Ind AS 8 Prior Period Errors and Retrospective Restatement

Understand Prior Period Errors and Retrospective Restatement

Key rules to remember

Rule for correcting material prior period errors (para 42)

Restate comparatives for the prior period(s) in which the error occurred; if the error is older than the earliest period presented, restate opening assets, liabilities and equity of the earliest period presented

Done in the first set of financial statements approved for issue after discovery. Applies to material errors, subject to impracticability.

Retrospective restatement (para 5)

Correct recognition, measurement and disclosure as if the prior period error had never occurred

Use this definition when an answer asks you to explain the term.

Impracticability: period-specific effects (para 44)

If period-specific effects on comparatives cannot be determined, restate opening balances for the earliest period for which restatement is practicable (may be the current period)

Para 43 is the general limit: correct retrospectively except to the extent impracticable to determine period-specific or cumulative effect.

Impracticability: cumulative effect (para 45)

If the cumulative effect at the start of the current period cannot be determined, restate comparatives to correct the error prospectively from the earliest date practicable

This is the last resort.

No hindsight (para 53)

Do not use information that became available after the prior period statements were approved for issue

Applies to assumptions about management intentions and to estimates.

Disclosures (para 49)

(a) nature of error; (b) correction for each prior period presented, for each line item affected and for basic and diluted EPS if Ind AS 33 applies; (c) correction at start of the earliest prior period presented; (d) if impracticable, the circumstances and how and from when corrected

Subsequent periods need not repeat these disclosures. Amounts are given to the extent practicable.

How to solve Prior Period Errors and Retrospective Restatement questions

1. 1Decide whether it is an error or a change in estimate. Ask: was reliable information available when the earlier statements were approved, and should it reasonably have been used? If yes, it is an error.
2. 2Check materiality. The retrospective restatement rule applies to material prior period errors. An error found in the current period before approval is simply corrected in that period.
3. 3Identify when the error occurred and the earliest period presented. This tells you whether to restate comparatives or the opening balances of the earliest period.
4. 4Compute the effect for each affected period, line by line: expense or income, asset or liability, and the related tax effect if the question gives a tax rate. Do not use hindsight.
5. 5Restate comparative figures, or opening retained earnings and the affected balances, as the facts require. Leave current year profit free of the old error.
6. 6Check impracticability. If the data cannot support period-specific or cumulative figures, apply the para 44 or para 45 fallback and say so.
7. 7Write the disclosures: nature of error, correction per line item and per period, EPS effect where Ind AS 33 applies, and the amount at the start of the earliest period presented.
8. 8State the final restated figures clearly, with the opening balance adjustment shown separately.

Quickest way: Timeline and restated-line method

Common mistakes in Prior Period Errors and Retrospective Restatement

• Passing the correction through current year profit or loss

  Students remember the old approach of showing prior period items in the current statement of profit and loss.

  Fix: Under Ind AS 8, restate comparatives or opening balances. Current year profit contains only current year items.

• Treating a change in estimate as an error

  Both involve a different number from the one earlier reported.

  Fix: Ask what information existed at approval. New information makes it an estimate change, applied prospectively. Overlooked available information makes it an error.

• Restating only the comparative year when the error is older

  Students focus on the previous year's column.

  Fix: If the error occurred before the earliest prior period presented, adjust the opening balances of assets, liabilities and equity of the earliest period presented.

• Using hindsight to estimate the prior period amount

  Later facts feel more accurate.

  Fix: Estimate using circumstances that existed then and information that would have been available when the statements were approved.

• Forgetting the disclosures or the EPS effect

  Students stop after the numbers.

  Fix: Always list the nature of the error, the correction per line item, per period, and for basic and diluted EPS if Ind AS 33 applies, plus the amount at the start of the earliest period presented.

• Applying restatement to immaterial errors

  Students assume every error needs a full restatement.

  Fix: The restatement rule is for material prior period errors. Note, however, that immaterial errors made intentionally to achieve a particular presentation still make statements non-compliant.

Worked examples