and complicate disclosure of interim financial information. Consistent with changes made in annual periods, ASC a change in accounting principle 250 requires that made in an interim period be reported by retrospective application, both to the prior years, as well as to the interim periods within the fiscal year that the accounting change was adopted . However, the impracticability exception provided in ASC 250- 10- 45 -9 cannot be applied to the interim periods of the fiscal year in which the accounting change is made. When an entity determines that retrospective change interim periods of the fiscal year of the cha application to the pre- nge is impracticable, the desired change may only be made as of the beginning of the subsequent fiscal year. Accounting changes and error corrections Financial reporting developments | 21

27 3 Change in accounting principle 3-4: Accounting change in interim period Illustration Assume that in 20X6 a calendar year- end company makes a voluntary change in accounting principle in its third quarter. The effect of the change must be applied retrospectively to the first and second quarters of 20X6 and to the prior fiscal years presented for comparative purposes in its third quarter interim report. If the company determines that it is impracticable to apply the new principle to its 20X5 and prior financial statements, the cumulative effect of the change would be recognized as a component of opening retained earnings in 20X6 and the appropriate disclosure surrounding the ption would be included in its financial statements reported in 20X6. Alternatively, if the company ado determined that it was impracticable to apply the new accounting principle retrospectively to the first and second quarters of 20X6, it would be precluded f rom making the accounting change in the third quarter. If the company still elected to pursue the change in accounting principle, it could only be made (at the earliest) as of 1 January 20X7 (the beginning of the subsequent fiscal year) by recognizing the cumulative effect of the change in opening retained earnings as of 1 January 20X7. Fourth quarter accounting changes 3.5.1 principle made in the fourth quarter of the fiscal year, ASC 250- 10- Regarding changes in an accounting requires that if a public company that regularly reports interim information makes an accounting 45- 15 270- change during the fourth quarter of its fiscal year and does not report the data required by 10- ASC 50- 1 (the minimum requirements for summarized interim financial data, which exceed those required to comply with Item 302(a) of Regulation S -K), in a separate fourth -quarter report or in its annual report, that entity shall include disclosure of the effects of the accounting change on prior interim -period results 3.8, Disclosures for a change in accounting principle ). section (see This information may be disclosed in a separate footnote (see Illustration 3 -5 below) or if a registrant elects to include the selected quarterly financial data in an unaudited note to the financial statements, 250 and Item 302(a) of Regulation S -K the registrant may combine the disclosure requirements of ASC (a) in a single footnote. Item 302 requires the effect of the accounting change to be reflected and ed with those previously reported, including a disclosed in a reconciliation of the amounts present description of the reason for the difference. 3-5: Illustration Example disclosure reflecting accounting change Below is an example disclosure of quarterly results of operations included in the annual shareholders ’ report reflecting the change from LIFO to FIFO. For purposes of this example, quarterly financial information for fiscal year 20X8 is not presented, but would be required. Quarterly results of operations The following is a summary of the quarterly results of operations for the year ended 31 December 20X9. Previously Previously Previously Adjusted Adjusted Adjusted reported reported reported Mar. 30 Jun. 31 30 Jun. Mar. 30 Sept. 31 30 Sept. 31 Dec. (In thousands, except per share data) 20X9 $ 42,500 Net sales $ 47,500 $ 35,000 $ 35,000 $ 42,500 $ 47,500 $ 37,500 Cost of (1) products sold 36,000 35,900 24,500 24,420 32,000 31,880 28,000 1,170 Net income 1,200 1,100 1,000 920 1,100 980 Net income per common share: Basic 1.20 1.10 1.00 .92 1.10 .98 1.17 1.17 Diluted 1.20 1.10 1.00 .92 1.10 .98 Accounting changes and error corrections Financial reporting developments | 22

28 3 Change in accounting principle (1) to the first -in, first -out (FIFO) In December 20X9, the Company changed its method of determining inventory cost in, first -out (LIFO) method. The Company believes that this change is preferable because (1) method from the last- ’s inventories have remained fairly level during the past several years, which has the costs of the Company substantially negated the benefits of the LIFO method (a better matching of current costs with current revenues in periods of rising costs), (2) the FIFO method results in the valuation of inventories at current costs on the consolidated balance sheet, whi ch provides a more meaningful presentation for investors and financial institutions, and (3) the change conforms to a single method of accounting for all of the Company ’s inventories. In accordance with quarters of 20X9, which had been previously reported, ASC 250 the quarterly information for the first three has been adjusted on a retrospective basis to reflect that change in principle. A registrant that adopts a change in accounting principle in the fourth quarter is not required to amend -Q to reflect the retrospectively adjusted filings on Form 10 interim financial statements. its previous However, in certain circumstances, disclosure of the effect of the accounting change may be appropriate prior to filing the annual report on Form 10 -K. 3.5.2 Interim periods after a change in accounting principle ASC 250 requires that in the fiscal year in which a voluntary change in accounting principle occurs or a new accounting principle is adopted, financial information reported for interim periods after the date of such a change or adoption should disclose the effect of the change on income from continuing operations, e captions of changes in the applicable net assets or performance indicator) net income (or other appropriat and related per -share amounts, if applicable, for the post -change interim periods. That is, for subsequent nt must determine and disclose interim periods in the fiscal year of an accounting change, the registra amounts that would have been reported under the “ old ” accounting principle had it not made the the accounting change. 3.6 Changes in accounting principle — materiality considerations Like all standards issued by the FASB, ASC 250 need not be applied to immaterial items. Like all materiality assessments, assessing materiality in the context of changes in accounting principle requires the exercise of judgment and careful consideration of all the relevant facts and circumstances associated with the change. An entity may make a change in accounting principle and conclude that the change is not material to the prior years and, therefore, will not apply the change on a retrospective basis. In this case, the entity is required to apply the new principle to the assets and liabilities affected by the change and recognize the cumulative effect of the change as an operating item in the income statement for the period of the change. The entity would not be permitted to recognize the cumulat ive effect on a separate line in the income statement, nor would it be permitted to recognize the cumulative effect in beginning of the period retained earnings. Accordingly, for an entity to conclude that the effect of a change in accounting principle sho uld not be applied retrospectively on the grounds that it is immaterial, it would have to conclude that the effect of the change is immaterial to the prior years and that the cumulative effect of the change is immaterial to the financial statements in the period of the change. Accounting changes and error corrections Financial reporting developments | 23

29 3 accounting principle Change in 3.6.1 Materiality of an interim change in accounting principle Excerpt from Accounting Standards Codification — Overall Accounting Changes and Error Corrections SEC Materials SAB Topic 5.F, Accounting Changes Not Retroactively Applied Due to Immateriality 250- 10 -S99- 3 The following is the text of SAB Topic 5.F, Accounting Changes Not Retroactively Applied Due to Immateriality. Facts: A registrant is required to adopt an accounting principle by means of retrospective adjustment ’ financial statements. However, the registrant determines that the accounting change of prior periods does not have a material effect on prior periods ’ financial statements and, accordingly, decides not to retrospectively adjust such financial statements. Question: In these circumstances, is it acceptable to adjust the beginning balance of retained earnings of the period in which the change is made for the cumulative effect of the change on the financial statements of prior periods? Interpretive Response: N o. If prior periods are not retrospectively adjusted , the cumulative effect of the change should be included in the statement of income for the period in which the change is made. Even in cases where the total cumulative effect is not significant, the staf f believes that the amount should be reflected in the results of operations for the period in which the change is made. However, if the cumulative effect is material to current operations or to the trend of the reported results of al income statements of the earlier years should be retrospectively adjusted. operations, then individu ASC 10 -45- 16 provides guidance on assessing materiality for accounting changes or error 270- corrections made in an interim period and states that materiality should be related to the estimated income for the full fiscal year and also to the effect on the trend of earnings. Changes that are material with respect to an interim period but not material with respect to the estimated income for the full fiscal year or the trend of earnings should be separately disclosed in the interim period of the change. See the discussion in s ection 3.8, Disclosures for a change in accounting principle, regarding the disclosure requirements of ASC that an accounting change is 250 in those situations where an entity concludes immaterial to the current and/or prior periods, but the change is expected to be material to future periods. For SEC registrants, SAB Topic 5.F , Accounting Changes Not Retroactively Applied Due to Immateriality , (Topic 5.F ) (co dified in ASC 250- 10 -S99- 3), provides guidance on accounting for changes that are deemed immaterial and is consistent with the position articulated in the preceding paragraph. In nge does not have a accordance with Topic 5.F, if a registrant determines that the accounting cha material effect on prior periods ’ financial statements and elects not to apply the change on a retrospective basis, the registrant may not adjust retained earnings at the beginning of the current fiscal year for the cumulative effect of prior periods. The registrant must report the cumulative effect of the change within operations in the interim period that the change is made with separate disclosure if material to that interim period. However, consistent with ASC 270- 10- 45 -16, if the cumulative effect of the change is material to the registrant ’s estimated income for the full fiscal year or to the trend of earnings, Topic 5.F indicates that the registrant should apply the accounting change on a retrospective basis to the income s for all periods presented (current and prior year). statement Accounting changes and error corrections Financial reporting developments | 24

30 3 Change in accounting principle Inclusion of cumulative effect of accounting changes in comprehensive income 3.7 250 is that a cumulative effect of a change in accounting principle does ASC The underlying principle in e period in which a change is made. As such, cumulative effect adjustments should not be not relate to th included as a component of comprehensive income, either through inclusion in net income or as a separate component of comprehensive income, in the period a change is m ade. ASC 250 requires that the cumulative effect of a change in accounting principle be applied to the carrying amounts of assets and liabilities as of the beginning of the earliest period to which the new accounting ting adjustment, if any, made to the opening balance of retained principle can be applied with an offset earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period. Additionally, new codification updates may provide specific transition requirements that require a similar adjustment be reported in retained earnings or accumulated other comprehensive income. For example, when FASB Statement No. 158, Employers ’ Accounting for Defined Benefit Pension , was originally issued, it provided that any adjustment relating to the and Other Postretirement Plans elimination of the additional minimum pension liability recorded pursuant to FASB Statement No. 87, Employers , should be recognized as an adjustment to the ending bal ance of ’ Accounting for Pensions accumulated other comprehensive income, in a manner similar to a cumulative effect adjustment, in the period of adoption. 220- 10- 45- 10B states that ” [i]tems required by accounting standards to be reported as direct ASC adjustments in capital, retained earnings or other non -income equity accounts ” are not to be to paid- included as components of comprehensive income. This seems to indicate that cumulative effect adjustments such as those described above should be excluded from comprehensive inco me in the period of change. This conclusion is also consistent with what the FASB had originally deliberated within the Basis 130, as to whether the effect , for Conclusions of FASB Statement No. Income Reporting Comprehensive of prior -period adjustments reflected as adjustments of the opening balance of retained earnings should that be included in comprehensive income for that period. In its Basis for Conclusions, the FASB stated, “ because of the requirement for retroactive restatement of earlier period fin ancial statements, items accounted for as prior -period adjustments are effectively included in comprehensive income of earlier periods and, therefore, should not be displayed in comprehensive income of the current period. ” 220- 10 -20 defines comprehensive income to “include[s] all changes in equity during a period except ASC ” This seems to indicate that those resulting from investments by owners and distributions to owners. cumulative effect adjustments, such as those described above, shou ld be included in comprehensive income in the period of change. Questions have arisen in practice relating to whether cumulative effect adjustments should be reported as a component of comprehensive income in the period the change is recognized. When the F ASB originally deliberated FASB Statement No. 154, Accounting Changes and Error Corrections ASC 250) , it considered requiring the cumulative effect of accounting changes (codified as be included in net income of the period in which the change was made. How ever, the FASB “ rejected that alternative on the basis that the cumulative effect of the change in accounting principle does not relate to the period in which the change was made. Therefore, it would be inappropriate to record the cumulative effects on prior periods in net income of the period of change, since none of the effects relate to that period ” (paragraph B12 of Statement 154 ). Based on this rationale, we believe cumulative effect adjustments such as those which are described above should be excluded from comprehensive income in the period of change. We believe such adjustments relate to prior periods and are not items affecting the current period ’s results. Therefore, including both such adjustments should be excluded from any current period measurements of income net income and comprehensive income. We understand that this view is consistent with the views of the FASB and SEC staff. Accounting changes and error corrections Financial reporting developments | 25

31 3 Change in accounting principle 3-6: Cumulative effect of accounting change not included in comprehensive income Illustration Example 1 Assume a company adopted a new accounting standard effective 1 January 200Y. A $1,000,000 cumulative effect of adoption of the standard is recognized as an adjustment to the 31 December 200X ounting standard should balance of retained earnings. The cumulative effect of adoption of the new acc not be included in comprehensive income for the year ending 31 December 200Y but rather as an , as illustrated in the table below (other components of stockholders ’ adjustment to retained earnings equity are not presented for ease of illustration): Accumulated other Retained comprehensive Total income earnings Balance at 31 December 200X $ 5,000,000 $ 10,000,000 $ 15,000,000 Cumulative effect of accounting change - 1,000,000 1,000,000 Balance at 31 December 200X , a s a djusted $ 5,000,000 $ 11 ,000,000 $ 16 ,000,000 Components of comprehensive income 3,000,000 Net Income 3,000,000 - Other comprehensive income 100,000 – 100,000 Total comprehensive income 3,100,000 19,100,000 Balance at 31 December 200Y $ 5,100,000 $ 14,000,000 $ Example 2 Assume the same facts as Example 1, except that the transition provisions of the new accounting standard effective 1 January 200Y requires the cumulative effect of adoption to be recognized as an t to the 31 December 200X balance of accumulated other comprehensive income. The adjustmen cumulative effect of adoption of the new accounting standard should not be included in comprehensive income for the year ending 31 December 200Y but rather as an adjustment to accumulated other comprehensive income as previously reported for the year ending 31 December 200X , as illustrated in ’ equity are not presented for ease of illustration): the table below (other components of stockholders Accumulated other Retained comprehensive income earnings Total Balance at 31 December 200X $ 5,000,000 $ 10,000,000 $ 15,000,000 Cumulative effect of accounting change 1,000,000 – 1,000,000 $ Balance at 31 December 200X , a s a djusted $ 6,0 00,000 10,000 ,000 $ 16,0 00,000 Components of comprehensive income – Net Income 3,000,000 3,000,000 Other comprehensive income 100,000 – 100,000 Total comprehensive income 3,100,000 Balance at 31 December 200Y $ 6,100,000 $ 13,000,000 $ 19,100,000 Accounting changes and error corrections Financial reporting developments | 26

32 3 Change in accounting principle 3.8 Disclosures for a change in accounting principle Excerpt from Accounting Standards Codification Accounting Changes and Error Corrections — Overall Disclosure Change in Accounting Principle -50 10 -1 250- An entity shall disclose all of the following in the fiscal period in which a change in accounting principle is made: a. The nature of and reason for the change in accounting principle, including an explanation of why the newly adopted accounting principle is preferable. b. The method of applying the cha nge, including all of the following: 1. A description of the prior -period information that has been retrospectively adjusted, if any. 2. The effect of the change on income from continuing operations, net income (or other appropriate captions of changes in the applicable net assets or performance indicator), any other affected financial statement line item, and any affected per -share amounts for the current period and any prior periods retrospectively adjusted. Presentation of the effect on financial stateme nt subtotals and totals other than income from continuing operations and net income (or other appropriate captions of changes in the applicable net assets or performance indicator) is not required. The cumulative effect of the change on retained earnings or other components of equity or net 3. assets in the statement of financial position as of the beginning of the earliest period presented. 4. If retrospective application to all prior periods is impracticable, disclosure of the reasons therefore, an d a description of the alternative method used to report the change (see -10- 45 -5 through 45 -7). paragraphs 250 If indirect effects of a change in accounting principle are recognized both of the following shall c. be disclosed: 1. A description of the indir ect effects of a change in accounting principle, including the amounts that have been recognized in the current period, and the related per -share amounts, if applicable 2. Unless impracticable, the amount of the total recognized indirect effects of the acc ounting change and the related per -share amounts, if applicable, that are attributable to each prior period presented. Compliance with this disclosure requirement is practicable unless an entity cannot comply with it after making every reasonable effort to do so. Financial statements of subsequent periods need not repeat the disclosures required by this paragraph. If a change in accounting principle has no material effect in the period of change but is reasonably certain to have a material effect in later p eriods, the disclosures required by (a) shall be provided whenever the financial statements of the period of change are presented. -2 250- 10 -50 An entity that issues interim financial statements shall provide the required disclosures in the financial statem ents of both the interim period of the change and the annual period of the change. nges and error corrections Financial reporting developments Accounting cha | 27

33 3 Change in accounting principle - - 50 - 3 250 10 In the fiscal year in which a new accounting principle is adopted, financial information reported for he effect of the change on income from interim periods after the date of adoption shall disclose t continuing operations, net income (or other appropriate captions of changes in the applicable net assets or performance indicator), and related per -share amounts, if applicable, for those post -change interim periods. ASC 250- 10 -50- 1 requires the disclosures above to be made by an entity in the fiscal period in which a change in accounting principle is made. Financial statements of subsequent periods need not repeat the required disclosures initially made in the period of an accounting change. However, entities that issue interim financial statements must provide the required disclosures in the financial statements of both the interim and annual periods that include the direct or indirect effects of a change in accounting principle. For example, a public entity that makes a change in accounting principle in the second quarter of 20X6 must include the required disclosures in its second and third quarter interim financial statements. The entity must also include the requir ed disclosures for the annual period in its annual financial statements for 20X6. That is, the third quarter year -to-date interim financial statements, as well as the 20X6 annual financial statements, include the initial period of the change, and, therefor e, the disclosures remain applicable. These disclosures are not required in the financial statements for any interim or annual periods after 20X6. If a change in accounting principle does not have a material effect in the period of the change but is (a) 1 reason ably certain to have a material effect in later periods, the disclosures required in ASC 250- 10 -50- above ( provided whenever the financial nature of and reason why the change is preferable) are i.e., statements of the period of change are presented. Th is is a limited exception to the requirement that the required disclosures be provided only in the interim and annual period of a change in principle. This limited disclosure is required for all periods that include the period of the change in a set of fin ancial statements to inform the user that a change in accounting was made in a previous period. However, the accounting and disclosure requirements of ASC 250 are not included in the period of the change other rior periods. A voluntary change in accounting principle because the effects were immaterial in those p may be immaterial to prior periods, but have a profound effect on future periods, and this disclosure provides the financial statement user with the information necessary to assess that impact. 3 requires that in the fiscal year in which a new accounting principle is adopted, financial 10 -50- ASC 250- information reported for interim periods after the date of adoption disclose the effect of the change on income from continuing operations, net income (o r other appropriate captions of changes in the applicable net assets or performance indicator), and related per -share amounts, if applicable, for the post -change interim periods. That is, for subsequent interim periods in the fiscal year of an accounting change, an entity must determine and disclose the amounts that would have been reported under the “old ” accounting principle had it not made the accounting change. For the indirect effects of a change in accounting principle, an entity is required to disclo se a description of the indirect effects, the amounts 4 recognized in the current period and the related per share amounts, as well as, if practicable , the total recognized indirect effects of the accounting change and the related per share amounts attribut able to each prior period presented. 4 1(C) (2) requires compliance with disclosure requirements related to indirect effects of a change in acco ASC 250- 10 -50- unting principle unless an entity cannot comply after making every reasonable effort to do so. Accounting changes and error corrections Financial reporting developments | 28

34 3 Change in accounting principle 3-7: Disclosures for retrospective application of a change in accounting principle Illustration Based on Illustration 3 -1, ABC Company decides at the beginning of 20X7 to adopt the FIFO method of inventory valuation. ABC Company had used the LIFO method for financial and tax reporting since its inception on 1 January 20X5, and had maintained records that are adequate to apply the FIFO method retrospectively. ABC Company concluded that the FIFO method is the preferable inventory valuation method for its inventory. ABC Company ’s profit sharing plan contains provisions requiring adjustments for changes i n accounting. The change in accounting principle is reported through retrospective application. ABC Company ’s disclosure related to the accounting change is presented below. Change in method of accounting for inventory valuation Note 1: On 1 January 20X7, ABC Company elected to change its method of valuing its inventory to the FIFO ’ inventory was valued using the LIFO method. The Company believes method, whereas in all prior years ’s that the FIFO method of inventory valuation is preferable because (1) the cos ts of the Company negated the inventories have remained fairly level during the past several years, which has substantially financial reporting benefits of the LIFO method, which provides a better matching of current costs with current revenues in period s of rising costs, (2) the FIFO method results in the valuation of inventories at more current costs on the consolidated balance sheet, which proves a more meaningful presentation for investors, and (3) the change conforms to a single method of accounting for all of the Company ’s inventories. Comparative financial statements of prior years have been adjusted to apply the new method retrospectively. The following financial statement line items (see note below) for fiscal years 20X7 and 20X6 were affected by the change in accounting principle. Income Statements Year ended December 31, 20X7 As reported As computed Effect of under FIFO under LIFO change Sales $ 3,000 $ 3,000 $ 0 Cost of goods sold 1,100 1,130 (30) Selling, general, and 1,000 1,000 0 administrative expenses Income before profit sharing and income taxes 900 870 30 1 96 Profit sharing 87 9 804 783 21 Income before income taxes 9 Income taxes 322 313 Net income $ 482 $ 470 $ 12 Year ended December 31, 20X6 As originally Effect of reported change As adjusted $ 3,000 $ 3,000 $ 0 Sales Cost of goods sold 940 1,000 (60) 1,000 1,000 0 Selling, general, and administrative expenses Income before profit sharing and income taxes 1,060 1,000 60 Profit sharing 100 100 0 900 Income before income taxes 960 60 Income taxes 384 360 24 $ Net income $ 576 $ 540 36 1 This amount includes a $90 profit -sharing payment attributable to 20X7 profits and $6 profit -sharing payment attributable to adjusted 20X6 profits, which is an indirect effect of the change in accounting principle. The incremental payment attributable to 20X6 would have been recognized in 20X6 if ABC Company ’s inventory had originally been accounted for using the FIFO method. Accounting changes and error corrections Financial reporting developments | 29

35 3 Change in accounting principle Balance Sheets December 31, 20X7 As reported Effect of As computed under FIFO change under LIFO $ 2,732 $ 2,738 $ (6) Cash 320 390 70 Inventory $ 3,122 $ 3,058 Total assets $ 64 90 87 3 Accrued profit sharing 338 313 25 Income tax liability 428 400 28 Total liabilities - in capital 1,000 1,000 Paid 0 Retained earnings 1,694 1,658 36 ’ equity 2,694 2,658 36 Total stockholders $ ’ equity $ 3,122 stockholders 3,058 64 Total liabilities and $ December 31, 20X6 As originally Effect of reported As adjusted change $ 2,448 $ Cash 2,448 $ 0 Inventory 240 200 40 $ 2,688 $ 2,648 Total assets $ 40 Accrued profit sharing 100 100 0 16 Income tax liability 376 360 Total liabilities 476 460 16 -in capital 1,000 1,000 0 Paid 1,188 1,212 24 Retained earnings ’ equity 2,212 2,188 Total stockholders 24 Total liabilities and stockholders equity $ 2,688 $ 2,648 $ 40 ’ As a result of the accounting change, retained earnings as of January 1, 20X6, decreased from $648, as originally reported using the LIFO method, to $636 using the FIFO method. Statement of cash flows Year ended December 31, 20X7 Effect of As computed As reported under FIFO under LIFO change 12 Net income $ 482 $ 470 $ Adjustments to reconcile net income to net cash provided by operating activities (150) (120) (30) Increase in inventory profit sharing Decrease in accrued (10) (13) 3 Decrease in income tax liability (38 ) (47 ) 9 Net cash provided by operating activities 284 290 (6 ) 290 Net increase in cash 284 (6) 2,448 2,448 0 Cash, January 1, 20X7 ) $ (6 $ 2,732 $ 2,738 Cash, December 31, 20X7 Accounting changes and error corrections Financial reporting developments | 30

36 3 Chan ge in accounting principle Year ended December 31, 20X6 As originally Effect of reported change As adjusted 36 576 $ 540 $ $ Net income Adjustments to reconcile net income to net cash provided by operating activities (160) (100) Increase in inventory (60) Decrease in accrued profit sharing (20) (20) 0 (48 ) Decrease in income tax liability (72 ) 24 348 348 0 Net cash provided by operating activities 0 Net increase in cash 348 348 Cash, January 1, 20X6 2,100 2,100 0 $ 2,448 $ 2,448 Cash, December 31, 20X6 $ 0 3-8: — public entity with Illustration Retrospective application of a change in accounting principle three year comparative income statements and statements of cash flows presented Assume the same facts as Illustration 3 -1, however, ABC Company has been in existence for many years and elects to adopt the FIFO method of inventory valuation on 1 January 20X7. Assume further ent three years of comparative income that ABC Company is an SEC registrant that is required to pres statements, statements of cash flows, and is required to present earnings per share information related to its outstanding common stock and common stock equivalents. In this example, the change in accounting principle is applied retrospectively to the financial statements for the years 20X5 and 20X6 (including interim reporting periods) and the cumulative effect of the change is recognized in retained earnings as of 1 January 20X5. Application and disclosure of the change in accounting principle in this example would be the same as -2 and Illustration 3 Illustration 3 -7, except that an additional year of disclosures related to the income statement and statement of cash flow changes for 20X5 is included in the ABC Comp any ’s disclosures. Disclosure of the effect of the change on earnings per share for all years presented is also required. Further, the cumulative effect of the change in accounting principle recognized in retained earnings on s a component of retained earnings in ABC Company ’s 20X5 statement 1 January 20X5 is recognized a ’s equity. The change in accounting principle is applied retrospectively to the of changes in shareholder financial statements for the years 20X5 and 20X6. With respect to 20X7 (the period o f change), ABC Company is required to disclose the effect of the change on income from continuing operations, net income and the related per -share amounts for each of its quarterly financial statements issued during 20X7. The disclosures required by ASC 250 are not required in financial statements issued for periods subsequent to 20X7 because all periods are presented on the same basis of accounting. For SEC reporting purposes, ABC Company will apply the change in accounting principle retrospectively to all periods presented in its table of selected financial data required by Item 301 of SEC Regulation S -K. ABC Company will apply the new accounting principle to the carrying amounts of assets and liabilities of the earliest year presented in the table and ass ume an offsetting adjustment to the opening balance of retained earnings in the same period. The example disclosure in Illustration 3 -7 illustrates disclosure of the financial statement line items affected by the change in accounting principle in a tabula r format. While there is no required method of disclosing the information required by ASC 250- 10- 50- 1(b) and 50- 1(c) , we believe that a tabular presentation provides the most useful information to financial statement users. However, it is also acceptable t o disclose the required information in a narrative format if the facts and circumstances support such a presentation. Accounting changes and error corrections Financial reporting developments | 31

37 3 Change in accounting principle 3.8.1 Disclosures during the exposure period of a proposed amendment to the or before the effective date of a final codificat ion update codification (updated 2018) October Excerpt from Accounting Standards Codification Accounting Changes and Error Corrections — Overall SEC Materials SAB Topic 11.M, Disclosure of the Impact that Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant when Adopted in a Future Period 250- 10- S99 -5 The following is the text of SAB Topic 11.M, Disclosure of the Impact that Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant when Adopted in a Future Period. FN5 Facts: An accounting standard has been issued that does not require adoption until some future date. A registrant is required to include financial statements in filings with the Commission after the issuance of the standard but bef ore it is adopted by the registrant. Question 1: Does the staff believe that these filings should include disclosure of the impact that the recently issued accounting standard will have on the financial position and results of operations of the when such standard is adopted in a future period? registrant Interpretive Response: Yes. The Commission addressed a similar issue and concluded that registrants should discuss the potential effects of adoption of recently issued accounting standards in registration FN6 statements and reports filed with the Commission. The staff believes that this disclosure guidance applies to all accounting standards which have been issued but not yet adopted by the registrant unless FN7 FN8 MD&A the impact on its financial position and results o f operations is not expected to be material. requires registrants to provide information with respect to liquidity, capital resources and results of operations and such other information that the registrant believes to be necessary to understa nd its financial condition and results of operations. In addition, MD&A requires disclosure of presently known material changes, trends and uncertainties that have had or that the registrant reasonably expects will have a material impact on future sales, revenues or income from continuing operations. The staff believes that disclosure of impending accounting changes is necessary to inform the reader about expected impacts on financial information to be reported in the future and, therefore, should be disclo sed in accordance with the existing MD&A requirements. With respect to financial statement FN9 disclosure, GAAS specifically address the need for the auditor to consider the adequacy of the disclosure of impending changes in accounting principles if (a) th e financial statements have been prepared on the basis of accounting principles that were acceptable at the financial statement date but that will not be acceptable in the future and (b) the financial statements will be retrospectively adjusted in the future as a result of the change. The staff believes that recently issued accounting standards may constitute material matters and, therefore, disclosure in the financial statements should also be considered in situations where the change to the new accounting standard will be accounted for in financial statements of future periods, prospectively or with a cumulative catch -up adjustment. Question 2: Does the staff have a view on the types of disclosure that would be meaningful and appropriate when a new account ing standard has been issued but not yet adopted by the registrant? Interpretive Response: The staff believes that the registrant should evaluate each new accounting standard to determine the appropriate disclosure and recognizes that the level of informat ion available to the registrant will differ with respect to various standards and from one registrant to another. objectives of the disclosure should be to (1) notify the reader of the disclosure documents that a The Accounting changes and error corrections Financial reporting developments | 32

38 3 Change in accounting principle strant will be required to adopt in the future and (2) assist the standard has been issued which the regi reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted. The staff understands that the registrant will only be able to disclose information that is known. The following disclosures should generally be considered by the registrant: A brief description of the new standard, the date that adoption is required and the date that the registrant plans to adopt, if earlier. A discussion of the methods of adoption allowed by the standard and the method expected to be utilized by the registrant, if determined. A discussion of the impact that adoption of the standard is expected to have on the financial statements of the registrant, unless not known or reasonably estimable. In that case, a statement to that effect may be made. Disclosure of the potential impact of other significant matters that the registrant believes might as technical violations of debt covenant result from the adoption of the standard (such agreements, planned or intended changes in business practices, etc.) is encouraged. SEC Staff Announcement at Emerging Issues Task Force (EITF) Meetings SEC Staff Announcement: Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of a Registrant When Such Standards Are Adopted in a in accordance with Staff Accounting Bulletin [SAB] Topic 11.M) Future Period ( 250- 10- S99- 6 ASC The following is the text of SEC Staff Announcement: Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of a Registrant When Such Standards Are Adopted in a Future Period (in accordance with Staff Accounting Bulletin [SAB] Topic 11.M) . -09, This announcement applies to Accounting Standards Update (ASU) No. 2014 Revenue from Contracts with Customers (Topic 606) ; ASU No. 2016- Leases (Topic 842) ; and ASU No. 2016- 13, Financial 02, FN1 — Credit Losses (Topic 326): Measurement of Cred . Instruments it Losses on Financial Instruments SAB Topic 11.M provides the SEC staff view that a registrant should evaluate ASUs that have not yet FN2 been adopted to determine the appropriate financial statement disclosures about the potential material effects of those ASUs on the financial statements when adopted. Consistent with Topic 11.M, if a registrant does not know or cannot reasonably estimate the impact that adoption of the ASUs referenced in this announcement is expected to have on the financial statements, then in addition to making a statement to that effect, that registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted. In this regard, the SEC staff expects the additional qualitative disclosures to include a description of the effect of the accounting apply, if determined, and a comparison to the registrant’s policies that the registrant expects to current accounting policies. Also, a registrant should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed. ________________________________ FN5 Some registrants may want to disclose the potential effects of proposed accounting standards not yet issued, ( e.g., exposure drafts). Such disclosures, which generally are not required because the final standard may differ from th e exposure draft, are not addressed by this SAB. See also FRR 26. FN6 FRR 6, Section 2. FN7 In those instances where a recently issued standard will impact the preparation of, but not materially affect, the financial statements, the registrant is encourage d to disclose that a standard has been issued and that its adoption will not have a material effect on its financial position or results of operations. Accounting changes and error corrections Financial reporting developments | 33

39 3 Change in accounting principle FN8 Item 303 of Regulation S - K. FN9 See AU 9410.13- 18. FN1 This announcement also applies to any subsequ ent amendments to guidance in the ASUs that are issued prior to a registrant’s adoption of the aforementioned ASUs. FN 2 Topic 11.M provides SEC staff views on disclosures that registrants should consider in both Management’s Discussion & Analysis (MD&A) a nd the notes to the financial statements. MD&A may contain cross references to these disclosures that appear within the notes to the financial statements. Questions may arise regarding what disclosures, if any, should be made of the expected effects of an impending accounting change in financial statements issued either (1) during the exposure period of a proposed amendment to the codification or after the exposure period but before the final codification update is issued or (2) after the codification upda te is issued but before it is effective. The FASB has not dealt specifically with this disclosure question. However, the Accounting Standards The Impact on an Board, in Auditing Interpretation No. 3 (ASB 3), Auditor ’s Report of a FASB Statement Prior to th e Statement ’s Effective Date , considered it with regard to financial statements issued before the effective date of an issued accounting pronouncement by concluding that “ [f]or financial statements at are acceptable at the financial that are prepared on the basis of accounting principles th -statement date but that will not be acceptable in the future, the auditor should consider whether disclosure of the ” ASB 3 suggests there impending change in principle and the resulting restatement are essential data. will be circumstances when the effect of a new accounting pronouncement would be so material that disclosure would be required. Such disclosure might be made by supplementing the historical financial statements with pro forma financial data, either in compara tive columnar form, in the notes, or as separate financial statements. Also, SAS 1 (AU “If an accounting change has no material effect on the financial -C 708), states: statements in the current year, but the change is reasonably certain to have substantial effect in later years, the change should be disclosed in the notes to the financial statements whenever the statements of the period of change are presented... ” While ASB 3 is directed to the disclosure of the impending effect of a retroactive restatement (referred to herein as retrospective application subsequent to the issuance of ASC 250), and SAS 1 applies to the year in which an accounting change is made, the conclusions reached may be applied to disclosures of all accounting changes that will result from the adoption of accounting pronouncements that have already been issued but are not yet effective for the entity. While it is impractical to give guidance on the need to disclose the effects of pending accounting changes le situation, we believe the following general guidance will provide a useful that will address every possib framework for dealing with specific cases: 1. A codification update is issued but not effective for the financial statements being issued: a. Change will be given effect by eithe r retrospective application or a cumulative catch -up adjustment to retained earnings. The impending change and an approximate quantification, if known, normally would be disclosed if either of the following conditions are present: • Either the change will ma terially affect important balance sheet items such as shareholders ’ equity, working capital, certain ratios such as debt -to-equity, or it may cause defaults under debt or other agreements as to which waivers are not yet obtained or agreements are not amended, if the consequences of the default would be material to the fin ancial statements, or The change will materially affect the reported results of operations for any of the most • recent years (usually the last three years), including the current year on an actual (retrospectively applied) basis. ng changes and error corrections Financial reporting developments Accounti | 34

40 3 Change in accounting principle b. Change will be given eff ect prospectively. The impending change would be disclosed if the effect on financial position or results of operations is expected to be material. The MD&A disclosures would indicate the expected magnitude of the effect of the change on future periods, while the financial statement notes should disclose the anticipated effect of a new standard on historical financial statements. 2. An amendment to the codification is in the exposure period, or that period has ended but a final codification update has not yet been issued. Generally, no disclosure is required because exposure drafts do not establish GAAP and it is usually uncertain whether an amendment to the codification will be issued in substantially the same form as proposed. Disclosure of the potential e ffects of a proposed accounting standards update may be appropriate only in those rare situations in which adopting the update in the form in which the proposed update is exposed would change drastically the reported financial position or level of ility shown by the financial statements. An example of this situation was ASC 730, Research profitab and Development . As exposed (and as finally adopted), that codification topic removed all deferred research and development costs from the balance sheet, and that w as the only significant asset some companies had. In such a case, the potential effects of the change would ordinarily be disclosed. Many companies whose financial statements are likely to be significantly affected by a codification update will determine at least the approximate effects as soon as the update is issued and will wish to provide users of their financial statements with information quantifying the expected effects of the impending change. It is acceptable to disclose that the effect of the cha nge has not yet been determined in situations when the effect of the change has not been determined since the company can only disclose information that is known at the time the disclosure is made. However, if more than one reporting date is e the effective date of the update to the codification, disclosure should improve as the involved befor effective date approaches. In addition, in SAB Topic 11.M Disclosure of the Impact that Recently Issued Accounting Standards , WillH ave on the Financial Statements of t he Registrant When Adopted in a Future Period (Topic 11.M) , SEC staff stated that disclosure of impending accounting changes due to recently issued codification the is necessary to inform the reader about the expected effects on financial information to be updates reported when such codification update is adopted in the future and, therefore, should be disclosed in accordance with existing MD&A requirements. The SEC staff believes that recently issued codification updates may constitute material matters and , therefore, disclosure in the financial statements also should be considered in situations when the change to the new codification update will be adopted in the future. The objectives of financial statement disclosure should be to (1) notify the reader of the disclosure that a codification update has been issued that the registrant will be required to adopt in the future and (2) assist the reader in assessing the significance of the effect that the new codification update will have on the financial stateme nts of the registrant when adopted, including whether the financial statements will be retrospectively adjusted in the future as a result of the change. The objectives of Topic 11.M and the purpose of financial statement disclosures are not necessarily con sistent. MD&A should discuss known information about the expected effect of a new codification update on future periods, while the financial statement notes should disclose the anticipated effect of a codification update new on historical financial statements. By distinguishing these objectives, a preparer can avoid redundancy in its disclosures. Accounting changes and error corrections Financial reporting developments | 35

41 3 Change in accounting principle disclosures are only required if the registrant reasonably expects a The SEC staff noted that Topic 11.M codification update to have a material effect o n its financial statements. That is, the SEC staff only new expects a registrant to disclose pending codification updates that will require adoption via material retroactive adjustments to the historical financial statements (to be disclosed in the financial s tatement notes) or which will have a material effect on future financial statements via prospective adoption (to be A registrant should consider the full scope of new standards to evaluate if adoption disclosed in MD&A). of the standard is material. This would include presentation and disclosure in addition to recognition and measurement of transactions. If a recently issued codification update with a delayed effective date allows for its early adoption, we believe the Topic 11.M disclosures should include a description of when and how the codification update is expected to be initially applied. In effect, by allowing for early adoption, the new accounting standard creates a new accounting policy election. That is, during the early be multiple acceptable -adoption period there may company accounting policies. For example, following the issuance of a new accounting pronouncement a may have the option of continuing to follow their previous accounting policy, or electing to apply the requirements of the new codification update before its effective date. At the September 2016 Emerging Issues Task Force (EITF) Meeting, the SEC staff announced disclosure consideration s that are applicable to ASU 2014 -09, Revenue from Contracts with Customers (Topic 606) , ASU 2016- 02, Leases (Topic 842) and ASU 2016 -13, Financial Instruments —Credit Losses (Topic 326): The SEC staff stated that, consistent with . Measurement of Credit Losses on Financial Instruments Topic 11.M, if a registrant does not know or cannot reasonab se ly estimate the impact that adoption of the it should make a statement to that effect and consider ASUs is expected to have on the financial statements qualitative disclosures to assist the reader in assessing the significance of the impact tha t the providing standard will have on the financial statements of the registrant when adopted. Those qualitative disclosures should include a description of the new standard’s effect of the registrant’s accounting policies and provide a comparison to the registrant’ s current accounting policies. A registrant should also describe the status of its process to implement the new standards and the significant implementation matters yet to be Also consistent with Topic 11.M, the SEC staff expects an entity’s dis closures to evolve in addressed. each reporting period as more information about the effects of these new standards becomes available. 3.9 Preferability letter When an SEC registrant makes a voluntary change in accounting principle, it generally is required to include a preferability letter issued by its independent registered public accounting firm as Exhibit 18 to its first periodic report filed subsequent to the accounting change ( e.g., -Q if Quarterly Report on Form 10 , Annual Report on Form 10 -K if the the change is made in an interim period other than the fourth quarter 250 has no effect on this requirement. The SEC staff has change is made in the fourth quarter). ASC taken the position that a preferability letter is needed for each situation in which a registrant discloses a voluntary change in accounting principle, even though the auditors may consider the change to not be material and do not comment thereon in their report. Item 601 of Regulation S -K states that a preferability letter is not required when an accounting change is made in response to standards adopted by the FASB. Goodwill impairment date testing In a December 2014 speech at the AICPA Conference on Current SEC and PCAOB Developments, an SEC 5 staff member stated the following: “... the staff has observed that some registrants may view a change in goodwill impairment testing date to not represent a material change to a method of applying an accounting 5 Carlton Tartar, Associate Chief Accountant, Office of the Chief Accountant Accounting changes and error corrections Financial reporting developments | 36

42 3 Change in accounting principle principle, even if goodwill is material to the financial statements, because the change in impairment testing date is not viewed to have a material effect on the financial statements in light of the registrant’s internal controls and requirements under Topic 350 to assess goodwill impairment upon certain triggering events. The staff acknowledges that judgment is required when assessing materiality and the assessment of whether a change in accounting principle is material may include considerations beyond the quantitative etermines that a change in significance of the financial statement line items. Accordingly, if a registrant d goodwill impairment testing date does not represent a material change to its method of applying an accounting principle, the staff will no longer request a preferability letter to be obtained and filed, provided that such change is prominently disclosed in the registrant’s financial statements. The staff also reserves the right to ask questions based on the registrant’s specific facts and circumstances, which may include situations where it appears that a registrant’s goodwill imp airment testing date is frequently changed. ” We believe this exception to the requirement to include a preferability letter as an exhibit to the first periodic report filed subsequent to the accounting change is limited to voluntary changes in accounting related to the date the annual goodwill impairment assessment is performed. It is inappropriate to analogize to this view for other types of voluntary changes in accounting principle. A registrant should determine that the appropriate processes and controls are designed and operating at a precision level sufficient to monitor goodwill and timely identify triggering events that indicate goodwill may In be impaired prior to determining that a change in goodwill impairment assessment date is appropriate. additi on, while the change may not require a preferability letter a registrant should still have valid reasons for making the change ( e.g., reasons beyond administrative burden) including rationale for why the new date is better. Private Company Council (PCC) al ternatives 6 The FASB issued ASU 2016 -03, which eliminates the effective dates of four PCC alternatives. A private company that adopts an alternative is voluntarily changing an accounting principle. Such a change normally triggers the requirements in 250, including a preferability assessment. That would have ASC been costly and complex for private companies. ASU 2016 -03 allows private companies to forgo a preferability assessment the first time they elect each of these alternatives. After the initial electio n of a PCC alternative, subsequent accounting changes will require a preferability assessmen t. Summary of requirements The following is a summary of frequent situations in which an accounting change is reflected along with a summary of whether or not such change in accounting principle requires a preferability letter: Description Preferability letter requirement Voluntary change in accounting principle in a recurring A preferability letter is required for all material SEC filing. voluntary changes in accounting principle in a recurring 10- Q, 10- K, NSAR filings) . A e.g., SEC filing ( preferability letter is not required when an accounting change is made in response to standards adopted by the codification update). However, when two FASB (i.e., accounting alternatives are specifically approved by the FASB and the registrant subsequently changes from one alternative to the other, a preferability letter is required. 6 ASU 2016- 03 Intangibles — Goodwill and Other Topics (Topics 360); Business combinations (Topic 805); Consolidation (Topic 810); Derivatives and Hedging (Topic 815); Effective Date and Transition Guidance (a Consensus of the Private Company Council) Accounting changes and error corrections Financial reporting developments | 37

43 3 Change in accounting principle Description Preferability letter requirement The SEC staff expects and requires a preferability letter An immaterial voluntary change in accounting principle that has been in a recurrin g SEC filing. for accounting changes that are disclosed (whether in the disclosed financial statements or by other means) or that result in a change in the description of accounting policies. The staff be lieves that although a change might not be SEC material enough to require a reference to consistency in the auditor’ s report or retrospective adoption, if it is important enough to be disclosed or to have caused a change in disclosure, it should be supported b y a preferability letter. As described above, a preferability letter may not be required for voluntary changes in a goodw ill impairment assessment date. If the change in accounting principle is not disclosed due to immateriality, we believe no preferability letter would be required. required in 1933 Act Change in accounting in an initial public offering Preferability letters are not 7 (previously financial statements were not filed with filings. SEC). the Voluntary change in accounting principl e by an entity ’s ’s subsidiary or equity method investee When an entity makes a voluntary change in accounting principle, a subsidiary or equity method investee. preferability letter may be needed depending on the materiality of the change to the consolidat ed financial statements. A change in accounting estimate effected by a Like other voluntary changes in accounting principle, a change in accounting estimate that is effected by a voluntary in an accounting principle in a change recurring SEC filing. chang e in an accounting principle may be made only if the new accounting principle is justifiable on the basis that it is preferable. However, the SEC staff does not require a preferabilty letter for a change in accounting estimate that is effected by a change in accounting 8 principle. A change in accounting disclosed in a voluntary Form 20 - F does not have a requirement for a 20 -F. preferability letter. Therefore, no preferability letter is Form required of a foreign private issuer for a change in home country or US GAAP accounting principles included in a Form 20 -F. conform an A change in accounting principle made to As a limited exception, the SEC staff has indicated that a ’s accounting policy to that of the acquired entity preferability le tter generally is not required after a business combination when changes in the acquired acquirer. ’s accounting are made to conform to those of the entity acquiring entity. For example, when a company acquires a registrant that continues as a reporting entity (e.g., the acquired registrant guarantees public debt of the parent and does not qualify for financial statement relief under Rule 3- 10) and the acquired registrant makes an accounting change to conform to that of the parent, a preferability letter generally is not required. 7 Although not required , a preferability letter may be requested by the SEC staff. 8 — Division of Corporation Finance, Section 4230.2.c.4. C Financial Reporting Manual SE Financial reporting developments Accounting changes and error corrections | 38

44 3 Change in accounting principle 3.10 Internal control over financial reporting considerations Financial statement risks related to changes in accounting principle including voluntary changes in accounting principle as well as changes required by newly issued ASUs should be appropriately mitigated by internal controls. The concepts of ASC 250 are pervasive ( i.e., not limited to a single account or process) and both entity -level and transaction -level controls will often be necessary to mitigate the risks of material misstatem ent related to changes in accounting principle. - -level controls: The risk that inconsistent policies are applied is often mitigated through entity Entity -national companies will often have a set of global accounting level controls. For example, multi policies and require quarterly confirmation by subsidiaries that such policies are consistently applied. Subsidiary reporting packages may assist in the identification of a change in policy in a period that may require accounting and reporting under ASC 250. -level controls: Similar to other infrequent transactions ( Tra nsaction e.g., business combinations, impairment charges), in a period where a company has a voluntary change in accounting policy, it may be necessary to document the process for initiating, implem enting and reporting the voluntary change and related controls. Controls that may be identified include management ’s assessment and documentation of the preferability of the proposed voluntary change in accounting policy and review trospective adjustments. Additionally, for public business entities, the Audit of the calculation of re Committee may approve voluntary changes in accounting. Accounting changes and error corrections Financial reporting developments | 39

45 4 Change in accounting estimate Excerpt from Accounting Standards Codification — Overall Accounting Changes and Error Corrections Other Presentation Matters Change in Accounting Estimate 250- 10 -45 -17 A change in accounting estimate shall be accounted for in the period of change if the change affects that period only or in the period of change and future periods if the change affects both. A change in accounting estimate shall not be accounted for by restating or retrospectively adjusting amounts reported in financial statements of prior periods or by reporting pro forma amounts for prior periods. 250- 10 -45 -18 Distinguishing between a change in an accounting principle and a change in an accounting estimate is sometimes difficult. In some cases, a change in accounting estimate is effected by a change in accounting principle. One example of this type o f change is a change in method of depreciation, amortization, or depletion for long -lived, nonfinancial assets (hereinafter referred to as depreciation method). The new depreciation method is adopted in partial or complete recognition of a change in the estimated future benefits inherent in the asset, the pattern of consumption of those benefits, or the information available to the entity about those benefits. The effect of the change in accounting principle, or the method of applying it, may be inseparable from the effect of the change in accounting estimate. Changes of that type often are related to the continuing process of obtaining additional information and revising estimates and, therefore, shall be considered changes in estimates for ying this Subtopic. purposes of appl 10 -45 -19 250- Like other changes in accounting principle, a change in accounting estimate that is effected by a change in accounting principle may be made only if the new accounting principle is justifiable on the basis that it is prefer able. For example, an entity that concludes that the pattern of consumption of the expected benefits of an asset has changed, and determines that a new depreciation method better reflects that pattern, may be justified in making a change in accounting estimate effected by a change in accounting principle. (See paragraph 250- 10- 45- 12 .) 250- -45 -20 10 However, a change to the straight -line method at a specific point in the service life of an asset may be planned at the time some depreciation methods, such as the modified accelerated cost recovery system, are adopted to fully depreciate the cost over the estimated life of the asset. Consistent application of such a policy does not constitute a change in accounting principle for purposes of applying this Subtopi c. ASC 250- 10 -45- 17 requires a change in accounting estimate to be accounted for in (a) the period of change if the change affects that period only or (b) the period of change and future periods if the change affects both. As such, a change in accounting estimate shall not be accounted for by restating or retrospectively applying the change to prior periods or by reporting pro forma amounts for prior periods. Accounting changes and error corrections | 40 Financial reporting developments

46 4 Change in accounting estimate Common examples of changes in accounting estimates include, but are not limited to the following: 1. Change in the estimated useful life or salvage value of a long -lived asset 2. Change in estimated allowance for loan losses or bad debts 3. Change in estimated liability for warranties 4. Change in estimates of obsolete and excess inventory 5. Change in method of depreciating long -lived assets (presumed to be a change in estimate pursuant 18) to ASC 250- 10- 45- 250 describes when the effect of the change in accounting principle, or the method of applying it, ASC may be inseparable from the effect of the ch ange in accounting estimate. One example of this type of change is a change in method of depreciation, amortization or depletion of long -lived, non -financial assets. Since changes of this type often are related to the continuing process of obtaining additional information and revising estimates of the pattern of consumption, such changes are considered changes in estimates for purposes of applying ASC 250. Consistent with other changes in accounting principle, a change in accounting estimate that is effected by a change in accounting principle may be made only if the new accounting principle is justifiable on the basis that it is preferable. For example, an entity that concludes the pattern of consumption of the expected benefits of a long -lived asset has ch anged and believes that a new depreciation method better reflects that consumption pattern, may be justified in making a change in accounting estimate effected a change in depreciation method). by the change in accounting principle ( e.g., In contrast, an e ntity that makes a change from one method of depreciation to another could not justify the change as preferable if the reason for the change was simply that the new method was more prevalent in the industry in which the reporting entity operates. Better reflecting the pattern of economic consumption of the asset being depreciated should be the sole basis for determining the preferable depreciation method. That said, if industry practice is to depreciate similar assets on a different basis than that used by a particular entity, that fact may cause the company to challenge whether their depreciation method for those assets best reflects their pattern of economic consumption. However, industry practice alone cannot be the basis for a change in accounting principle. 4.1 Disclosures for a change in accounting estimate Excerpt from Accounting Standards Codification Accounting Changes and Error Corrections — Overall Disclosure Change in Accounting Estimate -50 -4 10 250- The effect on income from continuing operations, net income (or other appropriate captions of changes in the applicable net assets or performance indicator), and any related per -share amounts of the current period shall be disclosed for a change in estimate that affects several future periods , such as a change in service lives of depreciable assets. Disclosure of those effects is not necessary for estimates made each period in the ordinary course of accounting for items such as uncollectible accounts or inventory obsolescence; however, disclos ure is required if the effect of a change in the estimate is material. When an entity effects a change in estimate by changing an accounting principle, -1 through 50 the disclosures required by paragraphs 250- 10- 50 -3 also are required. If a change in te does not have a material effect in the period of change but is reasonably certain to have a estima material effect in later periods, a description of that change in estimate shall be disclosed whenever the financial statements of the period of change are presented. tions Financial reporting developments Accounting changes and error correc | 41

47 4 Change in accounting estimate Change in Estimate Used in Valuation Technique 10 -50 -5 250- The disclosure provisions of this Subtopic for a change in accounting estimate are not required for its application revisions resulting from a change in a valuation technique used to measure fair value or when the resulting measurement is fair value in accordance with Topic 820 . For a change in accounting estimate that affects several future periods, entities are required to disclose the effect of the change on income from continuing operat ions, net income (or other appropriate captions -share amounts of of changes in the applicable net assets or performance indicator), and any related per the current period. An example of a change that would affect several future periods is a change in service lives of depreciable assets. In contrast, disclosure of the effects is not necessary for estimates made each period in the ordinary course of accounting for items such as uncollectible accounts or inventory obsolescence. However, disclosure is required if the effect of such a change in estimate is material. Illustration 4 -1: Evaluating a change in accounting estimate Assume a company evaluates the collectability of accounts receivable based on several factors. During the year, collections of outstanding receivables notably deteriorated compared to previous years causing the company to recognize a material increase in its allowance for doubtful accounts. As a result, the company concludes disclosure of the change in the allowance is required. As an example, the company could disclose the following in the notes to its financial statements: In the year ended 20X6, due to deteriorations in collections of receivables, the Company changed its estimates of the allowance for doubtful accounts related to its custo mers, primarily based on historical experience of write- offs of outstanding accounts receivable. The result of this change in estimate resulted in an increase compared to the year ended 31 December 20X5 to the allowance ly $9 million ($6 million net of tax) in the year ended 20X6, for doubtful accounts by approximate or $0.42 per share (basic and diluted) for the three and twelve months ended 31 December 20X6. When an entity changes an accounting estimate by changing an accounting principle, the required estimate and a change in accounting principle are made disclosures for a change in accounting . If a change in estimate does not have a material effect in the period of change but is reasonably certain s, a description of that change in estimate shall be disclosed to have a material effect in later period whenever the financial statements of the period of change are presented. Illustration 4-2: Reporting a change in accounting estimate Effective 1 January 20X6, Widget Company changed its estimates of the useful lives of certain machinery and equipment in its manufacturing plants. The following is an example disclosure of this get Company would include in its 20X6 change, in accordance with the provisions of ASC 250, that Wid financial statements. If Widget Company was a publicly traded enterprise, a similar disclosure would be made in each of its interim financial statements throughout 20X6. Accounting changes and error corrections Financial reporting developments | 42

48 4 Change in accounting estimate Note 1: Change in depreciable lives of property and equipment In accordance with its policy, the Company reviews the estimated useful lives of its fixed assets on an ongoing basis. This review indicated that the actual lives of certain machinery and equipment at its n the estimated useful lives used for depreciation purposes in manufacturing plants were longer tha the Company ’s financial statements. As a result, effective 1 January 20X6, the Company changed its estimates of the useful lives of its machinery and equipment to better reflect the estimated p eriods during which these assets will remain in service. The estimated useful lives of the machinery and equipment that previously averaged ten years were increased to an average of 15 years, while those that previously averaged six to eight years were inc reased to an average of ten years. The effect of this change in estimate was to reduce 20X6 depreciation expense by $500,000, increase 20X6 net income by $300,000, and increase 20X6 basic and diluted earnings per share by $0.03. Internal control over financial reporting considerations 4.2 Financial statement risks related to changes in estimates should be appropriately mitigated by internal controls over financial reporting. Management should understand the significant assumptions, methods, data and contro ls related to estimates and how necessary changes in those assumptions, methods and data are timely identified by controls. A key consideration of the design of controls over an estimation process is timely performance. Timely performance ensures that a necessary change in estimate is identified as new information becomes available. For example, assume a company has a control that the accounts receivable aging is reviewed to identify collection issues. The control is designed to mitigate risks to the comple teness and valuation assertions associated with the accounts receivable allowance. If this control is not performed timely, a necessary change in estimate may not be identified as of the end of a reporting period. If the change in estimate is identified in a later reporting period, the adjustment may represent the correction of a prior section 6.1.1, . Error correction versus a change in accounting estimate period error. See discussion in Accounting changes and error corrections Financial reporting developments | 43

49 5 Change in reporting entity nting Standards Codification Excerpt from Accou — Overall Accounting Changes and Error Corrections Glossary 250- 10 -20 Change in the Reporting Entity A change that results in financial statements that, in effect, are those of a different reporting entity . A change in the reporting entity is limited mainly to the following: Presenting consolidated or combined financial statements in place of financial statements of a. individual entities Changing specific subsidiaries that make up the group of entities for which consolid ated financial b. statements are presented Changing the entities included in combined financial statements. c. Neither a business combination accounted for by the acquisition method nor the consolidation of a variable interest entity (VIE) pursuant to Topic 8 10 is a change in reporting entity. Other Presentation Matters Change in Reporting Entity 250- 10 -45 -21 When an accounting change results in financial statements that are, in effect, the statements of a different reporting entity, the change shall be retros prior periods pectively applied to the financial statements of all Previously presented to show financial information for the new reporting entity for those periods. the amount issued interim financial information shall be presented on a retrospective basis. However, of interest cost previously capitalized through application of Subtopic 835 -20 shall not be changed when retrospectively applying the accounting change to the financial statements of prior periods. ASC 10 -45- 21 requires entities to reflect a change in the reporting entity ( i.e., financial statements 250- that are, in effect, the statements of a different reporting entity), by retrospective application to the financial statements of all prior periods presented to show financial information for th e new reporting entity. Further, the change in reporting entity shall be applied to previously issued interim financial information on a retrospective basis. One exception is that the amount of interest cost previously capitalized through application of AS C 835- 20, Capitalization of Interest , shall not be changed when retrospectively applying the accounting change to the financial statements of prior periods. Common examples of an accounting change that is a change in reporting entity are mainly limited to the following: 1. Presenting consolidated or combined financial statements in place of financial statement s of individual entities 2. Changing specific subsidiaries that make up the group of entities for which consolidated financial statements are presented 3. Changing the entities included in combined financial statements Accounting changes and error corrections | 44 Financial reporting developments

50 5 Change in reporting entity ASC Business Combinations , nor the Neither a business combination accounted for under 805, ASC 810- 10 , consolidation or deconsolidation of a variable interest entity (VIE) pursuant to solidation — Overall , is a change in reporting entity. For example, assume a company consolidates a Con VIE pursuant to ASC 810- 10 in its consolidated financial statements for the year ended 20X8. On 1 January 20X9, because of the addition of a new investor in the VIE that is given contractual rights to make decisions , the company is no longer considered the primary beneficiary for the VIE. As such, the company deconsolidates the VIE and prospectively accounts for the VIE using the equity method of accounting p ursuant to ASC Investments — Equity Method and Joint Ventures . As the change in 323, accounting for the VIE is the result of an event that has economic substance, the change does not meet the definition of a change in reporting entity. That is, the change in accounting for the VIE was not a result of a voluntary accounting change as contemplated by ASC 250 and retrospective application of a change in reporting entity is not required or permitted. 5.1 Disclosures for a change in reporting entity Excerpt from Accounting Standards Codification Accounting Changes and Error Corrections — Overall Disclosure Change in Reporting Entity 250- 10 -50 -6 When there has been a change in the reporting entity, the financial statements of the period of the change shall describe the nature of the change and the reason for it. In addition, the effect of the change on income from continuing operations , net income (or other appropriate captions of changes in the applicable net assets or performance indicator), other comprehe nsive income, and any related per - share amounts shall be disclosed for all periods presented. Financial statements of subsequent periods need not repeat the disclosures required by this paragraph. If a change in reporting entity does not have a material ef fect in the period of change but is reasonably certain to have a material effect in later periods, the nature of and reason for the change shall be disclosed whenever the financial statements -50 of the period of change are presented. (Sections 805 -10 -50 , 805- 20 -50 , 805 -30 , and 805 -740 -50 describe the manner of reporting and the disclosures required for a business combination.) 5.2 Internal control over financial reporting considerations The financial statement risk related to changes in reporting entity should be appropriately mitigated by internal controls over financial reporting. A key consideration of the controls associated with a change in reporting entity is timely identifying the change in reporting entity. Additionally, when a change in reporting entity occurs, it may be necessary for management to reconsider the controls associated with consolidation and intercompany transactions. ections Financial reporting developments Accounting changes and error corr | 45

51 6 Correction of an error in previously issued financial statements a company must assess the appropriate means to account for the correction Once an error is identified, of that error. A decision whether that correction should be reflected in a restatement of prior financial statem ents and how to reflect that restatement or if the error correction can be recognized in the current period financial statements is based on the materiality of the error to the current period and prior period(s) financial statements. There are three primar y considerations upon discovery of a potential error : 1. Determining whether an error exists (instead of a n acceptable reclassification, change in estimate or change in accounting principle) — See section 6.1, Determining whether an error exists 2. Assessing the materiality of an error (also includes internal control considerations) section 6.2, — See Assessing the materiality of an error 3. Reporting an error in previously issued financial statements — See section 6.3, Reporting an error in previous ly issued financial statements 6.1 Determin ing whether an error exists Excerpt from Accounting Standards Codification Accounting Changes and Error Corrections — Overall Glossary 10 -20 250- Error in Previously Issued Financial Statements An error in recognition, measurement, presentation, or disclosure in financial statements resulting in the application of generally accepted accounting principles from mathematical mistakes, mistakes (GAAP), or oversight or misuse of facts that existed at the time the financial statements were prepared. A change from an accounting principle that is not generally accepted to one that is generally accepted is a correction of an error. Errors may occur in the recognition, measurement, presentation or disclosu re of transactions or events. Determining whether an adjustment is an error versus a change in estimate, acceptable reclassification accounting principle is an important determination. Examples of corrections of errors in or change in previously issued financial statements include, but are not limited to, the following: • A change from an accounting principle that is not generally accepted to one that is generally accepted • Corrections of mistakes in the application of US GAAP • Corrections of mathematical mistakes Oversight or misuse of facts that existed at the time the financial statements were prepared • Accounting changes and error corrections | 46 Financial reporting developments

52 6 Correction of an error in previously issued financial statements Error correction versus a change in accounting 6.1.1 estimate ate. A change in estim In some cases it can be difficult to distinguish an error from a change in accounting estimate is defined in the ASC Master Glossary as “ a change that has the effect of adjusting accounting the carrying amount of an existing asset or liability or altering the subsequent accounting for existing or future assets or liabilities. A change in accounting estimate is a necessary consequence of the assessment, in conjunction with the periodic presentation of financial statements, of the present status and expected future benefits and obligations associated with assets and liabilities. Changes in accounting estimates result ” See 4, Change in accounting estimate , for further information about Chapter from new information. accounting for a change in estimate. Developing and applying accounting estimates is a necessary part of accounting and financial reporting. Numerous pronouncements require entities to develop accounting estimates and assess on accounting an ongoing basis whether the underlying assumptions have changed . Examples of estimates include receivables obsolescence and warranty obligations. By their very nature, such uncollectible , inventory estimates will and should change over time as new information and experience develops. However, the fact that the accounting treatment involves an estimation process does not mean that all changes related to an estimation process are changes in estimates. If the actual results do not support the assumptions used to develop the accounting estimate, an entity should evaluate whether an error (rather than a change in accounting estimate) has oc curred. Determining whether an adjustment is a change in accounting estimate or an error requires the use of judgment and is often a matter of degree. We often receive questions regarding whether the use of “new on depends ” represents a change in estimate or an error correction. The response information when the information was reasonably available, when the estimate was updated for the information, how the information was interpreted, etc. For example, not changing an estima te’s underlying assumptions fashion as new information is available or circumstances change could result in an error. in a timely in a previously issued Additionally, misinterpreting information used to develop or support an estimate set of financial statements is an error. 6.1.2 Error correction versus a reclassification A reclassification is a change in classification of the amount presented in financial statements to conform the presentation of prior period(s) to the current period. Such a change maintains comparability among the periods presented. A reclassification is a change from one presentation that complies with US GAAP to another presentation that complies with US GAAP. Excerpt from Accounting Standards Codification tements Presentation of Financial sta — Overall Other Presentation Matters 205- 10 -45 -3 Prior- year figures shown for comparative purposes shall in fact be comparable with those shown for the most recent period. Any exceptions to comparability shall be clearly brought out as described in Topic 250. Disclosure 205- 10 -50 -1 If, because of reclassifications or for other reasons, changes have occurred in the manner of or basis for presenting corresponding items for two or more periods, information shall be furnished that will explain the chang e. This procedure is in conformity with the well recognized principle that any change in practice that affects comparability of financial statements shall be disclosed. Accounting changes and error corrections Financial reporting developments | 47

53 6 Correction of an error in previously issued financial statements An assessment of whether a reclassification is a change in accounting principle ( e.g., a c hange in the classification of interest and penalties associated with an uncertain tax position) should also be considered. See s ection 3.4.3 , Assessing reclassifications for a voluntary change in accounting principle . 9 The SEC staff has observed -period that some entities improperly conclude that certain prior adjustments to the financial statements are reclassifications rather than error corrections. If the an error presentation of the prior period does not conform with US GAAP, then the change represents correction, not a reclassification. Illustration 6 -1: Error correction vs. reclassification In 20X2, Company ABC changes the presentation of a certain type of revenue from gross reporting to net reporting. ASC 605 Revenue recognition provides specific guidance to determine if gross or net reporting is appropriate. The company determines that the change is a result of a misapplication of US GAAP and should be treated as the correction of an error, even though its previously reported net income would not change. -useful In the same year, the company determines that the self -insurance accrual provides decision information for investors and wants to include the amounts on the face of the balance sheet even identified though such separately information is not required based on US GAAP or SEC rules. In the prior year, the self -insurance accrual balance was included in the other liabilities line item. To conform the presentation of the prior year balance sheet, the company adds a self -insurance accrual line item and adjusts the prior year other liabilities line item. This change in line item amounts presented in the prior year balance sheet is a reclassification. 6.1.3 Error correction and a change in accounting principle A change in accounting principle occurs when an entity changes from one generally accepted accounting principle to another generally accepted accounting principle or when an entity changes the method of applying an accounting principle. A change from one acceptable accounting p rinciple to another is not an accounting error. See Chapter 3, Change in accounting principle, for additional information on a change in accounting principle. In the period of a change in principle, an entity may discover an error as described in accounting section 6.1, Determining whether an error exists . It is not acceptable to encompass the correction of an error within the accounting for a change in accounting principle. Similar to all other errors, the entity should separately assess the materiality of the error and account for the correction of the error in accordance with ASC 250 and other related guidance as described in the following sections. 9 Nili Shah and Craig Olinger, Remarks before the 2011 AICPA National Conference on Current SEC and PCAOB Developments, Deputy Chief Accountants, Division of Corporation Fi nance, December 6, 2011 rrections Financial reporting developments Accounting changes and error co | 48

54 6 Correction of an error in previously issued financial statements corrections and industry practice 6.1.4 Error Excerpt from Accounting Standards Codification and Error Corrections Accounting Changes Overall — SEC Materials SAB Topic 1.M, Assessing Materiality 250- 10 -S99- 1 GAAP precedence over industry practice. Some have argued to the staff that registrants should be permitted to follow an industry accounting practice even though that practice is inconsistent with authoritative accounting literature. This e are few transactions and the accounting situation might occur if a practice is developed when ther results are clearly inconsequential, and that practice never changes despite a subsequent growth in the number or materiality of such transactions. The staff disagrees with this argument. Authoritative FN72 literature t akes precedence over industry practice that is contrary to GAAP. __________________________ FN72 See AU 411.05. To support a selected accounting treatment, some cite industry practice as the basis for supporting a GAAP. particular accounting treatment, even when that practice is contrary to the requirements of US SAB Topic 1.M acknowledges that industry practice may initially be applied to a few transactions that are clearly inconsequential to a reporting entity. However, if industry practice is inconsistent with US GAAP, SAB Topic 1.M explicitly states that authoritative literature takes precedence over industry practice. an industry) despite consistency of such misapplication within Therefore, the misapplication of US GAAP ( should be evaluated as an error. 6.1.5 Pre -filing communications with the SEC staff Excerpt from Accounting Standards Codification Accounting Changes and Error Corrections — Overall SEC Materials SAB Topic 1.M, Assessing Materiality 250- 10 -S99- 1 General comments. FN73 This SAB is not intended to change current law or guidance in the accounting or auditing literature. This SAB and the authoritative accounting literature cannot specifically address all of the novel and complex business transactions and events that may occur. Accordingly, registrants may account for, and make disclosures about, these transactions and events based on analogies to similar situations or other factors. The staff m ay not, however, always be persuaded that a registrant ’s determination is the most appropriate under the circumstances. When disagreements occur after a transaction or an event has been reported, the consequences may be severe for registrants, auditors, an d, most importantly, the users of financial statements who have a right to expect consistent accounting and reporting for, and disclosure of, similar transactions and events. The staff, therefore, encourages registrants and auditors to discuss on a timely basis with the staff proposed accounting treatments for, or disclosures about, transactions or events that are not specifically covered by the existing accounting literature. __________________________ FN73 The FASB Discussion Memorandum, “ Criteria for Determining Materiality,” states that the financial accounting and reporting process considers that “a great deal of the time might be spent during the accounting process considering insignificant matters... If presentations of financial information are t o be prepared economically on a timely basis and presented in a ” This SAB is not intended to require that misstatements arising concise intelligible form, the concept of materiality is crucial. Accounting changes and error corrections Financial reporting developments | 49

55 6 Correction of an error in previously issued financial statements he aggregate) arising from the normal recurring accounting close from insignificant errors and omissions (individually and in t processes, such as a clerical error or an adjustment for a missed accounts payable invoice, always be corrected, even if the error is identified in the audit process and known to management. Management and the auditor would need to consider the various factors described elsewhere in this SAB in assessing whether such misstatements are material, need to be corrected e Act. Because this SAB does not change to comply with the FCPA, or trigger procedures under Section 10A of the Exchang current law or guidance in the accounting or auditing literature, adherence to the principles described in this SAB should no t raise the costs associated with recordkeeping or with audits of financial statements. Au thoritative literature does not specifically address all of the novel and complex business transactions that may occur. If registrants choose to account for these unique transactions by analogy, the SEC staff may challenge the accounting and ultimately con clude that an error occurred. Registrants are encouraged to discuss with the SEC staff on a timely basis proposed accounting treatments for, or disclosures about, transactions or events that are not covered by the existing accounting literature. This commu filing submission. The SEC staff has nication is typically performed through a written pre- filing submissions that are available on the SEC published protocols and requirements for pre- website at http://www.sec.gov/info/accountants/ocasubguidance.htm . Assessing the materiality of an error 6.2 For all identified errors, entities need to determine in which annual period or periods the error occurred. A materiality analysis should be perfor med for each historical annual period affected. Excerpt from Accounting Standards Codification Overall Accounting Changes and Error Corrections — Other Presentation Matters Materiality Determination for Correction of an Error 250- 10 -45 -27 In determining materiality for the purpose of reporting the correction of an error, amounts shall be related to the estimated income for the full fiscal year and also to the effect on the trend of earnings. Changes that are material with respect to an interim period but not material with respect to the estimated income for the full fiscal year or to the trend of earnings shall be separately disclosed in the interim period. Materiality is a key consideration in financial reporting. However, the FASB Codification provides limited ASC guidance on assessing the materiality of financial statement errors . While 250- 27 relates to 10- 45- interim periods, it is the only authoritative FASB guidance that discusses assessing materiality of errors and says the determination of whether an error is material should be related to the estimated annual 6.4, ection for additional Interim reporting considerations, income and the trend of earnings. See s discussion of assessing materiality of an error to interim periods. authoritative) also discusses The FASB Statement of Financial Accounting Concepts No. 8 (CON 8) (non- materiality and provides some insight as to the lack of prescriptive materiality guidance and the use of judgment when assessing materiality. Accounting changes and error corrections Financial reporting developments | 50

56 6 Correction of an error in p reviously issued financial statements Excerpt from Statement of Concepts (non - authoritative) Concepts FASB Statement of Financial Accounting Qualitative Characteristics of No. 8, Chapter 3, Useful Financial Information Paragraphs QC11 to QC11B investor or other Relevance and materiality are defined by what influences or makes a difference to an decision maker; however, the two concepts can be distinguished from each other. Relevance is a general notion about what type of information is useful to investors. Materiality is entity specific. The omission or misstatement of an item in a financial report is material if, in light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or co rrection of the item. A decision not to disclose certain information or recognize an economic phenomenon may be made, for example, because the amounts involved are too small to make a difference to an investor or other decision maker (they are immaterial). However, magnitude by itself, without regard to the nature of the item and the circumstances in which the judgment has to be made, generally is not a sufficient basis for a materiality judgment. No general standards of materiality could be formulated to t ake into account all the considerations that enter into judgments made by an experienced, reasonable provider of financial information. That is because materiality judgments can properly be made only by those that understand the reporting entity’s pertinen t facts and circumstances. Whenever an authoritative body imposes materiality rules or standards, it is substituting generalized collective judgments for specific individual judgments, and there is no reason to suppose that the collective judgments always are superior. insufficient CON 8’s key concept is that magnitude ( i.e., a quantitative assessment) on its own is generally in the assessment of materiality. The nature of the item and other facts and circumstances also must be assessed. Because the FASB b elieved that no general materiality standard could be formulated given the unique facts and circumstances of each situation, both qualitative and quantitative factors as well as the use of judgment are necessary in assessing materiality. As part of decisions made in interpreting federal securities laws, the Supreme Court has held that a fact that the...fact would have been viewed by the reasonable is material if there is “ a substantial likelihood ’ of information available. ” The Supreme Court also total mix investor as having significantly altered the ‘ delicate assessments of the inferences a ‘ reasonable noted that determinations of materiality require “ 10 ’ would draw from a given set of facts and the significance of those inferences to him... ” shareholder The SEC staff provided further guidance on how to consider the Supreme Court and FASB views on materiality by publishing two Staff Accounting Bulletins (SABs). SAB Topic 1.M (SAB 99) • — states that the assessment of the materiality of errors should consider both and quantitative considerations and discusses more specific aspects of the qualitative qualitative considerations . • SAB Topic 1.N (SAB 108) — addresses quantifying the financial statement effects of errors ( i.e., the quantitative analysis) and provides guidan ce on the correction of errors , including the correction of immaterial errors existing in prior period financial statements . 10 TSC Industries v. Northway, Inc., 426 U.S. 438, 449 (1976) Accounting changes and error corrections Financial reporting developments | 51

57 6 Correction of an error in previously issued financial statements Combined, the SAB Topics require that a materiality analysis for errors generally includes all of the following: Qualitative analysis (Topic 1.M) • Iron curtain method quantitative analysis (Topic 1.N) • • Rollover method quantitative analysis (Topic 1.N) Private company considerations when assessing the materiality of a prior period error Although the SEC staff ’s views expressed in SAB Topic 1.M and SAB Topic 1.N are applicable only to public registrants, we believe private companies should consider this materiality guidance when assessing a prior period error and whether and how to restate. The SAB Topics provide the most comprehensive materiality guidance issued by a standard setter or regulator available and provide a well thought -out framework for assessing the concepts of relevance ( qualitative) and magnitude ( i.e., quantitative) i.e., set forth in CON 8. 6.2.1 Assessing materiality in annual financial reporting periods A decision of whether to restate and how to reflect that restatement is based on an evaluation of the error which necessarily includes qualitative and quantitative considerations. While US GAAP provides little guidance as it relates to assessing materiality, the SEC staff has issued fairly extensive guidan ce on the topic emphasizing the need to consider qualitative factors when assessing materiality. SAB Topic 1.M makes it clear that using quantitative rules of thumb, such as 5% of net income, is only the first step in assessing materiality. Excerpt from Ac counting Standards Codification Overall Accounting Changes and Error Corrections — SEC Materials SAB Topic 1.M, Assessing Materiality 10 -S99- 1 250- 1. Assessing materiality Facts: During the course of preparing or auditing year -end financial statements, financial management or the registrant ’s independent auditor becomes aware of misstatements in a registrant ’s financial statements. When combined, the misstatements result in a 4% overstatement of net income and a $.02 (4%) overstatement of earnings per share. Because no item in the registrant ’s consolidated financial statements is misstated by more than 5%, management and the independent auditor conclude FN24 that the deviation from G AAP is immaterial and that the accounting is permissible. -10- Question: FASB ASC paragraph 105 05 , -6 (Generally Accepted A ccounting Principles Topic) states “The provisions of this Statement need not be applied to immaterial items. ’s view, may a ” In the staff ts assume the immateriality of items that fall below a registrant or the auditor of its financial statemen percentage threshold set by management or the auditor to determine whether amounts and items are material to the financial statements? Interpretive Response: No. The staff is aware that certain registr ants, over time, have developed quantitative thresholds as “rules of thumb ” to assist in the preparation of their financial statements, and that auditors also have used these thresholds in their evaluation of whether items might be sers of a registrant ’s financial statements. One rule of thumb in particular considered material to u FN25 omission suggests that the misstatement or of an item that falls under a 5% threshold is not material in the absence of particularly egregious circumstances, such as self -dea ling or misappropriation by senior management. The staff reminds registrants and the auditors of their financial statements that exclusive reliance on this or any percentage or numerical threshold has no basis in the accounting literature or the law. Accounting changes and error corrections Financial reporting developments | 52

58 6 Correction of an error in previously issued financial statements The use of a percentage as a numerical threshold, such as 5%, may provide the basis for a preliminary assumption that — without considering all relevant circumstances — a deviation of less than the specified percentage with respect to a particular item on the registrant ’s financial statements is unlikely to be material. The staff has no objection to such a “ rule of thumb ” as an initial step in assessing materiality. But quantifying, in percentage terms, the magnitude of a misstatement is only the beginning of a n analysis of materiality; it cannot appropriately be used as a substitute for a full analysis of all relevant considerations. Materiality concerns the significance of an item to users of a registrant ’s financial statements. A matter is “ material” if there is a substantial likelihood that a reasonable person would consider it important. In its Concepts Statement 2, the FASB stated the essence of the concept of materiality as follows: if, in the light of The omission or misstatement of an item in a financial report is material surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced FN26 by the inclusion or correction of the item. Th is formulation in the accounting literature is in substance identical to the formulation used by the courts in interpreting the federal securities laws. The Supreme Court has held that a fact is material if there is - a substantial likelihood that the...f act would have been viewed by the reasonable investor as FN27 “total mix ” of information made available. having significantly altered the Under the governing principles, an assessment of materiality requires that one views the facts in the ” of total mix context of the “surrounding circumstances, ” as the accounting literature puts it, or the “ information, in the words of the Supreme Court. In the context of a misstatement of a financial statement item, while the “ ” includes the size in numerical or percentage terms of the total mix misstatement, it also includes the factual context in which the user of financial statements would view the financial statement item. The shorthand in the accounting and auditing literature for this analysis is ment and the auditor must consider both “quantitative ” and “qualitative ” factors that financial manage FN28 ’s materiality. in assessing an item Court decisions, Commission rules and enforcement actions, and FN29 accounting and auditing literature have all considered “qualitativ e” factors in various contexts. The FASB has long emphasized that materiality cannot be reduced to a numerical formula. In its Concepts Statement 2, the FASB noted that some had urged it to promulgate quantitative materiality situations. The FASB rejected such an approach as representing only a guides for use in a variety of “minority view, stating - The predominant view is that materiality judgments can properly be made only by those who have all the facts. The Board ’s present position is that no general standards of materiality could be formulated to take into account all the considerations that enter into an experienced human FN30 judgment. The FASB noted that, in certain limited circumstances, the Commission and other authoritative bodies had issued qua ntitative materiality guidance, citing as examples guidelines ranging from one to ten FN31 percent with respect to a variety of disclosures. And it took account of contradictory studies, one showing a lack of uniformity among auditors on materiality judgme nts, and another suggesting FN32 widespread use of a “ rule of thumb ” of five to ten percent of net income. The FASB also ’s considered whether an evaluation of materiality could be based solely on anticipating the market FN33 reaction to accounting information. Accounting changes and error corrections Financial reporting developments | 53

59 6 Correction of an error in previously issued financial statements “ the onerous duty of making materiality The FASB rejected a formulaic approach to discharging FN34 decisions in favor of an approach that takes into account all the relevant considerations. In so ” doing, it made clear that - [M]agnitude by itself, without regard to the nature of the item and the circumstances in which the FN35 generally be a sufficient basis for a materiality judgment. judgment has to be made, will not he relevant Evaluation of materiality requires a registrant and its auditor to consider all t circumstances, and the staff believes that there are numerous circumstances in which misstatements below 5% could well be material. Qualitative factors may cause misstatements of quantitatively small iting literature: amounts to be material; as stated in the aud As a result of the interaction of quantitative and qualitative considerations in materiality misstatements of relatively small amounts that come to the auditor ’s attention could judgments, FN36 ts. have a material effect on the financial statemen ___________________________ FN24 AU 312 states that the auditor should consider audit risk and materiality both in (a) planning and setting the scope for the audit and (b) evaluating whether the financial statements taken as a whole are fairly pre sented in all material respects in conformity with GAAP. The purpose of this SAB is to provide guidance to financial management and independent auditors with respect to the evaluation of the materiality of misstatements that are identified in the audit process or preparation of the i.e., materiality ” in financial statements ( (b) above). This SAB is not intended to provide definitive guidance for assessing “ other rules that other contexts, such as evaluations of auditor independence, as other factors may apply. There may be Rule 2a -4, 17 CFR 270.2a -4, under the Investment Company Act of 1940. address financial presentation. See, e.g., FN25 As used in this SAB, “ misstatement ” or “omission ” refers to a financial statement assertion that would not be in conformi ty with GAAP. FN26 Concepts Statement 2, paragraph 132. See also Concepts Statement 2, Glossary of Terms — Materiality. FN27 TSC Industries v. Northway, Inc., 426 U.S. 438, 449 (1976). See also Basic, Inc. v. Levinson, 485 U.S. 224 (1988). As the Supreme C ourt has noted, determinations of materiality require “ delicate assessments of the inferences a `reasonable shareholder’ would draw from a given set of facts and the significance of those inferences to him... ” TSC Industries, 426 U.S. at 450. FN28 Concepts Statement 2, paragraphs 123 e.g., -124; AU 312A.10 (materiality judgments are made in light of surrounding See, circumstances and necessarily involve both quantitative and qualitative considerations); AU 312A.34 ( “Qualitative the auditor in reaching a conclusion as to whether misstatements are material. considerations also influence ”). As used in the accounting literature and in this SAB, “qualitative ” materiality refers to the surrounding circumstances that inform an investor statement entries. Whether events may be material to investors for non -financial reasons is a ’s evaluation of financial matter not addressed by this SAB. FN29 See, e.g., Rule 1 -02(o) of Regulation S -X, 17 CFR 210.1- 02(o), Rule 405 of Regulation C, 17 CFR 230.405, and Rule 12b -2, 17 CFR 240.12b .11, 317.13, 411.04 n. 1, and 508.36; In re Kidder Peabody Securities Litigation, 10 F. Supp. -2; AU 312A.10 - 2d 398 (S.D.N.Y. 1998); Parnes v. Gateway 2000, Inc., 122 F.3d 539 (8th Cir. 1997); In re Westinghouse Securities Litigation, 90 F.3d 696 (3d Cir. 1996); In the Matter of W.R. Grace & Co., Accounting and Auditing Enforcement Release ( “AAER ”) 1140 (June 30, 1999); In the Matter of Eugene Gaughan, AAER 1141 (June 30, 1999); In the Matter of Thomas Scanlon, AAER 1142 (June 30, 1999); and In re Sensormatic Electronics Corporation, Sec. Act Rel. No. 7518 (March 25, 1998). FN30 Concepts Statement 2, paragraph 131. FN31 Concepts Statement 2, paragraphs 131 and 166. FN32 Concepts Statement 2, paragraph 167. FN33 Concepts Statement 2, paragraphs 1 -169. 68 FN34 Concepts Statement 2, paragraph 170. FN35 Concepts Statement 2, paragraph 125. FN36 AU 312.11. Companies cannot solely assess errors based on quantitative factors. The SEC staff has emphasized the need to qualitatively evaluate information and in SAB Topic 1.M provided several qualitative considerations. are not all qualitative factors listed in SAB Topic 1.M (see section 6.2.2, Qualitative analysis ) The - inclusive nor are they intended to be a check list . Registrants , as well as private companies , that discover an error should consider the total mix of information ( i.e., quantitative and qualitative factors) whether the error is material. to determine that an investor would consider Accounting changes and error corrections Financial reporting developments | 54

60 6 Correction of an error in previously issued financial statements Qualitative 6.2.2 analysis Excerpt from Accounting Standards Codification Accounting Changes and Error Corrections — Overall SEC Materials SAB Topic 1.M, Assessing Materiality 10 1 250- -S99- Assessing materiality [ continued 1. ] Among the considerations that may well render material a quantitatively small misstatement of a financial statement item are - whether the misstatement arises from an item capable of precise measurement or whether it FN37 arises from an estimate and, if so, the degree of imprecision inherent in the estimate whether the misstatement masks a change in earnings or other trends whether the misstatement hides a failure to meet analysts ’ consensus expectations for the enterprise whether the misstatement changes a loss into income or vice versa whether the misstatement concerns a segment or other portion of the registrant ’s business that has been identified as playing a significant role in the registrant ’s operations or profitability whether the misstatement affects the registrant ’s compliance with regulatory requirements whether the misstatement affects the registrant ’s compliance with loan covenants or other contractual requirements ’s compensation whether the misstatement has the effect of increasing management — for example, by satisfying requirements for the award of bonuses or other forms of incentive compensation whether the misstatement involves concealment of an unlawful transaction. This is not an exhaustive list of the circumstances that may affect the materiality of a qu antitatively FN38 small misstatement. Among other factors, the demonstrated volatility of the price of a registrant ’s securities in response to certain types of disclosures may provide guidance as to whether investors quantitatively small misstateme nts as material. Consideration of potential market reaction to regard disclosure of a misstatement is by itself “ too blunt an instrument to be depended on ” in considering FN39 s whether a fact is material. When, however, management or the independent auditor expect (based, for example, on a pattern of market performance) that a known misstatement may result in a significant positive or negative market reaction, that expected reaction should be taken into account FN40 when considering whether a misstatement is material. ___________________________ FN37 As stated in Concepts Statement 2, paragraph 130: Another factor in materiality judgments is the degree of precision that is attainable in estimating the judgment item. The amount of deviation that is considered immate rial may increase as the attainable degree of precision decreases. For example, accounts payable usually can be estimated more accurately than can contingent liabilities arising from litigation or threats of it, and a deviation considered to be material in the first case may be quite trivial in the second. This SAB is not intended to change current law or guidance in the accounting literature regarding accounting estimate s. e.g., See, -33 (July 1971) [Subtopic 250- 10] . Accounting Principles Board Opinion 20, Accounting Changes 10, 11, 31 FN38 The staff understands that the Big Five Audit Materiality Task Force ( “Task Force ”) was convened in March of 1998 and has made recommendations to the Auditing Standards Board including suggestions regarding communication s with audit committees about unadjusted misstatements. See generally Big Five Audit Materiality Task Force. “Materiality in a Financial Statement Audit — Considering Qualitative Factors When Evaluating Audit Findings ” (August 1998). FN39 See Concepts Stat ement 2, paragraph 169. FN40 If management does not expect a significant market reaction, a misstatement still may be material and should be evaluated under the criteria discussed in this SAB. Accounting changes and error corrections Financial reporting developments | 55

61 6 Correction of an error in previously issued financial statements An item is material if there is a substantial likelihood that a reasonable person would consider it important. SAB Topic 1.M includes a list of possible qualitative and quantitative factors that an entity assessing how a reasonable might consider s materiality . They include , but are when investor consider the evaluation of whether the misstatement: not limited to, • arises from an item that can be precisely measured or is an estimate • results in a change of earnings trend or other trends • results in a failure to meet analysts ’ consensus expectations • s or a loss into income changes income to a los • affects segment information and related trends • affects compliance with regulatory requirements • affects compliance with loan covenants or other contractual requirements • has the effect of increasing management ’s compensation, and act eals an unlawful • conc SAB Topic 1.M notes that other items also may affect the determination of whether a misstatement is material. For example, the SEC staff suggests that companies consider “ ” of the demonstrated volatility ’s securities prices, and the potential reaction to the misstatement as additional factors to registrant consider in assessing materiality. The SEC staff has indicated (i) the mere fact that the market may react one way or another is not necessarily the guide as to what is material, (ii) there has to be a well -established pattern of market reaction to news before causes for such market reaction can be judged (the SEC gave an example of a well- established pattern where, for the last six quarters, a positive or negative variance of one cent in actual EPS compared to expectations, led to a 20 percent change — positively or negatively — in stock market value), and (iii) the entity is not supposed to speculate or guess at market reactions. Entities should not take a “ checklist ” approach to asses sing qualitative factors. Instead, an entity should consider all quantitative and qualitative factors that may be relevant in its circumstances, regardless of whether such factor is included in SAB Topic 1.M examples. The following SEC staff speech provides their views on qualitative factors. Extract from SEC staff speech by Mr. Mark Mahar December 8, 2008 AICPA National Conference on Current SEC and PCAOB Developments The staff does appreciate that materiality decisions necessarily involve the use of judgment. Specific to this circumstance, judgment includes developing a robust analysis that steps into the investors ’ shoes, identifying what is significant to investors e limited to the factors ’ decisions and should not b provided in SAB 99 because those factors are neither exhaustive nor intended to preclude conclusions that quantitatively larger errors may be considered not material. Rather, evaluators of materiality should consider the relevant information considered important to investors which may include non - SAB 99 specified circumstances ...when I say such as, let us be clear there could be other circumstances, so such as considering: • company specific trends and performance metrics that may inf luence investment decisions; or • when a factor important to a reasonable investor is impacted by an unrelated circumstance. For example, when an error in the income statement is magnified simply by occurring during a period in which net income is abnormally small as compared to historical and expected future trends. Accounting changes and error corrections Financial reporting developments | 56

62 6 Correction of an error in previously issued financial statements Topic 1.M are not all- As previously noted, the qualitative factors in SAB inclusive. Examples of considerations not explicitly mentioned in SAB Topic 1.M include, but are not limited to, whether the error: Affects entity -specific trends and performance metrics ( e.g., non- GAAP measurements) that may • influence investment decisions • Affects metrics that do not drive investor conclusions or are not important to investor models • -time item and does not alter investors ’ perceptions of key trends affecting the entity Is a one • Does not affect a business segment or other portion of the registrant ’s business that investors regard as driving valuation or risks Relates to items involving related parties or known users ( e.g., • whether the external parties to the transaction are related to the entity ’s management) • Causes the disclosures to not be adequate or omit inform ation not specifically required by US GAAP but is important to the understanding of the financial statements or conveys something in a false or misleading manner • Affects other information communicated in documents containing the audited financial statements that may reasonably be expected to influence the economic decisions of the users of the financial “management discussion and analysis” information included in ) statements ( e.g., • financial statements that are publicly issued (even May have a material effect on the next interim though the misstatement is immaterial to the current period financial statements) • Relates to the incorrect selection or application of an accounting policy that has an immaterial effect on the current period ’s financial stat ements but is likely to have a material effect on future periods ’ financial statements Evaluating whether an item is material requires judgment. The existence of quantitative or qualitative factors is individually considered in the materiality assessment . However, in practice it is often difficult to conclude that quantitatively large errors are immaterial based on qualitative factors. Illustration 6 -2: Qualitative factor considerations Scenario A a small portion of the registrant An error that, if corrected, would result in the default of ’s debt that could easily be cured or paid off from existing working capital may not otherwise be considered significant material. On the other hand, if a - amount of debt would be in default (or triggered via cross default provisions), the error would likely be deemed material, regardless of its quantitative effect. Scenario B A relatively small quantitative error that results in satisfying the threshold for the award of bonuses or management would be considered “ more significant ” in other forms of incentive compensation for assessing its significance to users of the financial statements. The scenarios in the previous illustration indicate that evaluating an error solely based on quantitative or qualitative factors is not su fficient regardless of the quantitative results. Entities must consider qualitative factors when the error is small in magnitude. In addition, qualitative factors also should be considered sual that a quantitatively significant when an error is quantitatively large. However, we expect it is unu error is overcome through qualitative factors. Accounting changes and error corrections Financial reporting developments | 57

63 6 issued financial statements Correction of an error in previously 6.2.2.1 — small intentional misstatements Qualitative analysis Excerpt from Accounting Standards Codification Accounting Changes and Error Corrections — Overall SEC Materials SAB Topic 1.M, Assessing Materiality 250- 10 -S99- 1 ] [continued 1. Assessing materiality For the reasons noted above, the staff believes that a registrant and the auditors of its financial statements should not assume that even small intentional misstatements in financial statements, for FN41 manage ” earnings, are immaterial. While the intent of example those pursuant to actions to “ management does not render a misstatement material, it may provide significant evidence of materiality. The evidence may be particularly compelling where management has intentionally misstated items in the financial statements to “ manage ” reported earnings. In that instance, it presumably has done so believing that the resulting amounts and trends would be significant to users FN42 of the registrant . The staff believes that investors generally would regard as ’s financial statements significant a management practice to over - or under -state earnings up to an amount just short of a percentage threshold in order to “manage ” earnings. Investors presumably also would regard as significant an accounting practice that, in ess ence, rendered all earnings figures subject to a management -directed margin of misstatement. __________________________ FN41 Intentional management of earnings and intentional misstatements, as used in this SAB, do not include insignificant errors an d sions that may occur in systems and recurring processes in the normal course of business. See notes 37 and 49 infra. omis FN42 Assessments of materiality should occur not only at year -end, but also during the preparation of each quarterly or interim financial s e.g., In the Matter of Venator Group, Inc., AAER 1049 (June 29, 1998). tatement. See, The SEC staff is concerned about quantitatively small errors that may be material on a qualitative basis, including instances where management has intentionally misstated items in the financial statements to “manage e.g., achieve a bonus target). ” reported earnings or achieve some other result ( Intentional but quantitatively small errors by management may have additional consequences, including violation of the books and records provisions of the Securities Exchange Act of 1934. See additional information at section 6.2.4, Intentional misstatements, including considerations of the books and records provision . 6.2.2.2 Qualitative analysis — segments Excerpt from Accounting Standards Codification — Overall Accounting Changes and Error Corrections SEC Materials SAB Topic 1.M, Assessing Materiality 250- 10 -S99- 1 1. Assessing materiality (continued) The materiality of a misstatement may turn on where it appears in the financial statements. For example, a misstatement may involve a segment of the registrant ’s operations. In that instance, in assessing materiality of a misstatement to the f inancial statements taken as a whole, registrants and their auditors should consider not only the size of the misstatement but also the significance of the FN43 “A misstatement of the revenu e segment information to the financial statements taken as a whole. Accounting changes and error corrections Financial reporting developments | 58

64 6 Correction of an error in previously issued financial statements and operating profit of a relatively small segment that is represented by management to be important FN44 to the future profitability of the entity is more likely to be material to investors than a ” misstatement in a segment that management has not ident ified as especially important. In assessing — as with materiality generally - situations the materiality of misstatements in segment information may arise in practice where the auditor will conclude that a matter relating to segment information is qualitat ively material even though, in his or her judgment, it is quantitatively immaterial to the FN45 financial statements taken as a whole. _________________________ FN43 See, e.g., In the Matter of W.R. Grace & Co., AAER 1140 (June 30, 1999). FN44 AU 9326.33. FN45 Id. The effect of the error(s) to segment information, both quantitatively and qualitatively, should be considered as part of the entity ’s analysis of the effect on the financial statements taken as a whole. The qualitative assessment of a misstatement related to a small segment that is important to future growth could differ from the assessment related to either another small segment that is not expected to grow significant ly or a larger segment that is more mature. 6.2.3 Aggregation and netting Exce rpt from Accounting Standards Codification Overall Accounting Changes and Error Corrections — SEC Materials SAB Topic 1.M, Assessing Materiality -S99- 1 10 250- Aggregating and Netting Misstatements. In determining whether multiple misstatements cause the financial statements to be materially misstated, registrants and the auditors of their financial statements should consider each misstatement FN46 A registrant and its auditor should separately and the aggregate effect of all misstatements. “consider whether, in relation evaluate misstatements in light of quantitative and qualitative factors and to individual amounts, subtotals, or totals in the financial statements, they materially misstate the FN47 financ This requires consideration of the significance of an item ial statements taken as a whole.” to a particular entity (for example, inventories to a manufacturing company), the pervasiveness of the misstatement (such as whether it affects the presentati on of numerous financial statement items), and FN48 the effect of the misstatement on the financial ... statements taken as a whole Registrants and their auditors first should consider whether each misstatement is material, irrespective of its effect when co mbined with other misstatements. The literature notes that the analysis should consider whether the misstatement of “ individual amounts ” causes a material misstatement of the financial statements taken as a whole. As with materiality generally, this analys is requires consideration of both quantitative and qualitative factors. If the misstatement of an individual amount causes the financial statements as a whole to be materially misstated, that effect cannot be eliminated by other misstatements whose effect may be to diminish the impact of the misstatement on other financial statement items. To take an obvious example, if a ’s revenues are a material financial statement item and if they are materially overstated, the registrant financial statements taken as a whole will be materially misleading even if the effect on earnings is completely offset by an equivalent overstatement of expenses. Accounting changes and error corrections Financial reporting developments | 59

65 6 Correction of an error in previously issued financial statements Even though a misstatement of an individual amount may not cause the financial statements taken as a whole to be materially misstated, it may nonetheless, when aggregated with other misstatements, render the financial statements taken as a whole to be materially misleading. Registrants and the auditors of their financial statements accordingly should consider the effect of the misstatement on subtotals or totals. The auditor should aggregate all misstatements that affect each subtotal or total and consider whether the misstatements in the aggregate affect the subtotal or total in a way that FN49 causes the registrant ’s financial stat ements taken as a whole to be materially misleading. The staff believes that, in considering the aggregate effect of multiple misstatements on a subtotal or are when total, registrants and the auditors of their financial statements should exercise particular c considering whether to offset (or the appropriateness of offsetting) a misstatement of an estimated amount with a misstatement of an item capable of precise measurement. As noted above, assessments given the imprecision inherent in estimates, there is of materiality should never be purely mechanical; by definition a corresponding imprecision in the aggregation of misstatements involving estimates with those that do not involve an estimate. Registrants and auditors also should consider the effect of misstatements from prior periods on the current financial statements . For example, the auditing literature states, Matters underlying adjustments proposed by the auditor but not recorded by the entity could potentially cause future financial statements t o be materially misstated, even though the auditor FN50 has concluded that the adjustments are not material to the current financial statements. This may be particularly the case where immaterial misstatements recur in several years and the cumulative effect becomes material in the current year. ____________________ FN46 concept of materiality recognizes that some matters, either individually or in the The auditing literature notes that the “ aggregate, are important for fair presentation of financial st atements in conformity with generally accepted accounting AU 312.03. See also AU 312.04. principles.” FN47 AU 312.34. Quantitative materiality assessments often are made by comparing adjustments to revenues, gross profit, pretax s, stockholders’ equity, or individual line items in the financial statements. The particular items in and net income, total asset the financial statements to be considered as a basis for the materiality determination depend on the proposed adjustment to be made and other factors, su ch as those identified in this SAB. For example, an adjustment to inventory that is immaterial to pretax income or net income may be material to the financial statements because it may affect a working capital ratio or cause the registrant to be in default of loan covenants. FN48 AU 508.36. FN49 AU 312.34. FN50 AU 380.09. In some circumstances, multiple errors exist relating to previously issued financial statements. SAB Topic 1.M does not prohibit offsetting. Rather, it provides guidance on how the offsetting of errors SAB discusses a “two should be considered. The process ” that should be followed when evaluating -step offsetting errors. First , each error should be evaluated sep arately (i.e., perform a quantitative and qualitative materiality analysis for each error individually) . If an individual error causes the financial statements taken as a s that diminish its cannot be offset by other error . effect whole to be misstated, that error hanges and error corrections Financial reporting developments Accounting c | 60

66 6 Correction of an error in previously issued financial statements -3: Illustration 6 Multiple error analysis An entity identifies the following errors: • Overstatement of revenue due to using the incorrect unit of accounting Overstatement of a contingent liability • The entity performs an analysis of the overstatement of revenue individually and determines that the e.g., quantitatively error overstates revenue and net income by 11% and 7%, revenue error is material ( respectively, and qualitative factors also indicate the error is material because the compa ny and its analysts measure the company ’s results period to period based on revenue growth). Consideration of the offsetting effect of the overstatement of the contingent liability is not allowed. Second, if each individual error is not material on a standalone basis , companies should combine the out of effe the effe ct of prior period errors reversing in the current period ( i.e., , including ct of all errors period amounts) , and determine whether the aggregate effect is material based on quantitative and qualitative considerations . In evaluating the materiality of errors, companies should consider the appropriateness of offsetting an error of an estimated amount with an error of an item capable of precise measurement ( i.e., offsetting “hard ” debits with “soft ” credits). SAB Topic 1.M reminds companies that the assessments of materiality should never be purely mechanical and to exercise care when offsetting error s that can be precisely measured with error s involving significant judgmental estimates. The eva luation of eriality of errors, individually or in the aggregate, applied to an individual line the mat -total, or total, should be applied in the same manner as to any other measure ( pretax item, sub e.g., income or net income) . That is, the effect of the er rors on line items, subtotals and totals is only one of need s to evaluate the effe ct of the error or the factors to consider in assessing materiality. The company on the financial statements taken as a whole considering b oth aggregated errors, as appropriate, quantitative and qualitative factors . Thus , in determining whether a n error(s) is material to the financial statements taken as a whole, the company should consider whether and to what extent the error(s) affects a line item or subtotal that is significant to the users of the financial statements. -4: Illustration 6 Aggregation of error analysis An entity identifies the following errors: Understatement of costs of goods sold and accounts payable due to purchasing/receipt cut -off issues • • Understatement of costs of goods sold and warranty accrual due to a miscalculation of warranty costs Each error was separately determined to be immaterial under a quantitative and qualitative analysis. The entity performs a materiality analysis on the combined effect of these errors ( i.e., the cumulative understatement of costs of goods sold and current liabilities). The entity analyzes the combined effect of these errors to all related financial statement line items ( e.g., cost of goods sold, operating income, e.g., net income , current liabilities) and qualitative considerations ( effect on working capital ratio, debt covenants) to assess whether the aggregation of errors is material to the financial statements. Accounting changes and error corrections Financial reporting developments | 61

67 6 Correction of an error in previously issued financial statements misstatements, including considerations of the books and records 6.2.4 Intentional provision Excerpt from Accounting Standards Codification Changes and Error Corrections Accounting Overall — SEC Materials SAB Topic 1.M, Assessing Materiality 250- 10 -S99- 1 2. Immaterial Misstatements that are Intentional Facts: A registrant ’s management intentionally has made adjustments to various financial statement items in a manner inconsistent with GAAP. In each accounting period in which such actions were taken, none of the individual adjustments is by itself material, nor is the aggregate effect on the financial for the period. The registrant ’s earnings “management ” has statements taken as a whole material been effected at the direction or acquiescence of management in the belief that any deviations from GAAP have been immate rial and that accordingly the accounting is permissible. Question: In the staff ’s view, may a registrant make intentional immaterial misstatements in its financial statements? Interpretive Response: No. In certain circumstances, intentional immaterial miss tatements are unlawful. Considerations of the books and records provisions under the Exchange Act. FN51 — (7) of the registrants must comply with Sections 13(b)(2) Even if misstatements are immaterial, FN52 Securities Exchange Act of 1934 (the “ Under these provisions, each registrant ”). Exchange Act FN53 with securities registered pursuant to Section 12 of the Exchange Act, or required to file reports FN54 must make and keep books, records, and accounts, which, in pursuant to Section 15(d), reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the registrant and must maintain internal accounting controls that are sufficient to provide reasonable assurances that, among other things, transactions are recorded as necess ary to permit the FN55 preparation of financial statements in conformity with GAAP. In this context, determinations of ” what constitutes “ reasonable assurance ” and “reasonable detail” are based not on a “ materiality analysis but on the level of detail and degree of assurance that would satisfy prudent officials in the FN56 conduct of their own affairs. Accordingly, failure to record accurately immaterial items, in some instances, may result in violations of the securities laws. FN57 regarding the “reasonableness ” The staff recognizes that there is limited authoritative guidance ’s policy in standard in Section 13(b)(2) of the Exchange Act. A principal statement of the Commission FN58 this area is set forth in an address given in 1981 by then Chairman Harold M. Williams. In his address, Chairman Williams noted that, like materiality, “ reasonableness ” is not an “absolute standard FN59 of exactitude for corporate records. ” Unlike materiality, however, “ reasonableness ” is not solely a measure of the significance o f a financial statement item to investors. “Reasonableness,” in this context, ’s failure to correct a known misstatement implicates the reflects a judgment as to whether an issuer FN60 — (7) of the Exchange Act. purposes underlying the accounting provisions of Sections 13(b)(2) Accounting changes and error corrections Financial reporting developments | 62

68 6 on of an error in previously issued financial statements Correcti ’ s obligation to keep books In assessing whether a misstatement results in a violation of a registrant reasonable detail, ” registrants and their auditors should consider, in and records that are accurate “ in ’s potential addition to the factors discussed above concerning an evaluation of a misstatement materiality, the factors set forth below. The significance of the misstatement. Though the staff does not believe that registrants need to make finely calibrated determinations of significance with respect to immaterial items, plainly it is “reasonable” to treat misstatements whose effects are clearly inconsequential differently than more significant ones. How the misstatement arose. It is unlikely that it is ever “ ” for registrants to record reasonable misstatements or not to correct known misstatements — even immaterial ones — as part of an ongoing effort directed by or known to senior management for the pu rposes of “ managing” earnings. On the other hand, insignificant misstatements that arise from the operation of systems or recurring processes in the normal course of business generally will not cause a registrant ’s FN61 in reasonable det ” books to be inaccurate “ ail. The cost of correcting the misstatement. The books and records provisions of the Exchange Act FN62 do not require registrants to make major expenditures to correct small misstatements. Conversely, where there is little cost or delay involved in correcting a misstatement, failing to do so is unlikely to be “ ” reasonable. The clarity of authoritative accounting guidance with respect to the misstatement. Where reasonable minds may differ about the appropriate accounting treatment of a financial sta tement item, a failure to correct it may not render the registrant ’s financial statements inaccurate “ in reasonable detail. ” Where, however, there is little ground for reasonable disagreement, the case for leaving a misstatement uncorrected is correspondin gly weaker. ” that registrants and their auditors may ordinarily reasonableness There may be other indicators of “ consider. Because the judgment is not mechanical, the staff will be inclined to continue to defer to judgments that “ ’s accounting provisions allow a business, acting in good faith, to comply with the Act FN63 -effective way. in an innovative and cost ” ____________________________ FN51 ASC paragraph 105- 10- 05 -6 states that “[t]he provisions of the Codification need not be applied to immaterial FASB items.” This SAB is consistent with that provision of the Codification . In theory, this language is subject to the interpretation that the registrant is free intentionally to set forth immaterial items in financial statements in a manner that plainly would be contrary to GAAP if the misstatement were material. The staff believes that the FASB did not intend this result. FN52 — (7). 15 U.S.C. 78m(b)(2) FN53 15 U.S.C. 78l. FN54 15 U.S.C. 78o(d). FN55 Criminal liability may be imposed if a person knowingl y circumvents or knowingly fails to implement a system of internal accounting controls or knowingly falsifies books, records or accounts. 15 U.S.C. 78m(4) and (5). See also Rule 13b2 -1 under 1, which states, “No person sha the Exchange Act, 17 CFR 240.13b2- ll, directly or indirectly, falsify or cause to be falsified, any book, record or account subject to Section 13(b)(2)(A) of the Securities Exchange Act. ” FN56 15 U.S.C. 78m(b)(7). The books and records provisions of section 13(b) of the Exchange Act origin ally were passed as part of the Foreign Corrupt Practices Act ( “FCPA” ). In the conference committee report regarding the 1988 amendments to the FCPA, the committee stated: The conference committee adopted the prudent man qualification in order to clarify t hat the current standard does not connote an unrealistic degree of exactitude or precision. The concept of reasonableness of necessity contemplates the weighing of a number of relevant factors, including the costs of compliance. Cong. Rec. H2116 (daily ed. April 20, 1988). FN57 So far as the staff is aware, there is only one judicial decision that discusses Section 13(b)(2) of the Exchange Act in any detail, SEC v. World -Wide Coin Investments, Ltd., 567 F. Supp. 724 (N.D. Ga. 1983), and the courts generally have found that no pri vate right of action exists under the accounting and books and records provisions of the Exchange Act. See e.g., Lamb v. Phillip Morris Inc., 915 F.2d 1024 (6th Cir. 1990) and JS Service Center Corporation v. General Electric Technical Service s Company, 937 F. Supp. 216 (S.D.N.Y. 1996). Accounting changes and error corrections Financial reporting developments | 63

69 6 Correction of an error in previously issued financial statements FN58 The Commission adopted the address as a formal statement of policy in Securities Exchange Act Release No. 17500 (January 29, 1981), 46 FR 11544 (February 9, 1981), 21 SEC Docket 1466 (February 10, 1981). FN59 Id. at 46 FR 11546. FN60 Id. FN61 For example, the conference report regarding the 1988 amendments to the FCPA stated: The Conferees intend to codify current Securities and Exchange Commission (SEC) enforcement policy that penalties not be imposed for insignificant or technical infractions or inadvertent conduct. The amendment adopted by the Conferees [Section 13(b)(4)] accomplishes this by providing that criminal penalties shall not be imposed for failing to comply with the FCPA ’s books and records or accounting pro visions. This provision [Section 13(b)(5)] is meant to ensure that criminal penalties would be imposed where acts of commission or omission in keeping books or records or administering accounting controls have the purpose of falsifying books, records or ac counts, or of circumventing the accounting controls set forth in the Act. This would include the deliberate falsification of books and records and other conduct calculated to evade the internal accounting controls pril 20, 1988). requirement. Cong. Rec. H2115 (daily ed. A FN62 [t]housands of dollars ordinarily As Chairman Williams noted with respect to the internal control provisions of the FCPA, “ should not be spent conserving hundreds. ” 46 FR 11546. FN63 Id., at 11547. SAB Topic 1.M addresses situations w here management intentionally misstates the financial statements by amounts that are not material in an effort to manage earnings. I ntentional violations of the books and records provisions of the Securities Exchange Act of 1934 ( ) may be an unlawful act, and Exchange Act thus subject registrants and their independent auditors to the reporting requirements of Section 10A of the Exchange Act. The books and records provisions of the Exchange Act, added by the Foreign Corrupt Practices Act of 1977, require registrants to make and keep books, records, and accounts, which, in reasonable detail, accurately and dispositions of assets of the registrant. Registrants also must and fairly reflect the transactions re sufficient to provide reasonable assurances that, among maintain internal accounting controls that a other things, transactions are recorded as necessary to permit the preparation of financial statements in conformity with US GAAP. In assessing whether a misstatement results in a violation of the books and records provisions (i.e., in “reasonable detail ”), SAB Topic 1.M whether the registrant ’s books and records are accurate in addition to the materiality assessment: consider the following factors indicates that companies the significance of the mi sstatement • how the misstatement arose • the cost of correcting • the misstatement and • accounting guidance with respect to the misstatement. the clarity of authoritative Other indicators of can also be considered. This analysis is judgmental. reasonableness In evaluating the four factors above, the SEC staff acknowledges that a registrant ’s books and records may contain inconsequential misstatements that arise from different circumstances. However, inconsequential items may still be problematic. Immaterial misstatements that arise from the operation of systems or recurring processes in the normal course of business ( e.g., period -end closings) would be viewed differently than efforts by management to intentionally record or not correct known misstatements. SA B Topic 1.M also notes that situations where there is little cost to correct an error may be viewed differently than those that would require major delays in reporting or expenditures to correct. Finally, the SAB states that tements contain errors that are clearly in contravention of the accounting registrants whose financial sta literature may have a difficult time sustaining the argument that a books and records violation does not exist. Accounting changes and error corrections Financial reporting developments | 64

70 6 ncial statements Correction of an error in previously issued fina — Rollover and iron curtain 6.2.5 Quantitative analyses Excerpt from Accounting Standards Codification Accounting Changes and Error Corrections Overall — SEC Materials SAB Topic 1.N, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements 250- 10 -S99- 2 The foll owing is text of SAB Topic 1.N, Considering the Effects of Prior Year Misstatements when the Quantifying Misstatements in Current Year Financial Statements 108). (Added by SAB Facts: During the course of preparing annual financial statements, a registrant is evaluating the materiality of an improper expense accrual ( e.g., overstated liability) in the amount of $100, which has FN74 built up over 5 years, at $20 per year. The registrant previously evaluated the misstatement as being immaterial to each of the prior year financial statements ( i.e., years 1 -4). For the purpose of i.e., evaluating materiality in the current year ( year 5), the registrant quantifies the error as a $20 overstatement of expenses. the amount of this error for the purpose of Question 1: Has the registrant appropriately quantified evaluating materiality for the current year? Interpretive Response: No. In this example, the registrant has only quantified the effects of the statement. The staff believes a identified unadjusted error that arose in the current year income registrant ’s materiality evaluation of an identified unadjusted error should quantify the effects of the identified unadjusted error on each financial statement and related financial statement disclosure. Topic 1M notes that a materiality evaluation must be based on all relevant quantitative and qualitative FN75 factors. This analysis generally begins with quantifying potential misstatements to be evaluated. There has been diversity in practice with respect to this initial step of a materiality analysis. The diversity in approaches for quantifying the amount of misstatements primarily stems from the effects of misstatements that were not corrected at the end of the prior year (prior year misstatements). Thes e prior year misstatements should be considered in quantifying misstatements in current year financial statements. The techniques most commonly used in practice to accumulate and quantify misstatements are tain approaches. generally referred to as the rollover and iron cur The rollover approach, which is the approach used by the registrant in this example, quantifies a misstatement based on the amount of the error originating in the current year income statement. Thus, this approach ignores the effects of co rrecting the portion of the current year balance sheet misstatement that originated in prior years ( i.e., it ignores the carryover effects of prior year misstatements). The iron curtain approach quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatements year(s) of origination. Had the registrant in this fact pattern applied the iron curtain approach, the misstatement would have been quantified as a $100 misstatement based on the end of year balance sheet misstatement. Thus, the adjustment needed to correct the financial statements for the end of year error would be to reduce the liability by $100 with a corresponding decrease in current year exp ense. Accounting changes and error corrections Financial reporting developments | 65

71 6 Correction of an error in previously issued financial statements As demonstrated in this example, the primary weakness of the rollover approach is that it can result in the accumulation of significant misstatements on the balance sheet that are deemed immaterial in part because the amount that originates in each y ear is quantitatively small. The staff is aware of situations in which a registrant, relying on the rollover approach, has allowed an erroneous item to accumulate on the balance sheet to the point where eliminating the improper asset or liability would its elf result in a material error in the income statement if adjusted in the current year. Such registrants have sometimes concluded that the improper asset or liability should remain on the balance sheet into perpetuity. In contrast, the primary weakness of the iron curtain approach is that it does not consider the i.e., the reversal of the carryover effects) correction of prior year misstatements in the current year ( to be errors. Therefore, in this example, if the misstatement was corrected during the current year such that no error existed in the balance sheet at the end of the current year, the reversal of the $80 prior year misstatement would not be considered an error in the current year financial statements under the iron curtain approach. Implicitly, t he iron curtain approach assumes that because the prior year financial statements were not materially misstated, correcting any immaterial errors that existed in those statements in the current year is the correct accounting, and is therefore not considered an error in the current year. Thus, utilization of the iron curtain approach can result in a misstatement in the current year income statement not being evaluated as an error at all. The staff does not believe the exclusive reliance on either the rollove r or iron curtain approach appropriately quantifies all misstatements that could be material to users of financial statements. In describing the concept of materiality, FASB Concepts Statement No. 2, Qualitative Characteristics of Accounting Information, i ndicates that materiality determinations are based on whether it is probable that the judgment of a reasonable person relying upon the report would have been changed FN76 or influenced by the inclusion or correction of the item (emphasis added). The staff believes registrants must quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. The staff believes that this can be accomplished by qua ntifying an error under both the rollover and iron curtain approaches as described above and by evaluating the error measured under each approach. Thus, a registrant g ’s financial statements would require adjustment when either approach results in quantifyin a misstatement that is material, after considering all relevant quantitative and qualitative factors. an accounting principle that is not generally accepted to one that is As a reminder, a change from FN77 generally accepted is a correction of an error. The staff believes that the registrant should quantify the current year misstatement in this example using bot h the iron curtain approach (i.e., $100) and the rollover approach ( i.e., $20). Therefore, if the $100 misstatement is considered material to the financial statements, after all of the relevant quantitative and qualitative factors are considered, the registrant ’s financial statements would need to be adjusted. ______________________________ FN74 For purposes of these facts, assume the registrant pro perly determined that the overstatement of the liability resulted from an error rather than a change in accounting estimate. See the FASB ASC Master Glossary for the distinction between an error and a change in accounting estimate. FN75 Topic 1N addresses certain of these quantitative issues, but does not alter the analysis required by Topic 1M. FN76 Concepts Statement 2, paragraph 132. See also Concepts Statement 2, Glossary of Terms — Materiality. FN77 . Master Glossary ” in the FASB ASC See definition of “error in previously issued financi al statements Accounting changes and error corrections Financial reporting developments | 66

72 6 Correction of an error in previously issued financial statements SAB Topic 1.N requires the materiality evaluation to quantify the effects of the error on each financial statement and related financial statement disclosure. For example, performing an analysis that quantifies the current pe riod income statement is insufficient. The techniques the error only with respect to error s include the “ rollover ” and “iron curtain ” methods. commonly used to accumulate and quantify existing “rollover ” method quantifies an error based on the effects of correcting the error The in the • current period income statement . • The “iron curt ain ” method quantifies an error based on the effects of correcting the error existing in the balance sheet period being analyzed , regardless of the error’ s period(s) at the end of the reporting of origin. Illustration 6 -5: Rollover and iron curtain methods At the end of 20X5, a company determines that accumulated depreciation of a fixed asset is understated by $75. Upon further analysis, the company determines that the error relates to multiple the following amounts: years in • 20X3 — $25 • 20X4 — $25 — $25 20X5 • If the company performed the materiality analysis on the uncorrected error at the end of 20X5: The rollover method would quantify the error to the current year income statement as an understatement of depreciation expense of $25. The iron curtain method would quantify the error as a $75 understatement of accumulated depreciation with a corresponding increase in depreciation expense. With its focus on the current period income statement only, the rollover method does not consider the accumulation of individually immaterial errors over time. In Illustration 6 -5, each year’ s $25 error may not be material to each current year income statement; however, the errors accumulate on the balance sheet over time resulting in a $75 ba lance sheet misstatement in 20X5. As a result, the error may grow so large on the balance sheet that it cannot be corrected in a future period without materially misstating the income statement in the period of correction. In contrast , the iron curtain method focuses on the period -end balance sheet and therefore, does not the current period. For example, if the $75 accumulated consider the correction of prior period errors in -5 was corrected in 20X5 , the year depreciation error in Illustration 6 -end balance sheet does not contain any errors. If the company did not have any other errors, no errors would be included in the 20X5 iron curtain method analysis. The iron curtain method does not consider that the 20X5 income statement includes a $50 overstatement of depreciation expense ( i.e., 20X5 income statement includes $25 of depreciation expense that relates to 20X3 and 20X4 each). SAB Topic 1.N states that exclusive reliance on one method biased toward either the income statement or the balance sheet is inappropriate. Instead, companies must quantify the effects on the current year and financial statements of correcting all , including both the carryover ( i.e., accumulating) errors reversing (i.e., turnaround) effects of uncorrected prior year errors . Mechanically, the SEC staff believes that the quantitative materiality analysis can be accomplished by quantifying and evaluating errors under and iron curtain methods. Some entities develop a combined analysis that captures both the rollover both methods. Any method applied by an entity should consider all affected financial statements equally. rror corrections Financial reporting developments Accounting changes and e | 67

73 6 Correction of an error in previously issued financial statements -6: Illustration 6 Example quantitative materiality analysis (includes both methods) -end): Assume the following errors were identified pertaining to 20X6 (12/31 calendar year i.e., $100 understatement of accrued liabilities as of 12/31/X6, of which $60 relates to 20X5 ( • a carryover or accumulating error) $30 overstatement of 20X5 interest, corrected in 20X6 ( a reversing or turnaround error) • i.e., • $80 overstatement of 20X6 revenue The marginal tax rate for all errors is 35%. Because there are multiple errors, the company separately analyzed each error and found each error to be immaterial (quantitatively and qualitatively) on a standalone basis. The company prepared the following cumulative quantitative analysis for 20X6 that considers both the rollover and iron curtain method: Analysis of misstatements Debit/(Credit) Assets Liabilities — Assets Other orrecting the effect of c Liabilities Income nd of the: non-current current current -current balance sheet as of the e non (e.g., equity) Account Prior period Cur rent period Operating expense 60 100 Accrued liabilities (100) (30) Interest expense (80) Accounts receivable Revenue 80 0 Balance sheet totals (80) 0 (100) 0 Financial statement 8,000 2,000 5,000 2,000 amounts 3,000 Effect of uncorrected misstatements on 0 0% 1% 0% 2% F/S amounts Income effect of uncorrected misstatements (before tax) 180 30 Iron curtain Memo: Non -taxable items (marked ‘X’ above) A method Less: Tax effect at current year marginal rate (11) (63) Cumulative effect of uncorrected misstatements before turnaround effect 19 4% 117 Turnaround effect of prior period uncorrected misstatements (after tax) (19) Rollover Cumulative effect of uncorrected misstatements, after method turnaround effect 3% 98 Current year net income 2,925 Prior to concluding on the materiality analysis, the effect of netting errors and qualitative factors In addition, if the accrued liabilities or interest expense error pertaining to 20X5 should be considered. newly identified, a separate materiality analysis would be required for 20X5 to ensure that the was previously issued 20X5 financial statements are not materially misstated. __________________________ A The iron curtain method considers the aggregate balance sheet restatement (including the effect of errors arising in the income statement effect of correcting prior year errors. current period) while disregarding the results in Financial statements would need to be adjusted when either the rollover or iron curtain method quantifying a misstatement that is material, after considering all relevant quantitative and qualitative factors. Accounting changes and error corrections Financial reporting developments | 68

74 6 Correction of an error in previously issued financial statements an error 6.2.6 Correcting Excerpt from Accounting Standards Codification — Overall Accounting Changes and Error Corrections Materials SEC the Effects of Prior Year Misstatements when Quantifying SAB Topic 1.N, Considering Misstatements in Current Year Financial Statements 250- 10 -S99- 2 [Note: this extract is a continuation from the SAB extract included in S ection 6.2.5. The relevant facts in the example are the following: During the course of preparing annual financial statements, a of an improper expense accrual ( e.g., overstated liability) in the registrant is evaluating the materiality amount of $100, which has built up over 5 yea rs, at $20 per year. The registrant previously evaluated the misstatement as being immaterial to each of the prior year financial statements ( i.e., years 1 -4).] It is possible that correcting an error in ’s the current year could materially misstate the current year income statement. For example, correcting the $100 misstatement in the current year will: • Correct the $20 error originating in the current year; • Correct the $80 balance sheet carryover error that originated in Years 1 through 4; but also Misstate the current year income statement by $80. • If the $80 understatement of current year expense is material to the current year, after all of the relevant quantitative and qualitative factors are considered, the prior year financial statements should corrected, even though such revision previously was and continues to be immaterial to the prior be year financial statements. Correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. Such corr ection may be made the next time the registrant files the prior year financial statements. The following example further illustrates the staff ’s views on quantifying misstatements, including the consideration of the effects of prior year misstatements: Fac ts: During the course of preparing annual financial statements , a registrant is evaluating the error materiality of a sales cut -off in which $50 of revenue from the following year was recorded in the current year, thereby overstating accounts receivable by $50 at the end of the current year. In addition, -off error existed at the end of the prior year in which $110 of revenue from the a similar sales cut current year was recorded in the prior year. As a result of the combination of the current year and prior -off errors, revenues in the current year are understated by $60 ($110 understatement year cut of revenues at the beginning of the current year partially offset by a $50 overstatement of revenues at the end of the current year). The prior year error was ev aluated in the prior year as being immaterial to those financial statements. Question 2: How should the registrant quantify the misstatement in the current year financial statements? Interpretive Response: The staff believes the registrant should quantify the current year misstatement in this example using both the iron curtain approach ( i.e., $50) and the rollover approach ( i.e., $60). Therefore, assuming a $60 misstatement is considered material to the financial statements, after all ’s financial statements relevant quantitative and qualitative factors are considered, the registrant would need to be adjusted. Accounting changes and error corrections Financial reporting developments | 69

75 6 or in previously issued financial statements Correction of an err adjustment Further, in this example, recording an in the current year could alter the amount of the error affecting the current year financial statements. For instance: If only the $60 understatement of revenues were to be corrected in the current year, then the overstatement of current year end accounts receivable would increase to $110; or, If only the $50 overstatement of accounts receivable were t o be corrected in the current year, then the understatement of current year revenues would increase to $110. If the misstatement that exists after recording the adjustment in the current year financial statements is material (considering all relevant quant and qualitative factors), the prior year financial itative statements should be corrected, even though such revision previously was and continues to be immaterial to the prior year financial statements. Correcting prior year financial statements for rial errors would not require previously filed reports to be amended. Such correction may be immate made the next time the registrant files the prior year financial statements. If the cut nt year, a separate -off error that existed in the prior year was not discovered until the curre analysis of the financial statements of the prior year (and any other prior year in which previously undiscovered errors existed) would need to be performed to determine whether such prior year financial statements were materially misst ated. If that analysis indicates that the prior year financial statements are materially misstated, they would need to be restated in accordance with FASB ASC Topic 250, FN78 Accounting Changes and Error Corrections . ________________________________ FN78 ASC paragraph 250- 10- 45 -23. FASB As previously discussed in s ection 6.2.1, Assessing materiality in annual financial reporting periods , when an entity identifies an error relating to the prior period, a separate materiality analysis (considering all relevant quantitative and qualitative factors) is required for each reporting period ( the current and i.e., affected prior period(s)). It would be inappropriate to assess materiality solely for the current period. SAB Topic 1.N provides g uidance on whether and how to restate prior years when an error has been identified. The need to restate is dependent on the materiality of the errors to the prior year(s) and current year. The following table summarizes the potential outcomes. Material t o: Current year Whether and how to restate Prior year(s) “ of prior periods X Big R r estatement ” X of prior periods restatement Little r “ ” allowable to correct in the current period No restatement — estatement ” — When the error is material to the prior period(s) financial statements, the error A “Big R r is corrected through a “ Big R r estatement ”. The error also may be material to current period financial statements but that fact is not determinative in assessing whether a “Big R r estatement ” is appropriate. A “Big R restatement ” corrects all material errors including the correction of material errors relating to “Big R r requires an entity to revise previously issued classification and disclosure. A estatement” ments ( e.g., via a financial state 10- K/A filing or in some cases the next Form 10 -K filing ) to reflect Form the correction of the error in those financial statements. When an entity concludes a “Big R r estatement ” is appropriate, the prior financial cannot be relied upon and therefore the entity must notify statements users of the financial statements that those financial statements can no longer be relied upon. See section 6.2.7, Considerations for error analysis conclusions, for a discussion of the notification of non - -K filing requirements for SEC registrants. reliance requirements, including Form 8 The auditor issues a modified opinion upon reissuance of the amended prior period financial statements. Accounting changes and error corrections Financial reporting developments | 70

76 6 Correction of an error in previously issued financial statements -7: “Big Illustration 6 R restatement” valuation and corresponding cost of goods sold error inventory In 20X4, Company XYZ identifies an related to 20X3. The company performs a materiality analysis for 20X3 and determines: • Inventory is overstated by 40% • understated by 12% Costs of goods sold is • Net income is overstated by 8% • -related metrics ( e.g., turnover, working capital), which are monitored closely by Inventory investors and other financial statement users, were significantly affected and trends altered • The error pertained to a new product that is expected to grow significantly Based on its quantitative and qualitative analysis, Company XYZ determines that the 20X3 financial must restate the previously issued 20X3 financial statemen statements contain a material error and it ts. section 6.2.7, See for additional information about Considerations for error analysis considerations, reporting the “ Big R restatement. ” A “Little r restatement” — In some cases, an error is immaterial to the prior period(s) financial statements; , correcting the error in the current period would materially misstate the current however period financial statements ( i.e., the turn -around effect of the error correction is material to the current period income statement or statement of comprehensive inc ome). This situation often occurs when an immaterial error remains uncorrected for multiple periods and aggregates to a material number. , Because correcting the error in the current year would materially misstate those financial statements financial statements should be corrected, even though such revision previously was the prior period(s) and continues to be immaterial to the prior period(s) financial statements. However, correcting prior financial statements for immaterial errors would no filings to be amended period(s) t require previous no Form 10- (e.g., . Such correction may be made the next time the registrant files the prior K/A required) 11 period(s) financial statements. This type of “ Little r restatement ” provides for correcting the error in the current period financial statements by adjusting the prior period information and adding disclosure of the error. Because the prior period financial statements were not materia lly misstated, the entity is not required to notify users that they can no long er rely on the prior financial statements and the auditor ’s opinion is not modified when the prior period information is next presented. Noteworthy is that the type of errors that were contemplated by Topic 1.N as giving rise to a “ Little r ” we restatement re accumulating income statement errors that resulted in a balance sheet error. Correcting the balance sheet would result in a material error correction to that period ’s income statement. error without materially misstating the The SEC staff provides in Topic 1.N a means to correct this type of i.e. ,”Little r restatement ”). This concept of accumulating errors also current period income statement ( does applies when considering items of other comprehensive income. The concept of accumulating errors not, howev er, apply to errors solely in classification or disclosure in prior periods ’ financial statements as such correction does not affect (nor would such correction materially misstate) the current period financial statements. Instead , errors solely in classification and disclosure are evaluated as either giving rise to a “ Big R restatement ” or represent ing immaterial error corrections. 11 This timing assumes that a registrant does not plan on filing a 1933 Act registration statement prior to the next periodic fi ling -Q or Form 10 -K). (e.g., Form 10 Accounting changes and error corrections Financial reporting developments | 71

77 6 ents Correction of an error in previously issued financial statem i.e., The SEC staff further clarified the application of SAB Topic 1.N ( SAB Topic 108) in a 2008 SEC staff speech. SEC staff speech by Mr. Mark Mahar Extract from December 8, 2008 AICPA National Conference on Current SEC and PCAOB Developments Before I begin this dive into the conceptual world of materiality, I want to clarify an important point about the effect the method of quantifying an error has on assessing the materiality of an error existing in previously filed financial statements. Question 1 of SAB 108 addresses a circumstance where, during the course of preparing its financial statements, a registrant discovers an im proper $100 expense accrual which has built up at a rate of $20 per year over the course of the previous 5 years, inclusive of the Year 5 financial statements currently being prepared. Let us assume that the error existing on each balance sheet and income statement is not material, quantitatively or qualitatively, to any of the previous Years 1 through 4. However, correcting the 1 error in the Year 5 income cumulative $100 balance sheet error in Year 5 would introduce an $80 statement which would materially misstate Year 5. In that circumstance, SAB 108 indicates the “ prior year financial statements should be corrected even though such revision previously was and continues to be immaterial to the prior year financial statements.” However, the response also no tes that “ correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. ” Said another way, if a restatement of previously issued financial statements is required, but such restatement would not result in the previous year financial statements changing materially, then the company can restate those financial statements the next time they are presented without amendment to the previous filings or the issuance of an Item 4 -02 8- K. er the Year 2, 3 or 4 financial statements are materially misstated, we understand In evaluating wheth that some look to the response in Question 2. That response states that a “ separate analysis of the financial statements of the prior year (and any other prior year in which previously undiscovered errors existed) would need to be performed to determine whether such prior year financial statements were materially misstated ” (emphasis added). Despite the guidance, some registrants and auditors have interpreted this to mean tha t when evaluating Years 2, 3 or 4 separately, if the effect of 2 materially impacts the income statement of correcting the error that exists in each balance sheet each year, then the registrant must amend those previously filed financial statements. not how the staff applies SAB 108. The discovery of a material error generally requires This is 3 However, SAB 108 contemplated that in some restatement consistent with SFAS No. 154. ’s next filing rather th an via an circumstances restatements could be included in a company amendment to the previous filing or filings when the effect of restating the previously issued financial statements does not result in a material change to those financial statements. Using my example, recall that the balance sheet and income sta tement effect [sic] of the error is not material to any given period however an out of period correction of the cumulative balance sheet error in any particular year might have been material. If that is true, then the restatements would not materially alter the previous financial statements, as reported, and therefore those financial statements could still be relied upon. Therefore, the registrant could include the restatement with the 4 without amending the previous filings. next filing _______________________________ 1 $80 = the cumulative effect of the annual $20 error included in the Years 1 -4 financial statements. 2 Assuming no others errors exist, the balance sheet error in Years 2, 3 and 4 would be $40, $60 and $80 respectively. 3 Statement of Financia l Accounting Standard No. 154 Accounting Changes and Error Corrections , paragraph 25. 4 The correction would typically be effectuated by adjustments to the affected [sic] prior annual and quarterly periods, includ ing any selected financial data and supplem entary financial information such as information required by Items 301 and 302 of Regulation S -K. Accounting changes and error corrections Financial reporting developments | 72

78 6 Correction of an error in previously issued financial statements The SEC staff believes that errors should be corrected timely and has provided a means to do so even when the errors are not material to any one of the primary financial statements in any given year. The “Little r restatement ” is appropriate. when following illustration provides an example of “Little r restatement” -8: Illustration 6 In 20X9, a company identifies an accumulated error of $3,000 related to the understatement of a i.e., deferred tax liability that had built up ratably over the previous three years ( $1,000 error per year). No other current or prior period errors exist. To assess the error, the company: • i.e., the first year of the error). Performs a materiality analysis for the 20X7 financial statements ( The $1,000 error is concluded to be immaterial (both quantitatively and qualitatively) and no “Big R restatement ” is necessary. • Performs a materiality analysis for the 20X8 financial statements ( i.e., the second year of the error). The company determines the error is immaterial from a qualitative perspective. In addition, the company concludes that the $1,000 error from the understatement of 20X8 tax expense and the $2,000 cumulative error of the deferred tax liability are quan titatively immaterial. • The Company identifies the error in 20X9. However, if the company corrects the error by recording an adjustment in the 20X9 financial statements, the company concludes that the 20X8 activity) would be material to $2,000 overstatement of tax expense (related to 20X7 and the 20X9 income statement. Because the 20X7 and 20X8 financial statements continue to be fairly presented in all material respects, but correcting the error in the 20X9 financial statements ( i.e., current period financi al ” statements) would cause the 20X9 income statement to be materially misstated, a “ Little r restatement is appropriate. The company would not be required to notify users that the 20X7 and 20X8 financial statements can no longer be relied upon. The 20X7 a nd 20X8 comparative information would be corrected when issued with the 20X9 financial statements, with appropriate disclosure of the nature Reporting an error in 250 (see s ection and effect of the error correction, in accordance with ASC 6.3, previously i ssued financial statements, for additional information) . In assessing whether a “ Big R restatement ” or “Little r restatement ” is appropriate, the company does not need to include in its materiality assessment the “what if ” scenario that the error was corrected in 20X8. In other words, the company would not assess whether recording the $2,000 cumulative error in 20X8 would cause the 20X8 income statement to be materially misstated. Often individually immaterial errors accumulate over years and become material to a financial reporting period resulting in the need to restate financial statements. An effective way to reduce the risk of restatements ( ”) is to record all known errors, including “Big R restatements ” or “Little r restatements those that are not material in the period the error is first identified. See section 6.2.7, Considerations for error analysis considerations, for additional information about “Little r restatement ”. reporting requirements and other considerations for a Immaterial errors — When the error is immaterial to the prior period(s) financial statements and correcting the error in the current period is not material to the current period financial statements, the error is generally corrected in the current period with no restatement of prior period(s) financial statements. The concept of correcting prior period errors in the current period refers solely to errors that accumulate and would be corrected via an out of period adjustment in the current period. See s ection 6.2.7, for additional information about other considerations when Consideration s for error analysis conclusions, the company or auditor identifies immaterial errors. Accounting changes and error corrections Financial reporting developments | 73

79 6 Correction of an error in previously issued financial statements -9: Immaterial errors Illustration 6 In the prior year, an entity understated interest income by $500 related to a note receivable the entity received in exchange for a piece of equipment. The entity corrected the error in the current year. The effect on the individual income statement line item, subtotals and net income was quantitatively immaterial (the prior year error as well as the effect of recording the error correction in the current year). The effect on all applicable line items on the prior year’ s balance sheet was also quantitatively is material to either year. The immaterial. In addition, no qualitative factors indicate that the error additional $500 of interest income is recognized in the current year and no restatement of prior year financial statements is required. relate to the previously filed interim financial statements, see 6.4, Interim reporting If errors section considerations, for further information. Corrections of immaterial errors also include prior period financial statement classification errors (e.g., classification errors within the balance sheet, income statement, statement of cash flow, statement of comprehensive income and statement of shareholders ’ equity) that have been assessed as immaterial to prior period financial statements. However, if an entity chooses to correct immaterial prior period classification errors in the current year comparative financial statements, such immaterial error corrections to prior year financial statements. These error corrections should be disclosed as they represent changes are not the result of an accumulation of the immaterial errors and therefore are evaluated as either giving rise to a “ Big R restatement ” or represent immaterial error corrections. When errors (or omissions) in disclosure in prior year financial statements are discovered they are also evaluated to determine if they are so signific ant as to give rise to a “ Big R restatement ” (i.e., a restatement to revise previously issued statements (e.g., via a Form 10- K/A filing or in some financial cases the next Form 10 -K filing ) in which the auditor issues a modified opinion upon reissuance of the amended prior period financial statements ). The materiality analysis for disclosure errors should be es (i.e., 6.2.1 through 6.2.5), ections the analysis described in s similar to all other materiality analys including considerations of similar quantita However, the evaluation of tive and qualitative factors. disclosure -only errors is often more heavily weighted to qualitative factors. It is not uncommon for such omission or disclosure errors to be considered immaterial to the prior year financial statements given that the evaluation of the misstatement is based on the financial statements taken as a whole. If the error or omission were determined to be immaterial to the previously issued financial statements, it can be corrected by changing the footnote in the current period comparative financial statements. 6.2.7 Considerations for error analysis conclusions The following table summarizes the items that management should consider for each error analysis ”, “Little r restatement description of a “ Big R rest atement conclusion. For further ” and immaterial errors that would result in no restatement, see Section 6.2.6, Correcting an error . “ ” Big R r estatement “ Little r restatement ” No restatement Financial statement reporting requirements X X In some cases reliance requirement s Notification of non - X - (including Form 8 K filings) X X Internal control considerations X ions Financial reporting developments Accounting changes and error correct | 74

80 6 Correction of an error in previously issued financial statements Financial statement reporting requirements 6.3, Reporting an error in previously issued financial statements, for information on financial See section . statement reporting requirements Notification of non- requirements reliance 560, Subsequent Events and Subsequently Discover ed AU , paragraphs A.18 -A.26, -C Section Facts provides Subsequently Discovered Facts That Became Known to the Auditor After the Report Release Date, guidance on the procedures an auditor must perform when a material error to prior period financial statements is identified and such financial statements and related audit report can no longer be relied upon when a “ Big R restatement ” is required). The audit standard states that the preparer of the financial (i.e., statements should take steps to ensure that anyone in receipt of the audited financial statements is informed of the situation, including that the audited financial statements are not to be relied upon. Among other requirements, this includes issuing revised financial statements with appropriate disclosure varies based on the specific facts and of the matter. The actual method to communicate non -reliance -reliance of the financial statements . The auditor has responsibilities to communicate non circumstances if the preparer does not perform the required communications. For SEC registrants, a Non -reliance on previously issued financial statements or a n Item 4.02 Form 8- K, interim review related audit report or completed should be filed when a registrant ’s board of directors, , audit committee or board authorized officer(s) or current or former auditor concludes that previously its i.e., issued financial statements should no longer be relied upon due to an accounting error ( a “Big R restatement ”). The Form 8 -K filing requirement is not affected by whether the “ Big R restatement ” is or 8-K is generally not required for a An Item 4.02 Form K/A. will be included in a Form 10 -K or Form 10- “Little r restatement , Item 4.02 Non -reliance on previously issued ection 8.6.5.2 ”. See SEC Manual s a related audit report or completed interim review for additional information. financial statements or Internal co ntrol over financial reporting considerations 6.2.8 All entities , whether public or private, that identify an error should assess whether and how the identified error affects its conclusions about the effectiveness of the related internal controls . An evaluation of internal control is necessary even when the error does not require restatement because the error may indicate that some aspect of the internal control design or execution was not functioning properly should evaluate its current and previous conclusions (i.e., a control deficiency exists). Similarly, an e ntity related to the effectiveness of internal controls if out -of-period errors are identified (even if those errors are immaterial). determin ing a deficiency exists, the e ntity should When the evaluation results in consider whether it represents just a deficiency, a significant deficiency or a material weakness. It is important to note that a deficiency does not have to result in a material misstatement in order for it to be considered a material weakness. Instead, the entity ’s evaluation should consider the likelihood that the identified deficiency could have resulted in a material misstatement. Therefore, an entity ’s assessment of of any mitigating controls, whether the significance of a de ficiency should consider the existence such controls could have prevented or detected the error, as well as whether the entity has evidence that the operating effectively. mitigating controls were For SEC registrants sub ject to management ’s annual requirement to assess and report on internal control over financial reporting, it is important to note that an error that results in a restatement of an indicator of a esents previously issued financial statements to correct a material misstatement repr material weakness. Accounting changes and error corrections Financial reporting developments | 75

81 6 Correction of an error in previously issued financial statements s Report on Internal Control Over Extract from Commission Guidance Regarding Management’ Financial Reporting Under Section 13(a) and 15(d) of the Securities Exchange Act of 1934 Release No 33 -8810, June 27, 2007 Management should evaluate whether the following situations indicate a deficiency in ICFR exists and, if so, whether it represents a material weakness: Identification of fraud, whether • or not material, on the part of senior management; • Restatement of previously issued financial statements to reflect the correction of a material misstatement; • Identification of a material misstatement of the financial statements in the current period in circumstances that indicate the misstatement would no t have been detected by the company ’s ICFR; and • Ineffective oversight of the company ’s external financial reporting and internal control over financial reporting by the company ’s audit committee. The SEC ’s guidance is consistent with PCAOB Auditing Standa rd No. 5, An audit of internal control over financial reporting that is integrated with an audit of financial statements the . Auditors should consider same indicators of a material weakness in internal control over financial reporting when evaluating the effectiveness of a registrant ’s internal control over financial reporting . The auditor also has responsibility with respect to internal control considerations when an error has been identified. In addition, SEC registrants should consider the following to the extent an identified error results in a restatement : -K 307 in prior filings need to be modified, supplemented or Whether the disclosures provided under S • corrected in order to explain whether management s ’s previous conclusions regarding the effectivenes of disclosure and control procedures continue to be appropriate in light of the assessment to restate financial statements or non -reliance on a previously issued audit report (or interim review). Whether to revise its original report on the effectiveness of internal control o ver financial reporting • (S-K 308). There is no requirement for a company to reevaluate the effectiveness of its internal control and/or reissue a revised management ’s report on internal control over financial reporting when a company restates its financial statements. However, a company may need to consider whether or not its original disclosures in management ’s report continue to be appropriate in light of the error(s) and should modify or supplement its original disclosure to include any other material information that is necessary for such disclosures to not be misleading in light of the restatement. • Whether registrants should report a change in internal control over financial reporting under S -K 308(c). uld apply if a material change in controls led to an error in the current This reporting requirement co period or if any material weakness that resulted in a material misstatement was remediated during the period. For additional information, please refer to our SEC annual report s — Form 10- K publication section 4.7.1, Item 307 Disclosure controls and procedures , section 4.7.2 , Item 308(a) & (b) Internal control over . in internal control over financial reporting financial reporting , and s ection 4.7.3, Item 308(c) C hanges Accounting changes and error corrections Financial reporting developments | 76

82 6 usly issued financial statements Correction of an error in previo Reporting 6.3 an error in previously issued financial statements 6.3.1 Presentation requirements for restatements Excerpt from Accounting Standards Codification Accounting Changes and Error Corrections Overall — Glossary 250- 10 -20 Restatement The process of revising p reviously issued financial statements to reflect the correction of an error in those financial statements. rs Other Presentation Matte Correction of an Error in P reviously Issued Financial Statements 10 -45 -22 250- As indicated in paragraph 22 0-10- 45 -7A , net income for the period shall include all items of profit and loss recognized during the period, including accruals of estimated losses from loss contingencies, but shall not include corrections of errors from prior periods. As used in this Subtopic, t he term period refers to both annual and interim reporting periods. -23 -45 250- 10 Any error in the financial statements of a prior period discovered after the financial statements are issued or are available to be issued (as discussed in Section 855 -25) shall be reported as an error -10 -period financial statements. Restatement requires all of the following: correction, by restating the prior a. The cumulative effect of the error on periods prior to those presented shall be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented. b. An offsetting adjustment, if any, shall be made to the opening balance of retained earnings (or position) other appropriate components of equity or net assets in the statement of financial for that period. c. Financial statements for each individual prior period presented shall be adjusted to reflect correction of the period -specific effects of the error. 10 250- -45 -24 Those items that are reported as error corrections shall, in single period statements, be reflected as adjustments of the opening balance of retained earnings. When comparative statements are presented, corresponding adjustments should be made of the amounts of net income (and the components thereof) and retained earnings balances (as well as of other affected balances) for all of the periods reported therein, to reflect the retroactive application of the error corrections. Historical Summaries of Financial Data 250- 10 -45 -28 It has become customary for business ent ities to present historical, statistical -type summaries of financial data for a number of periods --commonly 5 or 10 years. Whenever error corrections have been recorded during any of the periods included therein, the reported amounts of net income (and components thereof), as well as other affected items, shall be appropriately restated, with the disclosure in the first summary published after the adjustments. Accounting changes and error corrections Financial reporting developments | 77

83 6 Correction of an error in previously issued financial statements to ASC 10- 45 -23, restatement of prior period financial statements requires that: 250- Pursuant effect of the error on periods prior to those presented shall be reflected in the cumulative a. The carrying amounts of assets and liabilities as of the beginning of the first period presented. offsetting b. An balance of retained earnings (or other adjustment, if any, shall be made to the opening appropriate components of equity or net assets in the statement of financial position) for that period. statements for each individual prior period presented shall be adjusted to reflect correction c. Financial of th -specific effects of the error. e period Unlike reporting the retrospective application of a change in accounting principle, reporting the correction ” of a material error when re- issuing prior year financial statements ( i.e., reporting a “Big R r estatement as described further in Correcting an error ) is characterized as a restatement. For “ Big R 6.2.6, section ”, entities should label the prior period column headings of applicable financial statements restatements and related footnote disclosures as restated. ection Little r restatement ” (as described further in s 6.2. When a “ 6, Correcting an error ) is appropriate, the error is corrected in the current -period financial statements by adjusting the prior -period information similar to the requirements in ASC 250- 10-45- 23. The prior period column headings are not generally labeled as restated given the prior year adjustment is , by definition, immaterial. Other information may be included within or along with financial statements. The information may be provided at management ’s discretion in conjunction with the issuance of the financial statements (e.g., a 10- e.g., S-K 302 year summary of financial data provided by private companies) or required ( ). For “ estatements ” and “Little r restatements ”, other quarterly information requirement Big R r information affected by the error correction also should be restated. For example, if a company ’s affects the five previous years, the historical data for each corresponding correction of a material error financial data table should be restated and labeled as such. year on the selected information -K, For additional on the process and related requirements of filing an amended Form 10 — Form 10- please refer to our SEC annual reports section 2.13.1 , Amendments . K publication 6.3.2 Disclosures for restatements Excerpt from Accounting Standards Codification Overall Accounting Changes and Error Corrections — Disclos ure Correction of an Error in Previously Issued Financial Statements 250- 10 -50 -7 When financial statements are restated to correct an error, the entity shall disclose that its previously issued financial statements have been restated, along with a description of the nature of the error. The entity also shall disclose both of the following: a. The effect of the correction on each financial statement line item and any per -share amounts affected for each prior period presented b. The cumulative effect of the change on retained earnings or other appropriate components of equity or net assets in the statement of financial positio n, as of the beginning of the earliest period presented. Accounting changes and error corrections Financial reporting developments | 78

84 6 Correction of an error in previously issued financial statements - 10 50 - 8 250 - When prior period adjustments are recorded, the resulting effects (both gross and net of applicable for the year in income tax) on the net income of prior periods shall be disclosed in the annual report after the date of which the adjustments are made and in interim reports issued during that year recording the adjustments. -50 10 250- -9 When financial statements for a single period only are presented, this disclosure shall indicate the eff ects of such restatement on the balance of retained earnings at the beginning of the period and on the net income of the immediately preceding period. When financial statements for more than one period are presented, which is ordinarily the preferable proc edure, the disclosure shall include the -10- 45 and paragraph effects for each of the periods included in the statements. (See Section 205 10 205- 1.) Such disclosures shall include the amounts of income tax applicable to the prior period -50- losure of restatements in annual reports issued the first such post -revision adjustments. Disc after disclosure would ordinarily not be required. 10 -50 -10 250- Financial statements of subsequent periods shall not repeat the disclosures required by paragraph s 10 -50- 7 through 50 -9. See paragraph 250 250- 50- 2. -10- Error Correction Related to Prior Interim Periods of the Current Fiscal Year -50 10 250- -11 The following disclosures shall be made in interim financial reports about an adjustment related to the current fiscal year. In financial reports for the interim period in which the prior interim periods of adjustment occurs, disclosure shall be made of both of the following: -share amounts for a. The effect on income from continuing operations, net income, and related per each p rior interim period of the current fiscal year b. Income from continuing operations, net income, and related per -share amounts for each prior interim period restated in accordance with paragraph 250 -10- 45 -26. Big R restatements ” ASC 250- 10 -50- 7 through 50- 11 provides disclos ure requirements for “ ”). (see 6.2.6, Correcting an error, for additional information about “ Big R restatements section Disclosure requirements related to an accumulation of immaterial errors ( i.e. ,”Little r restatements ” as described at section 6.2.6 , Correcting an error ) are not specifically addressed in ASC 250. We believe that when correcting an error that was not material to the prior period financial statements by adjusting previously issued financial statements, such correction should be disclosed. Including disclosure of the error correction facilitates transparency of fina ncial reporting. The SEC staff frequently requests a registrant ’s materiality assessment, particularly when the registrant has not disclosed that the error is immaterial to prior periods. In addition, the SEC staff also believes that transparent reporting of the error includes disclosure of how the error was identified. ng changes and error corrections Financial reporting developments Accounti | 79

85 6 Correction of an error in previously issued financial statements Extract from SEC staff speech by Mr. Scott Taub November 17, 2006 Remarks Regarding Restatements Before the Financial Executives International Meeting In addition to analyzing what caused the error, we were also interested in how the error was found so that it could be corrected. Unfortunately, about half of the restatement disclosures did not report any terested in this information on this point. As it strikes me that market participants would likely be in information, I wonder whether something should be done to encourage its disclosure. Even when information was provided, about half the time the disclosures indicate that the company identified the error with little further discussion of ho w that occurred. Financial statements for the period following the correction of an error need not repeat the required disclosures initially made in the period of the error correction. However, entities that issue interim financial statements must provide the required disclosures in the financial statements of both the interim and annual Such disclosure is consistent with changes in accounting periods that include the correction of an error. principle. See s Disclosures for a change in accounting principle, for additional discussion. ection 3.8, For the correction of an error, a question arises about whether the required disclosures must be repeated after the restated financial statements have been filed. For example, assume a public entity determines in the second quarter of 20X6 (prior to issuance of the second quarter 20X6 financial statements) that it needs to restate its prior financial statements, including its 20X5 Quarterly Reports on Form 10 -Q for the second and third quarters and its 20X5 Annual Report on Form 10 -K, for the correction of an error and in 20X6 files Forms 10 -Q/A and 10 -K/A to correct the 20X5 financial statements. The question that arises is whether the disclosures from the restated 20X5 financial statements should be repeated in the 2 0X6 financial statements that include comparative 20X5 information. That is, should the 20X6 quarterly and annual financial statements include the same required disclosures for the correction of an error as the entified in 20X6? Alternatively, does the issuance of 20X5 financial statements as the error was id restated financial statements eliminate the need to repeat the disclosures in 20X6? This issue is not specifically addressed in 250. However, we believe the filing of the restated 20X5 ASC financial statements prior to issuing the 20X6 financial statements (including the restated comparative 20X5 financial statements) eliminates the need for presentation of the disclosures in the 20X6 financial statements as these disclosures were included in the restated 20X5 financial statements, previously filed with the SEC. That is, once the 20X5 restated financial statements are filed, we do not believe detailed disclosures required by ASC 250- 10- 50 -7 are required. However, we believe it is preferable to include disclosure of the restatement and the nature of the corrected error in future filings made during 20X6 (e.g., the second and third quarter quarterly reports and the 20X6 Annual Report). Fin ancial statements filed for periods subsequent to 20X6 do not need to repeat the disclosures describing the restated financial statements. Reporting retrospective accounting changes in a Form 10 6.3.3 -K/A filed to correct an error (updated October 2018) At the SEC Regulations Committee ’s September 2003 joint meeting with the SEC staff, the SEC staff stated that a Form 10 -K/A filed to correct an error in prior period annual financial statements should not reflect any subsequent events that require retrospect ive treatment (e.g., retrospective application of a new accounting principle, discontinued operations, change in segments). At the Committee’ s June 2009 joint meeting, the SEC staff revised that position. The SEC staff indicated that the correction of a terial error in prior period financial statements should only be reported by amending the previously ma filed Form 10 -K ( i.e., filing a Form 10 -K/A, not a Form 8 -K). However, the SEC staff now believes that once an entity files interim information reflecting retrospective accounting changes, any subsequent Form 10- K/A to correct an error also should reflect the retrospective accounting. Accounting changes and error corrections Financial reporting developments | 80

86 6 Correction of an error in previously issued financial statements -10: Reporting a correction of an error and a subsequent event requiring Illustration 6 retrospective application dopts a new accounting standard with retrospective application reflected in its first quarter An entity a Form 10- Q and subsequently discovers a material error in its prior year financial statements. The statements should entity filed on a Form 10- K/A and should reflect BOTH the ’s amended financial be retrospective application of the new accounting standard AND the correction of the material error. The SEC staff advised that the disclosures included in the Form 10 -K/A should clearly segregate the effects of these two i tems. -K/A to correct an The SEC staff also indicated that a registrant should not delay the filing of a Form 10 even when it expects to file a Form 10 -Q in the near future error, that will retrospectively apply a new accounting standard. For example, if a calendar year entity discovers an error in early April before it files its first quarter Form 10 -Q and it is able to determine the effect of that error on its prior period financ ial statements, it should not delay filing the Form 10 -Q. -K/A until after filing its first quarter Form 10 Evaluating prior -period errors when adopting a new accounting standard 6.3.3.1 When an entity adopts a new accounting standard, it may identify error s in prior -period accounting as new accounting standard’s of its evaluation of the retrospective application of the transition part provisions (if applicable) related (i.e., the errors relate to the misapplication of . The errors may be un GAAP in previously issued financial statements) or related ( i.e., the errors result from its retrospective application of the new accounting standard in the year of adoption) to the implementation of the new te those errors, and how to correct accounting standard . Questions have arisen regarding how to evalua them, if material. Errors unrelated to the implementation of a new accounting standard -period s, those error s should be evaluated using s in prior financial statement If an entity identifies error the materiality thresholds that were relevant in the prior period and under the prior accounting method. thresholds that have since been revised following the That is, the entity should not apply materiality because the error s are unrelated to the adoption of the new application of the new accounting method . The entity should consider the newly identified error individually and in the aggregate s both standard with other unrecorded prior -period adjustments in order to determine whether the prior -period financial erially misstated. If so , a public entity should correct the errors by filing a 10 -K/A , statements were mat as described in section 6.3.3, Reporting retrospective accounting changes in a Form 10 -K/A filed to correct an error . Refer to section 6.2, an error , for further discussion of Assessing the materiality of accounting errors and materiality. Errors related to the implementation of a new accounting standard (prior to the issuance of the financial statements) If an entity identifies error s in prior periods that resulted from its retrospective application of a new accounting in the year the standard is adopted, it would evaluate those errors using revised standard materiality thresholds ( i.e., thresholds set following the application of the new accounting standard ). These erro rs should be corrected prior to the issuance of the financial statements in the period of Assessing the materiality of an error adoption. Refer to section 6.2, , for further discussion of accounting errors and materiality. Accounting changes and error corrections Financial reporting developments | 81

87 6 ection of an error in previously issued financial statements Corr rest atement reporting requirements 6.3.4 Initial public offering 250 is required for an initial public offering ( IPO ) At times, a correction of an error pursuant to ASC 12 Form S-1 pre -effective amendment. The SEC staff provided guidance that after initially disclosing an error correction -effective amendment , an entity is required to continue to provide the in a pre restatement disclosures and labeling in subsequent Form S -1 amendments until the registration s annual financial statements. This statement is updated to include a new fiscal year’ view applies equally to amendments to initial registration statements that are submitted confidentially under the JOBS Act, 13 which was enacted in April 2012. -11: IPO restatement reporting Illustration 6 , including audited financial statements for the three A company files an IPO registration statement years ended 31 December 20X8. The issuer identifies and corrects a material error in its 20X7 financial statements and files a pre -effective amendment, which includes restated financial statements for 20X7 and accompanying disclosures. To remove the restatement labeling and disclosure prior to effectiveness, the financial statements for the 12 months ending 31 December 20X9 would need to be filed in the IPO registration statement. The SEC staff believe s an objective of ASC 250 is to provide sufficient time for investors to consider plans to include restatement disclosures. Therefore, the SEC staff a lso suggests that, if an entity inancial statements in a restatement disclosures for a very short time before updating its annual f reg istration statement, the entity should discuss its plan in advance with the SEC staff. 6.4 Interim reporting considerations Excerpt from Accounting Standards Codification — Overall Accounting Changes and Error Corrections Presentation Matters Other Materiality Determination for Correction of an Error 10 -45 -27 250- In determining materiality for the purpose of reporting the correction of an error, amounts shall be related to the estimated income for the full fiscal year and also to the effect on the trend of earnings. Changes that are material with respect to an interim period but not material with respect to the e separately disclosed in the estimated income for the full fiscal year or to the trend of earnings shall b interim period. ASC 250 provides limited guidance on assessing materiality to interim reporting. The SEC staff has indicated it might publish additional guidance on interim materiality at a later date. While SAB Topic 1.N, Co nsidering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, and Topic 1.M, Assessing Materiality, do not specifically address applicability to interim periods, the SEC staff expects the guidance to be applied to interim financial reporting as well. 12 2011 AICPA National Conference on Current SEC and PCAOB Developments 13 SEC May 3, 2012 Jumpstart Our Business Startup Act Frequently Asked Questions FAQ 38 Accounting changes and error corrections Financial reporting developments | 82

88 6 Correction of an error in previously issued financial statements Extract from SEC staff speech by Mr. Mark Mahar December 8, 2008 AICPA National Conference on Current SEC and PCAOB Developments If consideration of the total mix of information and how a reasonable investor might consider such information is the premise of materiality evaluations, then whether an error appears within annual or interim financial information should not alter that premise. Rather, each error should be evaluated in light of the surrounding circumstances as a reasonable investor would. The same effort to identify and evaluate the relevant information in annual financial information should be applied to interim financial information, appreciating that the relevant information for annual and interim periods may not always be the same. See section 6.2, Assessing the materiality of an error, for further information about SAB Topics 1.M and 1.N. ASC 10 -45- 27 addresses materiality in the context of interim financial reporting and states that the 250- materiality assessment should include an assessment of the error relative to the trends of earnings and relative to estimated income for the full fiscal year . Evaluating the quarte rly materiality for trends is subjective and should consider both quantitative and qualitative trends. Examples of trend of earnings considerations include quarterly earnings trends (i.e., consecutive quarter and year to date trends as well as trends compa ring quarterly information year to year) , changing from net income to a loss or vice versa as well as comparing to analysts ’ expectations ’ expectations before an error is corrected and not meeting those meeting or exceeding analysts (e.g., expectations aft er the error is corrected). Whether an entity should use interim or expected annual results in making materiality judgments depends on the circumstances. For example, an entity may encounter situations where an uncorrected error identified in the interim period is material to interim results but is not material to expected annual results. In those situations, management should consider the nature of the error and whether the interim period is representative of historical and expected financial trends of the entity. If the interim reporting period historically is a loss period due to seasonality or other factors (for what is otherwise a highly profitable ts when making business), we generally believe management would look to expected annual resul quantitative judgments about materiality. Depending on the circumstances, we believe management also may choose to evaluate errors based on expected annual results when a significant portion of the errors are due to the effects of prior interim or annual period errors reversing in the current period ( i.e., out of period amounts). If subsequent analysis shows that annual results were less than expected, a previously immaterial error may now be considered material, resulting in a restatement at that time. If the correction of an error is material to income of the current interim period, but not material to the estimated income of the current full fiscal year or to the trend of earnings, the correction of the error should be disclosed separately in the interim period. Form 8 -K filing and other filing requirements When a registrant identifies a misstatement that materially affected a prior interim period, it should consider whether it must file an Item 4.02 Form 8- K. Item 4.02 of Form 8- K applies t o both annual and interim period financial statements that should no longer be relied upon due to a misstatement. Typically the correction of a material error to p rior interim filings ( i.e., a “Big R restatement ” as Q/A. 10- described in s ection 6.2.6, Correcting a n error ) is made by filing a Form Accounting changes and error corrections Financial reporting developments | 83

89 6 Correction of an error in previously issued financial statements Error correction reporting Correcting an error for interim financial statements of previous fiscal years requires the same presentation 250- 10- 45 -22 through 45- 24) and disclosures ( (ASC 250- 10- 50 -7 through 50 -9) as annual periods. ASC If the error correction relates to the prior interim period(s) of the current fiscal year, different disclosures 250- Reporting an error in previously issued 6.3, are required as described in ASC section 10- 50- 11. See financial statemen ts, for additional information. Adjustments to prior interim periods of the current year interim periods of the current fiscal year require entities to Certain types of adjustments related to prior retroactively adjust their prior interim periods. For additional information, please refer to our SEC quarterly 4.10.6, Adjustments to prior interim periods of the current year . reports — Form 10- Q publication Section Accounting changes and error corrections Financial reporting developments | 84

90 7 Glossary Excerpt from Accounting Standards Codification Changes and Error Corrections — Accounting Overall Glossary 10 -20 250- Accounting Change A change in an accounting principle, an accounting estimate, or the reporting entity. The correction of an error in previously issued financial statements is not an accounting change. Change in Accounting Estimate A change that has the effect of adjusting the carrying amount of an existing asset or liability or altering the subsequent accounting for existing or future assets or liabilities. A change in accounting estimate ecessary consequence of the assessment, in conjunction with the periodic presentation of is a n financial statements, of the present status and expected future benefits and obligations associated with assets and liabilities. Changes in accounting estimates result from new information. Examples of items for which estimates are necessary are uncollectible receivables, inventory obsolescence, service lives and salvage values of depreciable assets, and warranty obligations. Change in Accounting Estimate Effected by a Change in Accounting Principle A change in accounting estimate that is inseparable from the effect of a related change in accounting principle. An example of a change in estimate effected by a change in principle is a change in the -lived, nonfinancial assets. method of depreciation, amortization, or depletion for long Change in Accounting Principle A change from one generally accepted accounting principle to another generally accepted accounting principle when there are two or more generally accepted accoun ting principles that apply or when the accounting principle formerly used is no longer generally accepted. A change in the method of applying an accounting principle also is considered a change in accounting principle. Change in the Reporting Entity A chan ge that results in financial statements that, in effect, are those of a different reporting entity. A change in the reporting entity is limited mainly to the following: a. Presenting consolidated or combined financial statements in place of financial statements of individual entities b. Changing specific subsidiaries that make up the group of entities for which consolidated financial statements are presented c. Changing the entities included in combined financial statements. Neither a business combination a ccounted for by the acquisition method nor the consolidation of a variable interest entity (VIE) pursuant to Topic 810 is a change in reporting entity. Accounting changes and error corrections | 85 Financial reporting developments

91 7 Glossary Direct Effects of a Change in Accounting Principle Those recognized changes in assets or liabilities necessary to effect a change in accounting principle. An example of a direct effect is an adjustment to an inventory balance to effect a change in inventory valuation method. Related changes, such as an eff ect on deferred income tax assets or liabilities or an impairment adjustment resulting from applying the subsequent measurement guidance in Subtopic 330 -10 to the adjusted inventory balance, also are examples of direct effects of a change in accounting principle. Error in Previously Issued Financial Statements An error in recognition, measurement, presentation, or disclosure in financial statements resulting from mathematical mistakes, mistakes in the application of generally accepted accounting principles (GAAP), or oversight or misuse of facts that existed at the time the financial statements were prepared. A change from an accounting principle that is not generally accepted to one that is generally accepted is a correction of an error. a Change in Accounting Principle Indirect Effects of Any changes to current or future cash flows of an entity that result from making a change in accounting principle that is applied retrospectively. An example of an indirect effect is a change in a nondiscretionary profit s haring or royalty payment that is based on a reported amount such as revenue or net income. Restatement The process of revising previously issued financial statements to reflect the correction of an error in those financial statements. ation Retrospective Applic The application of a different accounting principle to one or more previously issued financial statements, or to the statement of financial position at the beginning of the current period, as if that principle had always been used, or a change to fin ancial statements of prior accounting periods to present the financial statements of a new reporting entity as if it had existed in those prior years. Accounting changes and error corrections Financial reporting developments | 86

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