Under AS 5 considering the errors are reported as ‘prior period adjustment' in the financial statements of the period in which such misstatements were discovered i.e. previous years' financial statements were not restated and therefore, it leads to a lack of understanding by the users of the revised financial position and performance of an entity, however, under Ind AS 8, due to the retrospective restatement of the financial statements to adjust the material prior period error, the reliability, relevance and the comparability of the financial statements over time is increased.
The article is divided into 3 parts:
a. Key differences between Ind AS 8 and AS 5
b. Some key practical issues
c. Voluntary revision under Companies Act 2013
d. Implications in the Auditor's Report
I. Below are the key differences between Ind AS 8 and AS 5
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Particulars |
Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors |
AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies |
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Omissions, misstatements in, the entity's financial statements for one or more prior periods arising from a failure/misuse of reliable information that: (a) was available when financial statements for those periods were approved for issue; and (b) could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements. Errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud. |
Income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods. Errors may occur as a result of mathematical mistakes, mistakes in applying accounting policies, misinterpretation of facts, or oversight. |
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Impact of material prior period error |
a. “Material” prior period errors are corrected retrospectively by restating the comparative amount for prior period presented in which the error occurred or if the error occurred before the earliest period presented, by restating the opening statement of financial position (third balance sheet). b. The requirement to present the third balance sheet is in line with the para 40A of Ind AS 1 and there is no requirement to present the related notes to the third balance sheet. |
It requires the correction of prior period items by including the required adjustments in the determination of net profit or loss for the current period. However, AS 5 also permits an alternative approach under which the adjustments are included in the statement of profit and loss after determination of current net profit or loss. |
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Disclosures |
a. Nature of the prior period error and b. For each prior period presented the amount of the correction (to the extent practicable) · for each financial statement line item affected · Impact on basic and diluted EPS; c. The amount of the correction at the beginning of the earliest prior period presented; and d. 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 |
No detailed disclosure required |
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Definition of material |
As per para 7 of Ind AS 1 –Presentation of Financial Statements: Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity. Also, materiality depends on the nature or magnitude of information or both. An entity assesses whether information, either individually or in combination with other information, is material in the context of its financial statements taken as a whole |
As per para 30 of Framework for the Preparation and Presentation of Financial Statements: Information is material if its misstatement (i.e., omission or erroneous statement) could influence the economic decisions of users taken on the basis of the financial information. Materiality depends on the size and nature of the item or error, judged in the particular circumstances of its misstatement. Materiality provides a threshold or cut-off point rather than being a primary qualitative characteristic which the information must have if it is to be useful |
II. Some Key Practical Issues
a. The reclassification of assets/liabilities from current to non-current or vice versa would be considered as correction of an error under Ind AS 8 considering as per para 41 of Ind AS 8, Errors can arise in respect of the recognition, measurement, presentation, or disclosure of elements of financial statements.
b. If the retrospective restatement of error in the statement of profit and loss has no effect on the information in the balance sheet at the beginning of the preceding period (for example classification of expenses from finance cost to other expenses) in such cases, the entity is not required to present a third balance sheet.
c. The entity is required to restate the material prior period in the first set of financial statements approved for issue after their discovery (for example interim financial statements) as it wouldn't be sufficient to correct the error by restating the comparatives in the annual financial statements only. Also, the entity is required to correct the error if the error is material for interim financial statements and immaterial from the annual financial statements point of view.
III. Voluntary revision under Companies Act 2013 (‘2013 Act')
As detailed out above, under Ind AS 8, unlike erstwhile AS 5, financial statements are restated if there is a change in accounting policy or an error and in line with the accounting framework, the 2013 Act allows reopening/revision of accounts after those are approved at the AGM in certain situations and provides procedural requirements in respect of revision of accounts. Further, the 2013 Act casts responsibility on auditors in relation to revision/ restatement of accounts and it requires the central government to notify a provision relating to the responsibility of auditors through rules. However, such rules have not been notified to date.
IV. Implications in the Auditor's Report
Where the entity has corrected the material prior period error in the reporting period in accordance with the requirements of Ind AS 8 or AS 5, the auditor can assess that whether the information involved quantitatively and qualitatively is fundamental for the users understanding and accordingly, whether an Emphasis of Matter as per SA 706 is required to be given in the auditor's report.
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