This Dataline outlines the framework (whether a restatement, revision, or out of period adjustment) for evaluating errors in previously-issued financial statements.
Potential restatements of previously issued financial statements are often challenging situations. To help companies navigate these challenging situations, this Dataline outlines the accounting framework for evaluating errors in previously issued financial statements.
Under the accounting literature, errors in US GAAP financial statements filed with the SEC must be evaluated using both the iron curtain method and the "rollover" method. Many companies whose financial statements are not filed with the SEC also evaluate errors using both of these methods. The use of both methods is commonly referred to as the "dual" method of evaluating errors.
When errors in previously-issued financial statements are identified, they must be assessed to determine whether the affected financial statements are materially misstated. If the previously-issued financial statements are materially misstated, they should be corrected promptly. For a public company, the correction of a material misstatement is ordinarily accomplished by amending prior filings. For a private company, the correction of a material misstatement is ordinarily accomplished by the company issuing corrected financial statements which indicate that they have been restated and including its auditor’s re-issued audit report. If the previously-issued financial statements are not materially misstated, then the error may be corrected prospectively.
Note: This Dataline updates and supersedes Dataline 2009-21 by providing clarifications based on questions received since Dataline 2009-21 was issued.