7. Correction of Errors

Question 1

Errors

Answer 1

▪ Errors can arise with regard to the recognition, measurement, presentation or disclosure of elements
of financial statements. They result from
▪ mistakes (false calculation, false application of accounting policies),
▪ misinterpretation of facts,
▪ fraud.

▪ Financial statements do not comply with IFRS if they contain material errors or immaterial errors made intentionally to achieve a particular presentation
▪ An error is material if it could influence the economic decisions of users of financial statements

▪ With respect to their time of discovery two types of accounting errors can be distinguished:
▪ Current period errors are discovered and corrected before the financial statements are authorized for issue.
▪ Prior period errors are not discovered until a subsequent period. They have to be corrected in the first set of financial statements issued after the error has been discovered.

Question 2

Correction of Errors

Answer 2

▪ The correction of prior period errors aims to enhance the relevance and reliability of an entity’s financial statements and to improve their comparability over time and with other entities
▪ All material prior period errors must be corrected by retrospective restatement
▪ Exceptions (IAS 8.43ff.): If it is impracticable to determine period-specific or cumulative effects of the error, limited retrospective or even prospective correction is applied.

Question 3

Changes in accounting policies

Answer 3

▪ In general, the principles for recognition, measurement, and presentation must be applied consistently, unless different policies are permitted or required

▪ An entity is permitted to change an accounting policy only if the change (IAS 8.14):
▪ is required by an IFRS or
▪ results in financial statements that provide reliable and more relevant information.

▪ The following are not changes in accounting policies (IAS 8.16):
▪ the application of an accounting policy for transactions or events that differ in substance from those previously occurring,
▪ applying an accounting policy to a transaction or event that did not occur before or was immaterial.

Question 4

Changes in Estimates

Answer 4

▪ In preparing financial statements entities have to rely on estimates for many accounting measurements. Estimates involve judgements on the latest available and reliable information.
▪ All estimates are subject to change if new information becomes available or new developments take place. Thus, a change in an accounting estimate does not relate to prior periods and is not the correction of an error.

Question 5

Accounting for Correction of Erros

Answer 5

1. Opening Statement
   - remember value-added tax: receiveables/1+vat
   - taxes in every journey entry
   - directly in equity
2. Closing Statement
   - also remember VAT for receiveables
   - no taxes for every journey
   - taxes only at the end as summary of all entries
   - directly in profit/loss