Prior period adjustment
Meaning & Definition
A prior period adjustment refers to an adjustment to an accounting report (financial statement) to identify an error or omission of the financial statements of a preceding accounting period. They are result from a miscalculation, omitted transactions, misstatement, or misapplication of accounting principles. This adjustment aligns the financial statements to reflect the correct financial information.
Important Aspects of Prior Period Adjustment
- Corrects material errors from previous accounting periods.
- Helps maintain accurate and reliable financial statements.
- Improves the comparability of financial information.
- Helps to protect past errors in accounting from pulling current results down.
- Supports transparency in financial reporting.
- Enables the administration and stakeholders to take more informed financial decisions.
Applicable Rules & Regulations
For companies applying Ind AS, prior-period errors are generally dealt with using Ind AS 8 – Accounting Policies, Changes in Accounting Estimates and Errors. Material prior-period errors are usually corrected retrospectively by adjusting comparative figures or the opening balances (as applicable) restating these, as specified by the Ind AS.
Other entities following other suitable Accounting Standards should apply the correction and disclosure requirements. Examples of additional disclosures Companies should also keep the relevant supporting records, disclosures in their financial statements.
