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IAI Actuarial Core Principles · Business Finance · Construction and features of company accounts and reports

A company discovers that depreciation in the prior year was understated because of a clear arithmetic error in the previous financial statements. Under the usual retrospective treatment, how is the correction reflected in the current year's statements?

The error is corrected retrospectively by restating comparative figures and adjusting opening retained earnings, with an explanatory note. This keeps current year profit undistorted, unlike charging the correction to the current year, which would misstate its performance.

  1. ACharged entirely to the current year's profit as an exceptional item
  2. BIgnored because the prior year accounts are closed
  3. CDisclosed only as a contingent liability in the notes
  4. DRestated by adjusting opening retained earnings and comparative figures, with disclosure in the notesCorrect
  5. Credited directly to the share premium account

Explanation

Material prior period errors are corrected retrospectively by restating comparatives and the opening balance of retained earnings, shown in the statement of changes in equity, with a note explaining the nature of the error. Charging it to current profit would distort the current year's result.

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