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Treatment of reclassification error of liabilities in the current year’s financial statements under AS?
Query
Green India Private Limited (herein referred to as "the company") is engaged in the business of manufacturing automobile parts. The Company has classified some of its material liability as "Current liability" up to F.Y. 20X1-20X2.
However, while preparing the annual accounts for F.Y. 20X2-20X3, it was found that those liabilities should have been classified as "Non-current liabilities" which were earlier classified as "Current liabilities".
The management of the company has changed the classification of liabilities in the comparative amounts of the financial statements for the period ending 31-03-20X2. State, whether this reclassification of liability from current to non-current in the comparative financials be needs any disclosure as per accounting standards (AS)?
Relevant Provisions
AS 5: Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
Para 4.3: Definitions
Prior period items are income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods.
Para 17: Prior period items
Errors in the preparation of the financial statements of one or more prior periods may be discovered in the current period. Errors may occur as a result of mathematical mistakes, mistakes in applying accounting policies, misinterpretation of facts, or oversight.
Para 15:
The nature and amount of prior period items should be separately disclosed in the statement of profit and loss in a manner that their impact on the current profit or loss can be perceived.
Analysis
(a) To determine if the reclassification of liabilities from current to non-current will be considered an error, we need to refer to AS 5, which states that errors can arise as a result of mathematical mistakes, mistakes in applying accounting policies, misinterpretation of facts, or oversight. Consequently, reclassifying liabilities from current to non-current without appropriate justification or correction can be considered an oversight error.
(b) According to AS 5, prior period items are income or expenses arising in the current period due to errors or omissions in one or more prior periods. Since the reclassification itself does not generate any income or expenses affecting the current period's profit or loss, it doesn't strictly qualify as a prior period item.
(c) While the reclassification may not directly impact the current period's profit or loss, it's essential to disclose the nature of the error and the amount reclassified. This disclosure shall be done to maintain the integrity of the financial statements, providing a clear view of the company's financial position and performance across periods.
(d) Illustrative Disclosure by the company
"The company has restated its comparative financial statements in the F.Y 20X2-20X3 for reclassifying the material liabilities from current to non- current. This has resulted in the reduction of total current liabilities by Rs. XXX and equal increase in the total non-current liabilities in the comparative amounts of the financial statements for the year 20X2-20X3."
Conclusion
From the above discussion, it can be concluded that though the reclassification may not fit the strict definition of a prior period item, it's still necessary to disclose it to ensure transparency and maintain the integrity of the financial statements in line with accounting standards.
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