ASPE
does not permit the correction of an error to be accounted for using partial
retrospective restatement or prospective restatement. However, IAS 8 does allow
partial retrospective restatement or even prospective treatment for error
corrections.
Instructions
(a)
Write a short memorandum that is suitable for being presented to your class in
support of the Canadian position for private enterprises.
(b)
Write a short memorandum suitable for presentation to your class in support of
the international position.
(a) The Canadian standard for private
enterprises for accounting changes requires the correction of an error to be
accounted for using full retrospective restatement, and it does not permit the
use of partial retrospective or prospective restatement. The result is the correction of amounts that
were reported in the financial statements of prior periods as if the error had
never occurred. In other words, the cumulative
effect of the change on the financial statements at the beginning of the period
is calculated and an adjustment is made to the financial statements. In
addition, all prior years’ financial statements that are affected are restated
on a basis that is consistent with the newly adopted policy, as it is believed
that an accounting error, by its definition and nature, can be traced to a
specific prior year.
This standard supports the position that only by restating prior periods
can accounting changes lead to comparable information. If this approach is not
used, the years before the change will contain errors and the current and
following years will present financial statements without errors. In addition,
partial retrospective restatement to the carrying amounts at the beginning of
the earliest period (this could even be the current year) for which restatement
is possible would result in “catch-up” adjustments, such as the adjustment of
the opening balance of retained earnings for error correction that may not be
clear enough for the financial statements users to understand. As consistency
is considered essential in providing meaningful trend data and other financial
relationships that are necessary to evaluate a business, partial retrospective
or even prospective restatement could cause confusion for the users and a loss
of confidence by investors.
(b)
International Accounting Standard (IAS) 8, on the other hand, indicates
that if full retrospective restatement is not practicable, then an entity is
permitted to restate information for the earliest period for which it is practicable.
Regarding how to judge ‘practicability’, IAS 8 states that hindsight should not
be used when correcting amounts for a prior period, either in making
assumptions about what management’s intentions would have been in a prior
period or estimating the amounts recognized, measured, or disclosed in a prior
period.
It specifically requires that, when an enterprise retrospectively applies a
new accounting policy or corrects a prior period error, it should distinguish
information that
1. provides evidence of circumstances that existed
on the date(s) at which the transaction, other event, or condition occurred;
and
- would have been available when the financial
statements for that prior period were authorized for issue from other
information.
When retrospective restatement would require
making a significant estimate for which it is impossible to distinguish these
two types of information, it is impracticable to correct the prior period error
retrospectively.
When an enterprise becomes aware of its accounting error but the correction
is impracticable, the best thing it can do to achieve the objective of
financial statements—communicating information that is useful to users—would be
to provide partial retrospective or prospective treatment if it is
impracticable to determine the full impact of the error correction on prior
periods. Also, this approach can be supported when an entity may find that data
from specific prior periods may only be available at too high a cost.
