Required Disclosure for error restatements

Required Disclosure for error restatements – If an error (either accidental or intentional in nature) is subsequently discovered that affected a prior period, the nature of the error, its effect on previously issued financial statements, and the effect of its adjustment on current period’s net income and EPS should be disclosed in the period in which the error is adjusted. In addition, any comparative financial statements provided must be adjusted. Required Disclosure for error restatements

In accounting for events after the reporting period errors easily occur because adjusting events are not properly recognised or the difference between adjusting events and non-adjusting events is not correctly made. Adjusting events are those providing evidence of conditions existing at the end of the reporting period, whereas non-adjusting events are indicative of conditions arising after the reporting period (the latter being disclosed where material).

See also Examples of adjustments of errors for many examples and their adjustment to restore the correct accounting of these transactions. Errors are different from change in accounting policies and changes in accounting estimates, in that accounting policies and estimates are choices made for a longer term to be consistently applied, but they can change due to circumstances such as new information. Errors are not a choice, they are wrong and need to be adjusted.

An example of the disclosure provided when an error adjustment is made through a prior-period adjustment is given below; the error adjustment (intentional errors in this instance) was made in 2000 by Xerox. Xerox provides extensive disclosure as to the effect of the errors on the income statement and the balance sheet for each year affected.

As you read over the business like a description of the accounting errors uncovered at Xerox, keep in mind that underlying these long-fold disclosures are the destroyed careers of many accountants and managers at Xerox who stepped over the earnings management line into the area of earnings misstatement. Between the lines of this note, one can also sense the lost trust of Xerox shareholders, customers, suppliers, and regulators. Required Disclosure for error restatements

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The general principle in IAS 8 is that an entity must correct all material prior period errors retrospectively in the first set of financial statements authorised for issue after their discovery by: [IAS 8 42]

• restating the comparative amounts for the prior period(s) presented in which the error occurred; or Required Disclosure for error restatements
• if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented.

However, if it is impracticable to determine the period-specific effects of an error on comparative information for one or more prior periods presented, the entity must 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]

Further, if it is impracticable to determine the cumulative effect, at the beginning of the current period, of an error on all prior periods, the entity must restate the comparative information to correct the error prospectively from the earliest date practicable. [IAS 8 45]

Disclosures relating to prior period errors

Disclosures relating to prior period errors include: [IAS 8 49]

• the nature of the prior period error
• for each financial statement line item affected, and
  • for each prior period presented, to the extent practicable, the amount of the correction:
  • for basic and diluted earnings per share (only if the entity is applying IAS 33)
• the amount of the correction at the beginning of the earliest prior period presented
• if retrospective restatement is impracticable, an explanation and description of how the error has been corrected.

Financial statements of subsequent periods need not repeat these disclosures.

Required Disclosure for error restatements

Required Disclosure for error restatements Required Disclosure for error restatements Required Disclosure for error restatements