Quantitatively Material Error in FAS 158 Transition May Not Require Restatement, Says SEC

July 10, 2007

FEI Summary

Staff of the U.S. Securities and Exchange Commission (SEC) have provided guidance, in the form of discussions with the Center for Audit Quality (CAQ) - affiliated with the AICPA, on when companies must restate and amend prior filings for a common misapplication of the transition provisions of  FASB Statement No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans”  (FAS 158). The SEC staff guidance was published in CAQ Alert 2007-30, “Reexamining the Adoption of SFAS 158.”

CAQ states it issued the alert because “it has come to our attention that some entities did not implement the transition provisions of SFAS 158 as specifically required by the standard.” Because of the broad-based applicability of the issue, says CAQ, they made this particular alert available to the public; most of their alerts are available to CAQ members only.

The error in question involves companies that erroneously recorded the FAS 158 ‘transition adjustment’ (i.e., previously unrecognized gains or losses, prior service costs or credits, and transition assets or obligations) as part of Other Comprehensive Income (OCI), rather than as a direct adjustment to the ending balance of Accumulated Other Comprehensive Income (AOCI) as of the end of the year of adoption.

Quantitatively Material Errors May Not Require Restatement Under Certain Conditions

Significant in the SEC staff’s guidance on this particular issue is that it specifies circumstances in which it “would not object” to a company’s determination of immateriality (presumably, on a “qualitative” basis) for this particular error, (thereby avoiding restatement and amendment of prior filings) even – says SEC staff - for a quantitatively material misstatement of OCI and/or AOCI due to misapplication of the FAS 158 transition provision - if certain conditions are met. These conditions include certain transparency in the original filing and certain required disclosures in future filings.  

Not a Precedent, SEC May Require Restatement in Some Circumstances

The alert notes the SEC staff states this guidance is not intended to set a precedent for other errors relating to OCI/AOCI.  Additionally, says the alert, “the SEC staff indicated that in some cases, restatement of a previously filed Form 10-K may be necessary.” Circumstances in which such a restatement may be required are described.

Additional information can be found in this detailed summary.  

Other summaries from:

Deloitte (June 7 - Financial Reporting Alert 07-2)

Prepared July 10, 2007 by Edith Orenstein, Director, Technical Policy Analysis, Financial Executives International (FEI). This summary does not represent FEI opinion unless specifically noted above.