## **Learning Outcomes**

After reading this article, you will be able to explain what constitutes a prior period error under IAS 8, outline the process and accounting entries required to correct such errors, and describe the disclosure requirements for retrospective restatement. This knowledge is directly relevant to ACCA Financial Reporting (FR) exam scenarios on the correction of prior period errors.

## **ACCA Financial Reporting (FR) Syllabus**

For ACCA Financial Reporting (FR), you are required to understand the treatment, presentation, and disclosure of prior period errors as prescribed by IAS 8. In particular, this article focuses on:

- The definition and identification of prior period errors
- The retrospective restatement of prior period errors in the financial statements
- The required disclosures when correcting prior period errors
- The distinction between corrections of errors, changes in accounting policy, and changes in accounting estimate

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which of the following is classified as a prior period error under IAS 8?
   a) Change in the estimated useful life of a machine
   b) Arithmetical mistake made in last year’s accounts
   c) Adoption of a new accounting standard
   d) Updated measurement of inventory under more recent market prices

2. True or false? When a material prior period error is discovered, comparative figures in the financial statements are restated, unless it is impracticable to determine the effect.

3. Briefly outline the main steps required to correct a material prior period error identified after the financial statements have been authorised for issue.

4. Name two types of disclosure required when prior period errors are corrected.

## **Introduction**

IAS 8 _Accounting Policies, Changes in Accounting Estimates and Errors_ requires that prior period errors are corrected by restating comparative figures and adjusting opening balances as if the error had never occurred. The approach gives users a faithful and comparable view of the entity's financial performance and position. For ACCA FR, you are expected to accurately apply retrospective restatement and meet all disclosure requirements when prior year mistakes are identified.

## **Definition and Identification of Prior Period Errors**

A prior period error is any omission from, or misstatement in, the entity's previously issued financial statements arising from a failure to use, or the misuse of, reliable information available at the time of preparation.

> **Key Term: prior period error**
> Omissions from, or misstatements in, an entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that existed and could reasonably have been expected to be used in those prior periods.

Such errors include:

- Mathematical mistakes
- Mistakes in applying accounting policies
- Oversights or misinterpretations of facts
- Fraud

Routine changes in estimates or the adoption of new accounting standards are **not** prior period errors.

## **Correction of Prior Period Errors**

Once a prior period error is identified, IAS 8 requires correction by **retrospective restatement** unless it is impracticable to do so.

> **Key Term: retrospective restatement**
> Presenting comparative amounts as if a prior period error had never occurred, by restating affected figures and adjusting opening balances of equity for the earliest period presented.

Retrospective restatement means:

- Correcting the error in the current period's comparative figures for prior years
- Adjusting opening balances of affected assets, liabilities, or equity at the start of the earliest period presented

If it is impracticable to determine the cumulative effect for one or more periods, restate as far back as possible.

### **Worked Example 1.1**

**During finalising the 20X5 financial statements, Springtown Ltd discovers that its closing inventory at 31 December 20X3 was overstated by \$400,000 due to a spreadsheet error. What is the required accounting treatment and what will be disclosed in the 20X5 financial statements?**

> **Answer:**
> Springtown Ltd corrects the error by restating the figures for 20X4, reducing opening inventory (retained earnings) and retained earnings by \$400,000 at 1 January 20X4. The 20X4 comparatives are revised, and a disclosure note in the 20X5 accounts will detail the nature of the error, the amounts involved, and explain that the comparative information has been restated.

## **Accounting for a Restatement: Process and Presentation**

1. Identify all periods affected by the error
2. Restate the comparative figures for the affected periods as if the error had never occurred
3. Adjust the opening balances of assets, liabilities, and equity for the earliest comparative period presented
4. Do not correct errors by adjusting the current period’s profit or loss

The restated financial statements must show:

- As-revised prior year comparatives (e.g., statement of profit or loss and statement of financial position)
- A third balance sheet at the start of the earliest restated comparative period

### **Worked Example 1.2**

**Coral Co discovers in 20X7 that \$250,000 of sales made in 20X5 were not recorded. The financial statements at 31 December 20X5 and 20X6 are already published. How should Coral Co treat the discovery in its 20X7 financial statements?**

> **Answer:**
> Coral Co must retrospectively restate comparative figures for 20X5 and 20X6, increase retained earnings at 1 January 20X6 by \$250,000, and present a statement of financial position at 31 December 20X6, 31 December 20X7, and 1 January 20X6. A disclosure note must explain the error and the amount of adjustments made.

### **Exam Warning**

> It is not correct to simply "write off" the error against the current period’s income or expense. The correction must show prior periods as if the error had never occurred.

## **Disclosure Requirements**

Entities must include, in the annual report:

- A description of the nature of the prior period error
- For each affected item, the amount of the correction for each prior period presented
- The amount of the correction at the beginning of the earliest period presented
- If retrospective restatement is impracticable, an explanation and description of how the error was corrected

Disclosures must be thorough enough for users to understand the effect of the correction.

### **Worked Example 1.3**

**Minto Co corrects a \$100,000 understatement of depreciation from 20X2, restating comparatives back to 20X2. What disclosure is required?**

> **Answer:**
> In the 20X4 statements, Minto Co’s notes will explain the nature of the \$100,000 depreciation error, detail which items and which periods were affected, show the corrected figures for all restated years, and state that opening retained earnings at 1 January 20X3 were decreased by \$100,000.

## **Impracticable Restatement**

If it is impossible to restate the error for any or all comparative periods (for example, because data cannot be determined), IAS 8 requires:

- Restating only as far back as possible
- Disclosing why full restatement is impracticable and how corrections have been applied

## **Summary**

Prior period errors must be corrected by retrospective restatement, as if the error had never occurred. Comparative figures and opening balances for the earliest period presented are adjusted accordingly. Sufficient disclosure must be provided to allow users to understand the effect of the correction. Restatement must be as complete as possible, but where impracticable, correct prospectively from the earliest time feasible.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define 'prior period error' according to IAS 8
- Differentiate between errors, changes in estimates, and policies
- Outline the required retrospective restatement process and accounting entries
- Explain the disclosure requirements for correcting prior period errors
- Describe the approach when retrospective restatement is impracticable

## **Key Terms and Concepts**

- prior period error
- retrospective restatement

Accounting policies, estimates, and errors (IAS 8) - Prior period errors and restatements