Example - Correction of Prior Period Accounting Errors IAS 8


Management of ABC LTD, while preparing financial statements of the company for the period ended 31st December 20X2, noticed that they had failed to account for depreciation in last year's accounts in respect of an office building acquired in the preceding year.

Following are extracts of ABC LTD's most recent financial statements before the application of FIFO method.


Statement of Financial Position as at 31 December 20X2
20X2
$M
20X1
$M
Non Current Assets:
Cost5050
Accumulated Depreciation108
4042


Income Statement for the year ended 31 December 20X2
20X2
$M
20X1
$M
Administration Expenses:
Depreciation21


Statement of Changes in Equity for the year ended 31 December 20X2
20X2
$M
20X1
$M
Retained Earnings:
Opening Reserves4030
Net Profit3020
Dividend(10)(10)
Closing Reserve6040

Accounting Treatment

The omission of depreciation of office building in the previous year's financial statements represents a prior period accounting error which must be accounted for retrospectively in the financial statements. Consequently, ABC LTD shall adjust all comparative amounts presented in the current period's financial statements affected by the accounting error.

Management estimates that depreciation charge for the year 20X1 was under booked by $1 million.

Financial statement extracts of ABC LTD would appear as follows after the retrospective correction of the prior period accounting error.

Statement of Financial Position as at 31 December 20X2
20X2
$M
20X1
$M
Non Current Assets:
Cost5050
Accumulated Depreciation119
3941


Income Statement for the year ended 31 December 20X2
20X2
$M
20X1
$M
Administration Expenses:
Depreciation22


Statement of Changes in Equity for the year ended 31 December 20X2
20X2
$M
20X1
$M
Retained Earnings:
Opening Reserves3930
Net Profit3019
Dividend(10)(10)
Closing Reserve5939

Note that the correction of the error is applied to all prior period comparative amounts affected by the omission (i.e. retrospectively). Current year's profit is therefore unaffected by the correction of prior period error.

The nature of the correction of prior period error must be disclosed in the financial statements of ABC LTD.