Statement of Financial Accounting Standards No. 16

INTRODUCTION AND BACKGROUND INFORMATION
The AICPA Committee on SEC Regulations and others have requested that the FASB consider the criteria
for prior period adjustments stated in paragraph 23 of APB Opinion No. 9, «Reporting the Results of
Operations,» and provide further guidelines for the application of those criteria. Paragraph 23 of APB Opinion
No. 9 states:
Adjustments related to prior periods—and thus excluded in the determination of net income for
the current period—are limited to those material adjustments which (a) can be specifically
identified with and directly related to the business activities of particular prior periods, and (b)
are not attributable to economic events occurring subsequent to the date of the financial
statements for the prior period, and (c) depend primarily on determinations by persons other than
management and (d) were not susceptible of reasonable estimation prior to such determination.
Such adjustments are rare in modern financial accounting. They relate to events or transactions
which occurred in a prior period, the accounting effects of which could not be determined with
reasonable assurance at that time, usually because of some major uncertainty then existing.
Evidence of such an uncertainty would be disclosure thereof in the financial statements of the
applicable period, or of an intervening period in those cases in which the uncertainty became
apparent during a subsequent period. Further, it would be expected that, in most cases, the
opinion of the reporting independent auditor on such prior period would have contained a
qualification because of the uncertainty. Examples are material, nonrecurring adjustments or
settlements of income taxes, of renegotiation proceedings or of utility revenue under rate
processes. Settlements of significant amounts resulting from litigation or similar claims may also
constitute prior period adjustments.
The requests referred to in paragraph 1 were prompted by Securities and Exchange Commission staff
administrative interpretations of APB Opinion No. 9 during 1975 limiting prior period adjustments for
out-of-court settlements of litigation. The view of the SEC staff was later explained in Staff Accounting Bulletin
No. 8 (see Appendix C). In addition, differing interpretations of the criteria of paragraph 23 and of the
provisions of paragraph 24 of APB Opinion No. 9 have been cited as a basis for requesting a reconsideration of
the concept of prior period adjustments.