To mark this momentous year for UK GAAP, I'm embarking on a mission to work my way through FRS 102, reading a portion on each working day of 2015 and writing a short blog entry on my thoughts and musings (be they few or many).
We're still in section 10 (but not for long)...
DAY 18 (28 Jan)
It's 3pm and you are due in a client wrap-up meeting at 3:30pm to sign off his company's year-end accounts, which sit glistening in the printer tray. As you sit back down at your desk with a coffee, you casually flick through the file and suddenly spot that a sizeable purchase invoice was, in the previous year, posted to distribution costs in error. As you try to remember who on earth was responsible for such a clumsy mistake (and thank your stars it's a non-audit client), you realise with horror that you've barely any time to correct the material error before the client arrives. But wait - do you need to bother?
Client service issues aside, the question of whether prior period errors need to be corrected by a prior period adjustment ('PPA') is dealt with in FRS 3 para 7. This states that PPAs arise either from changes in accounting policy or the correction of fundamental errors. I seem to remember a quote from the ICAEW that fundamental means 'very, very material' i.e. a significantly higher threshold than materiality; per para 63 of FRS 3 a fundamental error is 'of such significance as to destroy the truth and fairness and hence validity of a set of financial statements'.
Now unless this mis-posting was truly epic (which is pretty hard to imagine in this scenario), we're not talking about a fundamental error. After all, the operating profit is undisturbed, as is the balance sheet. So you can breathe a bit easier (and hope the client doesn't ever notice).
How is all this relevant to my daily trawl through section 10 of FRS 102? Well, it's been widely and accurately reported that the new standard uses the term 'material error' in connection with PPAs. Which means it's more likely that we'll all need to do PPAs in the future, including in this scenario. Time to put down that coffee cup and get reposting.
I am not working for the rest of the week, conveniently timed to coincide with heavy snow in the East Midlands. Barring any sledging or snowman-building accidents, I'll be back on Monday...
P.S. If you missed yesterday's instalment click here