Prior Period Adjustments And Their Impact Under Ind AS 8

Introduction

Under Ind AS, correcting past errors isn’t just a bookkeeping fix – it can reshape reported profits, trigger fresh CSR obligations, clash with ICDS rules, and even change the final tax bill. This article shows how a single adjustment to prior-period income can open the door to multiple financial and compliance consequences.

The mercantile system of accounting requires that any expenditure be claimed or accounted for in the year in which it accrues.
Prior Period Items refer to income or expense items that belong to previous accounting periods but were omitted or recorded incorrectly in those periods due to mathematical mistakes, misapplication of accounting policies, oversights or misuse of information.

The term prior period does not include other adjustments necessitated by circumstances, which, though related to prior periods, are determined in the current period.

To understand this definition, let us see some examples of prior period items:

• Mathematical errors

While finalising FY 2023-24 accounts, depreciation on machinery was calculated as Rs.5,00,000 instead of Rs.50,000 due to a mathematical error.

• Misapplication of accounting policies

The company capitalised routine repair expenses of Rs.3,00,000 in FY 2021-22, although as per its accounting policy and Ind AS 16, such expenses should have been charged to the Statement of Profit and Loss.

• Oversights or misuse of information

An electricity bill for March 2023, amounting to ?1,20,000, was received before finalisation of accounts, but was overlooked and not recorded.

1. Concept of Crystallization in Prior Period Items:

Crystallization is the point at which a possible or unknown obligation becomes a definite and actual liability. It is the moment when the company can no longer avoid recognising the liability in its accounts.

1.1. Crystallized Liability – When to Treat as Prior Period Item

Crystallization only means “the liability becomes definite now.” Whether it becomes a prior period item depends on whether an error occurred in earlier financial statements.

For example: During the current accounting period, the company entered into a wage settlement with its workers, resulting in a revision of wages with retrospective effect. Consequently, arrear wages amounting to Rs.5,00,000 became payable to workers.

In this example, the liability crystallised during the current period when the wage agreement was concluded. The entire arrears of Rs.5,00,000 is charged to the current period’s Statement of Profit and Loss, and this is not treated as a prior period item, because the obligation arose and became determinable only in the current period.

Prior period items are important in accounting because they ensure accuracy, transparency, and fairness in financial reporting. Correcting past errors helps present financial statements reflect the actual financial performance and position of the business. This helps users make better decisions, avoids misleading comparisons and builds trust among investors and stakeholders.

2. Presentation of Prior Period Items in Financials as per AS- 5 & Ind AS- 8

As per AS–5, prior period items are not considered part of the current period’s ordinary profit or loss and must be shown separately in the statement of profit and loss in a manner that their impact on current profit or loss can be perceived. Typically, prior period items are presented after the net profit from ordinary activities of the current period, so that users can clearly distinguish the effect of past errors on the current profit.

As per Ind AS – 8, Prior Period items have a retrospective effect, which means that the entity must correct prior period items retrospectively in the financial statement of the current year by restating the comparative amounts for the prior period(s) presented in which the error or omission occurred. This can result in a change of net profit, reserves and surplus, ratios, EPS, etc.
If the error or omission occurred before the earliest prior period presented, then the opening balances of assets, liabilities, and equity for the earliest prior period presented must be restated.

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