October 20 To October 26, 2018 u Taxmann’s Corporate Professionals Today u Vol. 43 u (^13371)
statements of one or more prior periods.
Under AS 5 it is not relevant whether the
information was available or not at the time
of approval of those financial statements.If
the errors are found before the approval of
financial statements of any period then same
should be corrected before the approval.
In such case, the errors are not treated as
prior period errors. However, if the errors
are noticed after the approval of financial
statements, such errors shall be considered
as prior period errors and, hence, the relat-
ed income or expenses are treated as prior
period items. As per the principles of AS
5, the nature and amount of prior period
items should be separately disclosed on the
face of statement of profit and loss in order
to show its impact on the determination of
net profit or loss for the period in which
the errors are discovered.
Prior Period Items and Ind AS 8
- Errors can arise in respect of the recogni-
tion, measurement, presentation or disclosure
of elements of financial statements. According
to Ind AS 8, if financial statements contain
any errors, whether material or immaterial,
made intentionally by the management to
present a strong financial position, cash
flows and profitability of an entity then
such financial statements do not comply
with requirements of Ind ASs. So, errors
discovered before the approval of financial
statements for the period in which the er-
rors have been committed, must be corrected
before the approval. However, if errors are
found after approval then related income or
expenses or items of balance sheet shall be
restated retrospectively. Only the material
errors are required to be corrected. In other
words, an entity shall correct material prior
period errors retrospectively by:
(i) Restating the comparative amounts for
the prior periods presented (along with
the current period’s financial statements)
in which error occurred; or
(ii) If the error occurred even before the
earliest prior period presented (along
with the current period’s financial state-
ments), restate the opening balances of
assets, liabilities and reserves & surplus
for the earliest prior period presented.
However, if it is impracticable to determine
the retrospective impact of prior period er-
rors, the effects shall be given prospectively.
When it is impracticable to determine the
period-specific effects (in case of point (i)
above), the opening balances of assets, liabil-
ities and reserves & surplus for the earliest
period presented for which retrospective
application is practicable. When it is imprac-
ticable to determine the cumulative effects
of prior period errors (in case of point (ii)
above) at beginning of the current period
then the effects shall be given from current
period onwards by adjusting the balances of
items of balance sheet. Let’s understand this
with the help of an example.
Example
A Ltd. has discovered during current period,
say 2018-19, that the inventories of 2016-
were mistakenly short recorded by an amount
of ` 10,00,000.
In this case, if A Ltd. follows AS, then as
per AS 5, opening inventory of FY 2018-
shall be increased by ` 10,00,000 and at the
same time an income of ` 10,00,000 shall be
credited to statement of profit and loss for
the year ended march 31, 2019.
If A Ltd. follows Ind AS then as per Ind AS
8, opening balance of inventory and retained
earnings of FY 2018-19 shall be increased by
` 10,00,000.Conclusion
- There are differences in the provisions of
AS 5 and Ind AS 8 from the point of view
of financial reporting of prior period items.
In case of AS 5, the net profit for the current
year gets affected whereas in case of Ind AS
8, the net profit for the current year does
not get affected, prior period items affect
directly the items of balance sheet.
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PriOr PeriOd iTems-FinanCial rePOrTing PersPeCTiVe