What Are Prior Period Errors?
A prior period error is a mistake or omission in previously issued financial statements caused by a failure to use, or misuse of, reliable information available at the time — like a math error, fraud, or misapplying an accounting standard. Under IAS 8, material prior period errors are corrected retrospectively, restating the comparative figures as if the error had never occurred. This is different from a change in accounting estimate, which is applied only prospectively.
A prior period error is corrected retrospectively by restating prior period comparatives and adjusting the opening balance of retained earnings for the earliest period presented.
- •Caused by mistake, fraud, or misapplication of GAAP/IFRS
- •Corrected retrospectively
- •Restates prior year comparatives
- •Adjusts opening retained earnings
- •Caused by new information or experience
- •Applied prospectively
- •Prior year comparatives are NOT restated
- •Affects current and future periods only
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Step-by-step worked examples
A company discovers it forgot to record $40,000 of depreciation expense two years ago. The tax rate is 25%. How is this corrected?
Prior period error = $40,000 (understated expense) Net-of-tax adjustment = 40,000 × (1 − 0.25) = $30,000 Restate opening retained earnings down by $30,000 and correct the comparative income statement
An audit reveals inventory was overstated by $60,000 last year due to a counting error. Tax rate is 20%. What is the retained earnings adjustment?
Prior period error = $60,000 (overstated asset) Net-of-tax adjustment = 60,000 × (1 − 0.20) = $48,000 Reduce opening retained earnings by $48,000 and restate the comparative balance sheet
A company changes its estimate of a machine's useful life from 10 to 6 years. Is this a prior period error?
New information about the asset's condition drove this reassessment This is a change in accounting estimate, not an error Applied prospectively only — no restatement of prior years
Flashcards
Quick quiz
Q1.How should a material prior period error be corrected?
Q2.Which of these is a prior period error, not a change in estimate?
Q3.A $40,000 error is corrected with a 25% tax rate. What is the net retained earnings adjustment?
Q4.What financial statement line absorbs the retrospective correction of a prior period error?
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Common mistakes
Treating a prior period error like a change in estimate (applying it prospectively). — Correct: Material errors are corrected retrospectively, restating prior years — never just going forward.
Assuming all restatements mean fraud occurred. — Correct: Errors can be honest mistakes, oversight, or misapplication of a standard, not necessarily fraud.
Forgetting to adjust opening retained earnings. — Correct: The cumulative effect of the correction adjusts the opening balance of the earliest period presented.
Restating immaterial errors that don't affect user decisions. — Correct: Only material errors require restatement — immateriality is assessed based on impact on financial statement users.
FAQ
What is a prior period error?
A prior period error is a mistake or omission in previously issued financial statements, resulting from failing to use or misusing reliable information that was available when those statements were prepared.
What is the difference between a prior period error and a change in accounting estimate?
An error is corrected retrospectively by restating prior years; a change in estimate reflects new information and is applied only prospectively, with no restatement.
What are examples of prior period errors?
Mathematical mistakes, misapplication of an accounting policy, fraud, and overlooking facts that existed when the financial statements were prepared are common prior period errors.
How do you calculate the retained earnings adjustment for a prior period error?
Multiply the error amount by (1 − tax rate) to get the net-of-tax adjustment, then restate the opening retained earnings of the earliest comparative period presented.