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ACCA Strategic Professional · Strategic Business Reporting (International) · Discussion of issues in financial reporting

Brindle Co discovers in 20X5 that closing inventory at 31 December 20X4 was overstated by $40,000 because of a counting error. The error is material. Tax is ignored. How should Brindle Co correct it under IAS 8?

A material prior period error is corrected retrospectively by restating the comparative figures, including opening retained earnings if the error predates the earliest period shown. It is not treated as a change in estimate and is not passed through current profit or OCI.

  1. AReduce 20X5 profit by $40,000 as a change in estimate
  2. BRestate the 20X4 comparatives and opening 20X5 retained earnings, as a prior period errorCorrect
  3. CDisclose the error in a note only and make no adjustment
  4. DCharge $40,000 to other comprehensive income in 20X5

Explanation

A material prior period error is corrected retrospectively by restating comparative amounts for the prior period in which it occurred, or the opening balances of the earliest period presented. It is not a change in estimate, because it arose from a miscount, not new information about uncertainty. Charging OCI or just disclosing is not permitted.

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