SEC Issues SAB 108 On Quantifying Misstatements

September 13, 2006

FEI Summary

On Sept. 13, 2006, the U.S. Securities and Exchange Commission (SEC) released Staff Accounting Bulletin (SAB) No. 108 on Quantifying Financial Statement Misstatements (SAB 108).

According to a press release issued by the SEC describing SAB 108:  

• The SEC staff  believes registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material.
• The SEC staff will not object if a registrant records a one-time cumulative effect adjustment to correct errors existing in prior years that previously had been considered immaterial – quantitatively and qualitatively – based on appropriate use of the registrant’s approach. The SAB describes the circumstances where this would be appropriate as well as required disclosures to investors.

Additionally, while SAB's generally do not have an "effective date" since they represent the SEC staff's views of the proper interpretation of existing rules, Nov. 15, 2006 is a reference point in SAB 108 as follows:

• "The staff will not object if a registrant6 does not restate financial statements for fiscal years ending on or before November 15, 2006, if management properly applied its previous approach, either iron curtain or rollover, so long as all relevant qualitative factors were considered.
• "To provide full disclosure, registrants electing not to restate prior periods should reflect the effects of initially applying the guidance in Topic 1N in their annual financial statements covering the first fiscal year ending after November 15, 2006.
• "The cumulative effect of the initial application should be reported in the carrying amounts of assets and liabilities as of the beginning of that fiscal year, and the offsetting adjustment should be made to the opening balance of retained earnings for that year.
• "Registrants should disclose the nature and amount of each individual error being corrected in the cumulative adjustment. The disclosure should also include when and how each error being corrected arose and the fact that the errors had previously been considered immaterial.
• "Early application of [SAB 108] is encouraged in any report for an interim period of the first fiscal year ending after November 15, 2006, filed after the publication of this [SAB].
• "In the event that the cumulative effect of application of the guidance in Topic 1N is first reported in an interim period other than the first interim period of the first fiscal year ending after November 15, 2006, previously filed interim reports need not be amended.
  • "However, comparative information presented in reports for interim periods of the first year subsequent to initial application should be adjusted to reflect the cumulative effect adjustment as of the beginning of the year of initial application.
  • "In addition, the disclosures of selected quarterly information required by Item 302 of Regulation S-K should reflect the adjusted results. "
    

Links:

SAB 108

SEC press release describing SAB 108

Other Summaries From:

Deloitte

PwC 

Prepared Sept. 13, 2006 by Edith Orenstein (eorenstein@FinancialExecutives.org), Director, Technical Policy Analysis, Financial Executives International (FEI). This summary does not represent FEI opinion, unless specifically noted above.