The Portable MBA in Finance and Accounting, 3rd Edition

52 Understanding the Numbers

Institute of Certified Public Accountants (AICPA). The distribution of adop-
tion dates across several years, especially for SFAS 121, occurs because some
firms adopt the new statement prior to its mandatory adoption date. In addi-
tion, the required adoption date for new standards is typically for years begin-
ning after December 15 of the year specified. This means that firms whose
fiscal year starts on January 1 are the first to be required to adopt the new
standard. Other firms adopt throughout the following year.
Most recent changes in accounting principles have been reported on a cu-
mulative-effect basis. The cumulative effect is reported net of tax in a separate
section (see Exhibit 2.8) of the income statement. The cumulative effect is the
impact of the change on the results of previous years. The impact of the change
on the current year, that is, year of the change, is typically disclosed in a note
describing the change and its impact. However, it is not disclosed separately on
the face of the income statement. An example of the disclosure of both the cu-
mulative effect of an accounting change and its effect on income from contin-
uing operations is provided below:

Cumulative effect

Effective January 1, 1998, Armco changed its method of amortizing unrecog-

nized net gains and losses related to its obligations for pensions and other

postretirement benefits. In 1998, Armco recognized income of $237.5 million,

or $2.20 per share of common stock, for the cumulative effect of this account-

ing change.

Effect on income from continuing operations for the year of change

EXHIBIT 2.13 Accounting changes.

Number of Companies

Subject of the Change 1996 1997 1998 1999

Software development costs (SOP 98-1) — 1 37 66
Start-up costs (SOP 98-5) — 2 29 39
Inventories 5 4 5 5
Revenue recognition (SAB 101) — — — 5
Depreciable lives 3 3 4 4
Software revenue recognition — — 4 3
Derivatives and hedging activities — — — 3
Market-value valuation of pension assets — — — 3
Bankruptcy code reporting (SOP 90-7) — — — 3
Recoverability of goodwill — — — 2
Depreciation method 4 3 — 2
Business process reengineering (EITF 97-13) — 28 10 2
Impairment of long-lived assets (SFAS 121) 134 39 3 —
Repor t ing ent it y 1 1 2 —
Other 28 57 13 10

SOURCE: American Institute of Certified Public Accountants, Accounting Trends and Techniques(New
York: AICPA, 2000), 79.