A retrospective correction of prior period errors is a correction of errors that occurred in a previous period, but were not discovered until a subsequent period. Retrospective correction of prior period errors is required by IAS 8 and also FRS 102 s10.21 which state that errors should be corrected retrospectively by adjusting the opening balance of retained earnings for the earliest period presented.
To correct a prior period error retrospectively, the entity should first determine the amount of the error and the period in which the error occurred. The entity should then adjust the opening balance of retained earnings for the earliest period presented in the financial statements, by the amount of the error and a corresponding adjustment to the appropriate item in the statement of financial position.
For example, if an entity discovers a material £50,000 error in the calculation of opening balances for prepayments carried forward from 2022 during the audit of 2023, the entity would need to correct the error retrospectively. The other side of the entry would be to adjust the opening balance of retained earnings carried forward from 2022.
The journal in 2023 would be:
Dr prepayments £50,000
Cr retained earnings b/fwd £50,000
The comparatives column in the 2023 accounts would also be restated and the error would need to be disclosed.