Errors

There are several ways errors may be included in a set of financial statements. There may be classification errors, measurement errors, presentation errors, disclosure errors and/or other errors.

There are two important distinct types of errors in financial statements:

• material errors, see material omissions below, or
• immaterial errors made with the intent of achieving a specific financial statement result (in the financial position, financial performance or cash flows), despite the minimal size of the error,

that result in financial statements that do not comply with IFRS.

Guidance on the concept of material is provided by referring to the IFRS Definition of material omission or misstatement of items that are material:

Material Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor.

Illustration of the concept material – Financial performance:

The draft profit or loss of the XYZ Co. PLC shows a profit of CU999,995. The controller records a small adjustment of CU5 to increase the profit to CU1,000,000, at which point the management team qualifies for XYZ Co. PLC’s bonus plan. In this case the financial statements do not comply with IFRS, because the adjustment was made intentional and was identified as an (immaterial) error.

When material errors have been made, they have to be adjusted under one of the following ways:

• if the impacted financial statement period reporting is still reported as a comparative period, restate this financial statement period reporting,
• if the impacted financial statement period reporting is in a prior period that is no longer being reported as a comparative period, restate the relevant opening balances for the earliest comparative period presented. [IAS 8.42]

Note: in general this is not only the case for comparatives reported in the (audited) financial statements but also in the Management Commentary-section.

There are some limitations identified in IAS 8 on retrospective restatement

• A prior period error shall be corrected by retrospective restatement except to the extent that it is impracticable to determine either the period-specific effects or the cumulative effect of the error. [IAS 8.43]
• When it is impracticable to determine the period-specific effects of an error on comparative information for one or more prior periods presented, the entity shall restate the opening balances of assets, liabilities and equity for the earliest period for which retrospective restatement is practicable (which may be the current period). [IAS 8.44]
• When it is impracticable to determine the cumulative effect, at the beginning of the current period, of an error on all prior periods, the entity shall restate the comparative information to correct the error prospectively from the earliest date practicable. [IAS 8.45]
• The correction of a prior period error is excluded from profit or loss for the period in which the error is discovered. Any information presented about prior periods, including any historical summaries of financial data, is restated as far back as is practicable. [IAS 8.46]
• When it is impracticable to determine the amount of an error (eg a mistake in applying an accounting policy) for all prior periods, the entity, in accordance with paragraph 45, restates the comparative information prospectively from the earliest date practicable. It therefore disregards the portion of the cumulative restatement of assets, liabilities and equity arising before that date. Paragraphs 50–53 provide guidance on when it is impracticable to correct an error for one or more prior periods. [IAS 8.47]
• Corrections of errors are distinguished from changes in accounting estimates. Accounting estimates by their nature are approximations that may need revision as additional information becomes known. For example, the gain or loss recognised on the outcome of a contingency is not the correction of an error. [IAS 8.48]

Disclosure example

11(b) Correction of material error in calculating depreciation

In September 2020, a subsidiary discovered a computational error in calculating depreciation of some its equipment. The error resulted in a material understatement of depreciation recognised for the 2019 and prior financial years and a corresponding overstatement of property, plant and equipment. [IAS 8.49(a)]

The error has been corrected by restating each of the affected financial statement line items for the prior periods as follows: [IAS 8.49(b)(i),(c)]

Basic and diluted earnings per share for the prior year have also been restated. The amount of the correction for basic and diluted earnings per share was a decrease of CU0.4 and CU0.3 cents per share respectively. [IAS 8.49(b)(ii)]

The correction further affected some of the amounts disclosed in note 5(c) and note 6(a). Depreciation expense for the prior year increased by CU250,000, and deferred tax expense decreased by CU75,000.

Errors