Prior Period Adjustment
A correction to a previously issued financial statement for a material accounting error.
What is Prior Period Adjustment?
A prior period adjustment is a direct correction to the opening balance of retained earnings to fix a material error in financial statements from a previous accounting period. Under ASC 250 (Accounting Changes and Error Corrections), when a company discovers a material error in a prior year's financials — such as revenue recorded in the wrong period or misstated inventory — it must restate those prior financial statements rather than simply recording the correction as a current-period charge. Prior period adjustments are disclosed in the notes to the financial statements and require recasting comparative figures to reflect the corrected amounts, ensuring investors have accurate historical data.
Example
In 2022, a retail company discovered it had overstated its FY2021 revenue by $10 million due to premature recognition of gift card breakage income. Under ASC 250, the company restated its 2021 annual report, reduced retained earnings by $10 million (net of tax), and fully disclosed the error and its correction in the 2022 annual report footnotes.
Source: FASB ASC 250 — Accounting Changes and Error Corrections