Correction of prior period errors and replacement of financial statements

During the preparation of financial statements, certain errors may occur that affect the fair presentation of the assets, liabilities, capital, company results, as well as taxable profit or loss in the tax balance.

Errors may be mathematical in nature, relate to the incorrect application of accounting policies in the valuation of business events, misinterpretation of facts, fraud or oversight.

Errors that occurred in one accounting period and are discovered in the next or one of the subsequent periods may be treated as material errors from the previous period and should be corrected appropriately.

In addition to errors discovered by the company itself, it may happen that, during the audit of financial statements, the auditor proposes certain corrections to certain balance sheet items. Given that auditees submit corrected financial statements together with the auditor’s report, if the auditee accepts the auditor’s corrections and implements them in its business books, it will submit to the Business Registers Agency corrected regular (or consolidated) annual financial statements, adopted by the competent authority, with an auditor’s report, which will not contain qualifications related to the items for which the correction has been made.

To the extent practicable, an entity should retrospectively correct material prior period errors in the first set of financial statements authorised for issue after those errors are discovered by:

1. restate the comparative amounts for the prior period presented in which the errors occurred, or
2. if the error occurred before the earliest prior period presented, restate the opening balances of assets, liabilities and equity for the earliest prior period presented.

Material errors in the financial statements of a business entity from the previous period are corrected by adjusting the opening balance of retained earnings or losses in the period in which they were identified.

Corrections of errors from previous periods that are not considered material errors in accordance with the accounting policy of the business entity are made by adjusting income and expenses for the period in which those errors were identified.

The concept of prior period error under IAS 8 applies only to material errors. Under IAS 8, the materiality of an error is not determined in absolute or relative terms, but rather the management of each individual company should assess when an error is material.

Prior period errors may relate to the recognition, measurement, presentation or disclosure of elements of the financial statements. If material prior period errors are discovered in the current period, they are corrected in the adopted (adjusted) financial statements, as well as in the comparative information from the financial statements for the current year.

The method of posting when correcting an error depends on whether the error affected the items of the income statement or balance sheet or the elements of both financial statements.

IAS 8 does not apply to materially insignificant errors, which means that corrections of minor, materially insignificant errors can be included in income or expenses of the current period.

Replacement of financial statements and publicly disclosed documentation

The taxpayer may request the replacement of financial statements, the Statistical Report, as well as documentation, the audit report and special data, by submitting a request for replacement on the forms prescribed by the registry.

Given that the Rulebook does not prescribe a limitation regarding the replacement of a financial statement, the taxpayer may perform the replacement more than once, by paying an appropriate fee. When submitting replaced financial statements, the same fee is paid in the same amount to the same payment account as when initially submitting the replaced financial statements.

Impact of the error on dividends paid to equity holders

Given that a prior period error may be discovered several months after the financial statements are prepared or approved, it may happen that in the meantime, before the error is discovered, a distribution of profit as dividends is made.

Bearing in mind that the correction of a prior period error may lead to a change in retained earnings, if a distribution of profit as dividends was previously made, the correction will be carried out by creating a new profit or recognizing a loss, depending on the nature and effect of the error correction.