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Errors

Prior period errors must be corrected retrospectively (IAS 8: para. 42).

1. 
   Introduction
   

Errors discovered during a current period which relate to a prior period may arise through:

1. 
   Mathematical mistakes
   
2. 
   Mistakes in the application of accounting policies
   
3. 
   Misinterpretation of facts
   
4. 
   Oversights
   
5. 
   Fraud
   

A more formal definition is given in the Key Terms in Section 1.1.
Most of the time these errors can be corrected through net profit or loss for the current period. Where they are material prior period errors, however, this is not appropriate. The standard considers two possible treatments.

2. 
   Accounting treatment
   

Prior period errors: correct retrospectively. There is no longer any allowed alternative treatment.
This involves:

1. 
   Either restating the comparative amounts for the prior period(s) in which the error occurred, or
   
2. 
   When the error occurred before the earliest prior period presented, restating the opening balances
   

of assets, liabilities and equity for that period, (IAS 8: para. 42)
so that the financial statements are presented as if the error had never occurred.
Only where it is impracticable to determine the cumulative effect of an error on prior periods can an entity correct an error prospectively. (IAS 8: para. 43)
Various disclosures are required:

1. 
   Nature of the prior period error
   
2. 
   For each prior period, to the extent practicable, the amount of the correction:
   

1. 
   For each financial statement line item affected
   
2. 
   If IAS 33 applies, for basic and diluted earnings per share
   

3. 
   The amount of the correction at the beginning of the earliest prior period presented
   
4. 
   If retrospective restatement is impracticable for a particular prior period, the circumstances that
   

led to the existence of that condition and a description of how and from when the error has been corrected. Subsequent periods need not repeat these disclosures. (IAS 8: para. 49)


If you have to deal with a change of accounting policy or an error in an accounts preparation question, remember to adjust the opening balance of retained earnings.
Exam focus point

Error
Question
During 20X7 Global Co discovered that certain items had been included in inventory at 31 December 20X6, valued at $4.2m, which had in fact been sold before the year end. The following figures for 20X6 (as reported) and 20X7 (draft) are available.

	20X6	20X7 (draft)
	$'000	$000
Revenue	47,400	67,200
Cost of goods sold	(34,570)	(55,800)
Profit before taxation	12,830	11,400
Income taxes	(3,880)	(3,400)
Profit for the period	8,950	8,000

Retained earnings at 1 January 20X6 were $13m. The cost of goods sold for 20X7 includes the $4.2m error in opening inventory. The income tax rate was 30% for 20X6 and 20X7. No dividends have been declared or paid.