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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis.

Feb 16

Written by: Jack Ciesielski
2/16/2007 6:26 AM 

As blogged previously, the SEC's SAB 108 is two, two, two materiality tests in one. It requires firms to assess materiality of known but uncorrected errors on both a rollover basis and an iron curtain basis. (See linked post for discussion.) Applied correctly, it assures that known errors are isolated and removed from the balance sheet.

So, a new hobby might be developing here at the AAO Weblog: looking for interesting results from the application of SAB 108. It's bound to be some blog fodder over the next month or so as these items emerge in newly-filed 10-Ks.

One that caught my eye yesterday: H.B. Fuller's discussion in its 10-K. The net adjustment, a credit to retained earnings, was small - only $351 thousand - but there were a few moving parts:

* Investment-in-Affiliate Adjustment:
The company had recorded $309 thousand more expense than necessary when recording a subsidiary's earnings in a prior year, incorrectly reflected as an other long-term liability.

* Deferred Revenue on Shipments with Freight Claim Exposure:
Fuller had recognized $585 thousand of revenue on some pre-2004 shipments early, because they retained the risk of loss due to freight claim exposure.

* Consistent Application of Accounting for Sales Allowances:
Fuller had unrecorded reserves for sales allowances; putting them on the balance sheet required a net adjustment of $454 thousand.

* Tax Accounting Adjustments: The company had overstated income taxes payable by $1.081 million.

As we go through the discovery of what firms had previously chosen to ignore, it'll be interesting to see where errors occurred most often. Early bets (kind of like the sun coming up in the East): revenue issues and tax issues. Every company has both, there are plenty of moving parts to both, and especially in the case of taxes, a high concentration of technical issues. The opportunities to screw up are almost unlimited. It'll also be interesting to see what firms considered "immaterial" in the past.