Definition
Under ASC 250, a correction of an error in previously issued financial statements is a prior period adjustment. If the error is material to those statements, the entity restates them: it adjusts the opening retained earnings of the earliest period presented, labels the affected columns "as restated," and discloses the nature of the error and its effect on each line item and on net income. If the error is immaterial to prior periods and to the current period, the entity may revise the comparative amounts in the next report (often called a "little r" revision in SEC practice) with disclosure. Error corrections differ from changes in estimates.
Why it matters in an audit or review
Auditors assess the materiality of the error quantitatively and qualitatively, consider whether previously issued reports should be reissued or withdrawn, and communicate with those charged with governance. Lender notification may follow.
Example
(Illustrative) A company finds that prior-year depreciation was understated by $80,000 (pre-tax). If the error is material, it labels last year's statements "as restated", corrects depreciation and accumulated depreciation, adjusts opening retained earnings of the earliest period presented for any earlier-year effect, and explains the correction in the notes. If immaterial, it revises last year's comparatives in the next report with disclosure.
Common mistakes
- Correcting through current-year income.
- Not evaluating the error across multiple years cumulatively.
Sources
- FASB ASC 250-10-45-23 and 250-10-50-7 (correction of an error in previously issued financial statements)
- SEC, Staff Accounting Bulletin Topic 1.M and Topic 1.N (materiality and quantifying misstatements)
- AICPA, AU-C Section 560, Subsequent Events and Subsequently Discovered Facts
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error