Financial Reporting · Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors

Prior Period Errors and Their Correction (Ind AS 8)

Updated 5 October 2026 · Fact-checked

A prior period error is an omission or misstatement in earlier financial statements caused by misusing or ignoring reliable information that was available. Ind AS 8 requires retrospective correction: restate comparatives for the earliest period presented, or restate opening balances of that period if the error is older. If impracticable, correct from the earliest practicable date.

Understand Prior Period Errors and Their Correction

A prior period error is an omission from, or misstatement in, the entity's financial statements of one or more prior periods. It arises from failing to use, or misusing, reliable information that was available when those statements were approved for issue and could reasonably have been obtained and considered. Examples: mathematical mistakes, mistakes in applying accounting policies, oversights, misinterpretation of facts, and fraud.

The key test is information. If the information existed and you should have used it, it is an error. If the new information only became available later, or the outcome differs from a fair estimate, it is a change in accounting estimate, not an error. An estimate change is applied prospectively. An error is corrected retrospectively. This is the most tested distinction.

Correction is done by retrospective restatement. The entity restates the comparative amounts for the prior periods presented in which the error occurred. If the error occurred before the earliest prior period presented, it restates the opening balances of assets, liabilities and equity for that earliest period. The error is not put through the current year's profit or loss. The correction is excluded from profit or loss of the period in which it is discovered.

There is a limit. If it is impracticable to determine the period-specific effects of the error on comparatives, restate opening balances for the earliest period for which retrospective restatement is practicable (this may be the current period). If it is impracticable to determine the cumulative effect of an error on all prior periods at the start of the current period, restate the comparative information to correct the error prospectively from the earliest date practicable. Impracticable means the entity cannot apply the requirement after making every reasonable effort, for example because hindsight would be needed or the data was not collected.

Disclosure is required: the nature of the error, the amount of correction for each line item affected and for basic and diluted EPS, the amount at the start of the earliest prior period presented, and, if retrospective restatement is impracticable, the circumstances and how the error was corrected. Subsequent periods need not repeat these. Under Ind AS 1, a third balance sheet at the start of the earliest comparative period is presented when a retrospective restatement has a material effect on it.

Material errors must be corrected. Immaterial errors need not be, but you must not make or leave immaterial errors in order to achieve a particular presentation. Potential current-period errors discovered before the statements are approved for issue are corrected before issue.

Key rules to remember

Definition of prior period error: Error = omission or misstatement in prior period statements arising from failure to use, or misuse of, reliable information that was available and could reasonably have been obtained; If the information was not available then, it is not an error.
Standard correction rule: Restate comparatives for the prior periods presented; if the error is older, restate opening balances of the earliest period presented; Done in the first financial statements approved after discovery. Not through current year profit or loss.
Restated opening retained earnings: Restated opening retained earnings = Reported opening retained earnings ± after-tax effect of the error on earlier periods; Include the deferred or current tax effect of the correction.
Impracticability limit: If period-specific effects are impracticable: restate from the earliest period practicable. If cumulative effect at start of current period is impracticable: correct prospectively from the earliest date practicable; Impracticable is a strict test: not mere cost or inconvenience, and no use of hindsight.
Error vs estimate: Error: retrospective. Change in estimate: prospective (current and future periods); Estimate revisions come from new information or developments.

How to solve Prior Period Errors and Their Correction questions

Use this sequence for any question on prior period errors, whether it asks for a conclusion, journal entries or restated figures.

1Decide if it is an error: was reliable information available when the earlier statements were approved? If yes, error. If it came from new information, treat as a change in estimate.
2Check materiality. Material errors are corrected retrospectively; state this in your answer.
3Identify the period of the error and the earliest period presented. If it falls in a presented period, restate that comparative; if earlier, restate the opening balances of the earliest period.
4Compute the effect on each period: profit or loss, assets, liabilities, and the tax effect. Work period by period, not only in total.
5Pass the correcting entry through opening retained earnings (and restated comparatives), not the current year's profit or loss, then recompute any current-year effect separately.
6Check impracticability. If period-specific or cumulative effects cannot be determined, state the alternative treatment and why.
7Write the disclosures: nature of error, amount of correction per line item and per EPS, opening amount of the earliest period, and the third balance sheet where material.

Quickest way: Three-column restatement table

When to use it: Use for numerical questions asking for restated comparatives or opening balances.

Draw three columns: Earliest period presented, Previous year, Current year.
Enter the as-reported amounts for the affected line items.
Enter the error adjustment in the period it belongs to, with tax.
Add or subtract to get restated amounts. Anything earlier than the first column goes to opening retained earnings.
Current year figures should be correct on their own; the correction itself never appears as a current year expense or income.

Common mistakes in Prior Period Errors and Their Correction

Treating a change in estimate as an error, or an error as a change in estimate.
Both involve a difference from earlier figures, so they look alike.
Fix: Ask whether reliable information existed earlier and was ignored or misused. If yes, it is an error; if the facts are new, it is an estimate change.
Taking the correction to the current year's profit or loss.
Students follow the old practice of a prior period adjustment shown in the current statement.
Fix: Restate comparatives or opening retained earnings. The current year's profit shows only the current year's items.
Ignoring the tax effect in the correction.
The question focuses on the pre-tax amount.
Fix: Adjust the related current tax or deferred tax and show the net amount in retained earnings.
Restating only the immediate prior year when the error is older.
Students forget the earliest period presented rule.
Fix: If the error predates the earliest period presented, restate the opening balances of that period and the later comparatives.
Treating the impracticability exemption as a cost or effort concession.
The word is read as meaning difficult.
Fix: Use it only when, after every reasonable effort, the effects cannot be determined, for example because hindsight or missing data would be needed.
Forgetting EPS and third balance sheet disclosures.
Students stop after the journal entry.
Fix: Add the line-by-line correction amounts, the effect on basic and diluted EPS and the third balance sheet where material.

Worked examples

Example 1

ABC Ltd (an Ind AS company) prepares statements for the year ended 31 March 2027 with one comparative year. In 2026-27 audit work, it finds that closing inventory at 31 March 2026 was overstated by ₹4,00,000 because of a counting sheet that was available but not totalled correctly. Ignore tax. Retained earnings at 1 April 2025 were ₹50,00,000. Profit as reported for 2025-26 was ₹20,00,000. The error is discovered while preparing the 31 March 2027 statements. How is it corrected?

Show the solution

The error arose from misuse of available information (a mathematical mistake), so it is a prior period error and material here.
The error is in 2025-26, a comparative period presented, so restate comparatives.
Restated profit for 2025-26 = ₹20,00,000 − ₹4,00,000 = ₹16,00,000, because overstated closing inventory overstated profit.
Restated inventory at 31 March 2026 = reported inventory − ₹4,00,000.
Retained earnings at 31 March 2026 as originally reported = ₹50,00,000 + ₹20,00,000 = ₹70,00,000 (assuming no dividends or other movements).
Restated retained earnings at 31 March 2026 = ₹50,00,000 + restated profit ₹16,00,000 = ₹66,00,000. The reduction is ₹4,00,000, the same as the reduction in inventory.
In the 2026-27 statements, opening inventory is the restated amount. Using restated opening inventory, 2026-27 cost of sales is ₹4,00,000 lower than it would have been using the erroneous opening figure. No separate correcting entry is passed through 2026-27 profit or loss.
Disclose the nature of the error, the ₹4,00,000 correction for inventory and profit, and the EPS effect.

Answer: Restate the 2025-26 comparatives: inventory down ₹4,00,000, profit ₹16,00,000 (reported ₹20,00,000) and retained earnings at 31 March 2026 ₹66,00,000 (originally reported ₹70,00,000, a reduction of ₹4,00,000, equal to the inventory reduction). Opening inventory for 2026-27 uses the restated amount, so 2026-27 cost of sales is ₹4,00,000 lower than it would have been using the erroneous opening figure. No separate correcting entry goes through 2026-27 profit or loss. Disclose as required.

Example 2

XYZ Ltd presents 2026-27 with one comparative year (2025-26). In 2026-27 it discovers that depreciation of ₹3,00,000 per year on a machine put to use on 1 April 2024 was never charged in 2024-25 or 2025-26, although the cost and life were known. Tax rate 25%. Ignore deferred tax; assume the depreciation was deductible in each year, so the correction reduces the current tax liability and current tax expense of that year by 25% of the depreciation. Is this an error, and what are the corrections?

Show the solution

Cost and life were known, so the omission is a prior period error, not a change in estimate.
2025-26 is a presented comparative: restate its depreciation up by ₹3,00,000 and current tax expense down by ₹75,000, so profit falls by ₹2,25,000.
2024-25 is before the earliest period presented, so adjust the opening balances at 1 April 2025: accumulated depreciation up by ₹3,00,000, current tax liability down by ₹75,000, retained earnings down by ₹2,25,000.
At 31 March 2026 the restated accumulated depreciation is ₹6,00,000, the current tax liability is ₹1,50,000 lower than reported (₹75,000 × 2) and retained earnings are ₹4,50,000 lower than reported (₹2,25,000 × 2).
From 2026-27, the depreciation charge of ₹3,00,000 is recorded normally in the current year.
Present a third balance sheet at 1 April 2025 if the effect is material, and disclose the line-item corrections and EPS effect.

Answer: It is a prior period error. Reduce opening retained earnings at 1 April 2025 by ₹2,25,000, restate 2025-26 profit down by ₹2,25,000, and show accumulated depreciation of ₹6,00,000 at 31 March 2026. At 31 March 2026, retained earnings are ₹4,50,000 lower and the current tax liability ₹1,50,000 lower than reported. The 2026-27 charge is normal.

Exam tips

Start every answer with the classification: error or change in estimate, with the reason in one line from the definition.
In numerical questions, show a restatement table with the earliest period, the previous year and the current year, so the examiner can follow each line.
Always mention the tax effect and the effect on basic and diluted EPS, even briefly.
For MCQs, look for the phrase available information. If the facts were not available then, it is not an error.
When the question says impracticable, quote the two fallback treatments, not only that restatement is skipped.

Practice questions from Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors

Prior Period Errors and Their Correction in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CMA FinalPrior Period Errors and Retrospective Restatement

Prior Period Errors and Their Correction: frequently asked questions

What is the difference between a prior period error and a change in accounting estimate?

An error comes from not using, or misusing, reliable information that was available earlier. A change in estimate comes from new information or developments. Errors are corrected retrospectively; estimate changes are applied prospectively.

Can a prior period error be corrected in the current year's profit or loss?

No. Ind AS 8 requires restating comparatives, or opening balances of the earliest period presented. The correction is excluded from profit or loss of the period in which it is discovered.

When is it impracticable to restate for an error?

It is impracticable when the entity cannot apply the requirement after every reasonable effort, for example when hindsight would be required or data was not collected. Then it restates from the earliest period practicable, which may be the current period.

Do I need to pass journal entries for correcting a prior period error?

Yes, if asked. Adjust the affected asset or liability, the tax account, and opening retained earnings for the amount relating to earlier periods. Also show the restated comparatives.

Is a third balance sheet required?

Under Ind AS 1, a balance sheet at the start of the earliest comparative period is presented when a retrospective restatement has a material effect on the information in that balance sheet.