While preparing its Q3 financials, Flowserve Corporation (FLS), an industrial flow management equipment manufacturer, identified a prior period accounting error that resulted in the overstatement of operating income in prior periods. The accounting error was related to certain operating real estate leases that have escalating rent payments which were not correctly recorded on a straight-line basis totaling $6.4 million.

Approximately $5.8 million of the error impacted the Flowserve’s income statement prior to the adoption of ASU No. 2016-02 in 2019. The remaining $600,000 impacted each period since adoption.

Subsequently, Flowserve recorded an adjustment of $6.4 million of incremental operating lease expense in the third quarter of 2022 ($5.5 million classified as SG&A and $0.9 million classified as COS), with the offsetting reduction in operating lease right-of-use assets on the balance sheet for the period ended September 30, 2022.

Separately, Flowserve also appears to have understated its asbestos related liabilities in previous periods. In the three months ended September 30, 2022 and 2021, Flowserve updated its annual actuarial study to estimate the liability for pending and future claims not yet asserted, and which are probable and estimable and recorded the expenses associated with the true-up to the actuarial study.

The company recorded $9.4 million in asbestos related expenses in the latest quarter— including the actuarial adjustment— but does not break out the adjustment. The expense is recorded in SG&A.