Should all errors be accounted for using GRAP 3?

In recent discussions on the projects the ASB should undertake during 2021 to 2023, stakeholders indicated a recent trend of disclosing extensive information on the corrections of prior period errors – both in the statement of changes in net assets as well as the notes. Stakeholders indicated that the information provided detracted from the overall quality of the financial statements as it was not relevant to users of the financial statements. The disclosures often related to immaterial amounts, and the aggregation of information was not considered.

This practice means that the principles in GRAP 3 on Accounting Policies, Changes in Accounting Estimates and Errors – particularly materiality – are not being considered by entities when preparing their financial statements.

GRAP 3 explains that the Standards of GRAP are only applied to transactions and events that are material. This should always be considered by entities in deciding what accounting treatment should be applied, as well as what and how information should be presented in the financial statements and disclosed in the notes.

The Board’s recently issued Guideline on The Application of Materiality to Financial Statements provides guidance on the treatment of immaterial errors. The guidance is outlined below.

What are errors?
GRAP 3 explains that prior period errors are omissions from, and/or misstatements in, an entity’s financial statements arising from failure to use, or misuse of reliable information that is available, or could reasonably be expected to be obtained.

Material errors
Material errors are errors that individually or collectively could reasonably be expected to influence the users’ decisions taken on the basis of those financial statements. An entity >must correct all material errors in accordance with GRAP 3, i.e. retrospective correction and restatement of the error, with disclosure in the notes to the financial statements.

Immaterial errors
As the Standards of GRAP only apply to material items, and entity should consider the following in deciding how to treat errors that are immaterial.

Immaterial errors do not need to be corrected, unless the errors are made to achieve a particular presentation of an entity’s financial position, financial performance or cash flows. When an entity assesses an error not to be material individually, it considers whether it may be material in aggregate with other immaterial errors. The netting of errors is inappropriate.

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