On the requirement of materiality in accounting (financial) statements

How to distinguish a significant error from an insignificant one

According to clause 3 of PBU 22/2010 “Correcting errors in accounting and reporting”:

“An error is considered significant if it, individually or in combination with other errors for the same reporting period, can affect the economic decisions of users made on the basis of the financial statements prepared for this reporting period.”

The degree of materiality influences the economic decisions of users

The degree of materiality of the error depends on the value of correct information for the user of the statements, namely, for the economic decisions he makes.

Consequently, it is necessary to approach the determination of the significance of errors in accounting and reporting economically (qualitatively), and not just formally, mathematically (quantitatively).

It should also be borne in mind that the correction of a significant error from previous years, identified after the approval of the financial statements for the year, as a general rule requires a retrospective recalculation of the financial statements and is reflected in the balance of account 84 “Retained earnings (uncovered loss)” (clause 9 of PBU 22 /2010) during the period of its identification.

Correction of a minor error does not imply a retrospective recalculation, and the result of the adjustment is reflected in other income or expenses of the current reporting period (clause 14 of PBU 22/2010).

Thus, the main differences between significant and insignificant errors of previous years are as follows:

• influence / lack of influence on comparative indicators of financial statements;
• influence / lack of influence on the profit (loss) indicator of previous years.

It turns out that the fact of correcting a significant error forces the user to reconsider his understanding of the organization’s past and the dynamics of its financial indicators, which cannot but affect the assessment of prospects.

This conclusion allows us to identify standard indicators that characterize the financial position of an organization: liquidity ratios, profitability ratios, asset turnover and market value.

It is worth finding out exactly what coefficients internal users (manager, financial and economic service, participants (shareholders) of the organization) of your organization’s reporting are guided by when making economic decisions. Errors in the information used in such calculations will be the most significant.

The degree of materiality is determined based on rationality

Taking into account the information needs of reporting users, but also the principle of rationality, it is worth defining not only qualitative, but also quantitative criteria for the materiality of an error in order to avoid unnecessary labor costs for the accounting department to correct and disclose significant errors in the explanations to the reporting.

Let us make a reservation that in the case when even a small error in amount will have a fateful significance, the accountant will always be able to deviate from the canon and describe it in explanations.

It is traditionally accepted to take 5% of the base value of the indicator that was distorted as the level of materiality. Some organizations choose the percentage differentially for various indicators, the errors in which are considered significant (for some indicators 5%, for others - 7%, etc.).

The materiality of an error in percentage terms can coexist with materiality in absolute (total) terms. For example, in the accounting policy it may be decided to stipulate that “an error is significant if it exceeds 5% of the base indicator, but not less than 100,000 rubles.” or “the error is significant if it is greater than or equal to 5% of the base indicator or exceeds 1,000,000 rubles.” and so on. It all depends on the scale of the organization’s activities and the requests of its management services and owners.

You can approach this issue a little differently and take “punitive” legislation as a guide. Yes, Art. 15.11 of the Code of Administrative Offenses of the Russian Federation, a gross violation of accounting reporting requirements means a distortion of any indicator of accounting (financial) reporting expressed in monetary terms by at least 10%. This - much more formal - option is more suitable for those organizations that do not practice financial analysis based on financial statements and, as it seems to them, are more likely to prepare financial statements for regulatory authorities than to use their indicators for making economic decisions.

Regulatory legal acts (LLA) on accounting do not provide any clear formulations for enshrining in the accounting policy on the issue under consideration. Clause 3 of PBU 22/2010 only notes that the organization determines the materiality of an error independently, based on both the size and nature of the relevant item(s) of the financial statements.

The materiality factor must be taken into account based on the totality of errors

An error that is not significant in itself may turn out to be significant when combined with other errors made in the same reporting period. For this reason, it is necessary to determine the materiality not only of each error individually, but also of their totality, if they can have a joint impact on economic decisions.

For example, the value of an organization's net assets is determined by the formula:

Let's assume that errors were made in the balance sheet items “Revaluation of non-current assets” (line 1340) and “Retained earnings (uncovered loss)” (line 1370). They are both taken into account in the total of Section III of the Balance Sheet. Each error individually is below the level of materiality, but collectively they are significant. Their overall impact would lead to a distortion of such an important indicator as the value of net assets.

Thus, having determined the range of the most important financial indicators, care should be taken to ensure that errors in the parameters involved in their calculation are assessed for materiality, both individually and jointly.

The materiality of the error may vary depending on the reporting period

The materiality of a particular error may vary depending on the reporting period chosen.

Thus, annual reporting is used by a wide range of internal and external users to make, among other things, strategic decisions (regarding the distribution of profits, business structure, assessment of the financial stability of the counterparty).

However, the organization's management may decide to prepare interim financial statements based on the results of each month or each quarter, or at a specific reporting date of the current year.

The purposes for preparing interim reporting may vary. In particular, its data can be used to develop and adjust business plans and estimate the value of participants' shares. Such reporting can be provided to counterparties, investors or banks, etc.

For interim reporting, taking into account the purposes of its preparation, other errors may be significant than for annual reporting.

For example, it may be intended to provide food for thought about the solvency of the organization in the short term. To evaluate it, the so-called indicator is used. quick liquidity, calculated by the formula:

Errors in the indicated balance sheet lines (even not very significant in absolute terms) can seriously distort this indicator, which will lead to incorrect operational assessments of the organization's solvency and negative consequences. When analyzing only annual reporting, the quick liquidity ratio is much less important, because reflects the state of affairs solely at the reporting date and does not provide grounds for drawing conclusions for the long term. It turns out that in relation to interim reporting (depending on the purposes of its formation), its own criteria for the materiality of errors can be determined. They can also be fixed in accounting policies if the organization considers this appropriate.

Materiality level in IFRS

So, what is the level of materiality and how to determine it? First you need to understand what materiality is and where this concept comes from. Materiality (or materiality, as it is also called), together with the nature of the information, influences the so-called relevance (or relevance). And relevance, as you know, is one of the two fundamental qualitative characteristics (along with the reliability of presentation) required for the preparation of financial statements under IFRS (in accordance with the Conceptual Principles of IFRS). Let's define the concept of materiality. Materiality is the magnitude (or quality) of financial statement items, the failure to present or distortion of which (individually or in aggregate) would affect the economic decisions of a qualified user of the statements. Simply put, materiality is a property of information that influences the decision of a person using statements for economic purposes. Thus, it is important for the preparer of financial statements under IFRS or for a specialist who maintains accounting under IFRS to be able to determine the level of materiality. That is, the maximum value of reporting distortion, starting from which the user is more likely to be unable to draw correct conclusions based on it and make correct economic decisions. It is worth noting that the concept of materiality implies not only a quantitative component, such as the size of an article, but also a qualitative one, that is, its (the article’s) economic essence. Sometimes the nature of the item alone is enough to determine that the information is material and therefore should be presented and disclosed separately in the IFRS financial statements. A striking example is the presentation of a new reporting segment (for example, “sales to small and medium-sized businesses”) can greatly change the mood of the user of the reporting about the company’s prospects due to the emergence of new significant risks and opportunities. At the same time, from a quantitative point of view, the selected segment may be extremely small. However, when analyzing the level of materiality, a combination of qualitative and quantitative characteristics of the information should be used. The basic rules of thumb relating to the concept of materiality are: – each material class of items that are similar in nature should be presented separately in the financial statements; – non-essential items should be grouped by nature or function; – items that are not sufficiently material for the main reports may require disclosure in the notes to the statements. From a practical point of view, the level of materiality (materiality threshold) is still largely a quantitative indicator. However, despite this, there is no clear regulation of figures regarding the materiality of a particular item in IFRS (as well as in US GAAP standards). Apparently implying that determining the level of materiality is a matter of more judgment than mere banal calculation. More specifically than in IFRS, the issues of determining materiality are covered in the International Standards on Auditing (ISA), since such information is essential for auditors in for the purpose of performing their main work.

Determining the overall level of materiality for financial statements Let's look at one of the methods for determining the overall level of materiality for financial statements. First you need to determine the basic indicators. The following articles are often taken as such:

To calculate the overall level of materiality, both indicators of the current period and average indicators of the current and previous periods can be used. Also, indicators of the current period can be used, for example, when there have been significant changes in the organization's business in the current period, and the indicators for the current period and the previous period turned out to be incomparable. In addition, not all indicators can be used, but the largest ones - for example, for trading companies, revenue and profit will most likely be included in the calculation, and the value of assets on the balance sheet will be excluded from the calculation. From our example it is clear that the values ​​of basic indicators calculated on the basis revenues from core activities and assets are numbers of the same order and are within the same sign of the highest order. And accordingly they form a collection with similar numerical values. In this case, the value calculated on the basis of the net profit indicator falls out of the aggregate, and, even adjusted upward with a maximum coefficient of 2 (200 * 2 = 400), does not satisfy the requirements for the homogeneity of the already compiled population. And the value calculated on the basis of the net assets indicator, adjusted upward with a maximum coefficient of 2 (525 * 2 = 1,050) already satisfies the requirements for the homogeneity of the existing population.

We get:

Then we make the last preparatory calculation, in which we take a certain percentage (according to practice, this is usually a range from 0.5 to 5%) of each given indicator used. Professional judgment is used to form the coefficient:

Now we can already calculate the overall level of materiality as the arithmetic mean of the calculated indicators, we get: (200+53+288)/3 = 180 tr. We round the resulting value and use 200 tr. as a final overall indicator of the level of materiality. The difference between the level of materiality before and after rounding is 9%, which is within the acceptable rounding of 20%. In the process of preparing consolidated financial statements under IFRS, the indicators of all subsidiaries are summed up and preparers of financial statements often have a question: how to determine the level of materiality for each from the companies included in the Group. This is necessary, for example, in order to correctly distribute the load on the accounting services of subsidiaries as part of the overall work on reporting. In addition, it is very useful for the compiler to know what methods are used by the auditors checking him in order to avoid a large number of adjustments on the part of the latter. The International Auditing and Assurance Standards Board has issued guidance on determining materiality. For example, ISA 600 - Special Considerations - Audits of Group Financial Statements lists the following rules for determining the materiality threshold for a structure: 1. Materiality for components (for example, divisions, branches, subsidiaries) should be set at a level below group materiality. 2. Different levels of materiality are established for different components. 3. The materiality level of a component is not a simple proportional part of the “group-wide” materiality, and, on the other hand, the sum of all component materiality levels may exceed the group materiality level. Let's look at a fairly realistic and complex example of how the component level of materiality is determined when subsidiaries or branches are not equal in size.

Determining the level of materiality for items in the statement of comprehensive income within a group of companies A group reporting under IFRS consists of 4 subsidiaries (or branches, which is not particularly important for the purposes of determining materiality) with different levels of revenue. At the same time, the total group revenue is 400 million rubles. The Company intends to set the level of materiality for income and expense items. The group-wide materiality level is RUB 20 million. (5% of total revenue). Let's try to determine the materiality threshold for each company (component) of the group. But to do this, do not forget about two limiters: the minimum and maximum component level. Let’s assume that all companies in the group are the same, then the minimum level will be 5 million rubles. (20 million rubles/4). However, the materiality threshold cannot be lower than this minimum level. Otherwise, the following situation will arise: in the most unlikely case, when significant errors were made in all 4 companies, we still will not reach the group-wide level of materiality (by 20 million rubles). The same principle applies to the maximum level for each component, which cannot exceed 20 million rubles. for each of the companies. It is clear that each of the levels is presented as an extreme - a conservative and a progressive approach. And each of these approaches has its own disadvantage. Either significant reporting errors and omissions will remain uncorrected, or too much minor work and adjustments will be made. So, we have the following range of total component materiality: from 4 * 5 = 20 million rubles. up to 4*20 = 80 million rubles. ISA 600, of course, implies that the level of materiality for subsidiaries should be in this range, but does not provide precise guidance in this regard. As in many similar situations where there is no specific guidance in IFRS, most companies resort to so-called “best practice” - in this case, the “maximum aggregate component materiality (“ASMA”) method. To simplify the search for a multiplier for determining component materiality, it is best to use the following MSPS table (Table 1), which was developed as a result of international “best practice”:

Table 1

It is worth noting that when determining the number of components, clearly insignificant subsidiaries and branches are not taken into account. Let's return to our example and determine the multiplier. It will be equal to 2. Next we calculate the MSRP: 20 million rubles. (group-wide materiality) *2 = 40 million rubles. Then we calculate the percentage share of revenue of each company. We get:

table 2

The next step is the proportional calculation of the distribution of ASHI (column 3, table 2) according to the share of revenue of each company. That is, for company 3: 40 million rubles. * 35%. However, if there is a more complex group structure and there are still strong differences in component revenue, then you should use a weighted calculation of the distribution of ASHI (column 4, table 2) according to the formula: Materiality of the component = ASHI * √(component revenue) /(∑√(component revenue))After calculating the proportional and weighted distribution of ASHI, the final materiality levels are established for each company in the group (column 5, Table 2). To summarize, I would like to say that, despite the existence of international practices in determining the level of materiality when preparing reports under IFRS and auditing under ISAs, justification of the level of materiality is always a very individual task, requiring high professionalism in judgments and assumptions.

The article was published in the journal “Actual Accounting”

Examples of the wording of accounting policies regarding error correction

In conclusion, we give examples of wording from the actual accounting policies of several largest Russian companies. This may give you food for thought about your own accounting policies on this issue:

Option 1

«Level of materiality for error correction purposes

An error is considered significant if it, individually or in combination with other errors for the same reporting period, can affect the economic decisions of users made on the basis of the financial statements compiled for this reporting period.

Level of materiality for the purposes of disclosing individual indicators in the reporting

An indicator is considered material and is presented separately in the balance sheet, income statement, statement of changes in equity or statement of cash flows if its failure to disclose it could affect the economic decisions of interested users made on the basis of the reporting information. The level of materiality of the error is determined as 5% of the value of the basic reporting indicators.”

Option 2

“An error is considered significant if it, individually or in combination with other errors for the same reporting period, can affect the economic decisions of users made on the basis of the financial statements prepared for this reporting period. An error is considered significant if it amounts to 5 percent or more of the balance sheet currency or 5 percent or more of profit before tax.”

Option 3

“The company discloses in its annual accounting (financial) statements information regarding significant errors of previous reporting periods corrected in the reporting period. An error is considered significant if, individually or in combination with other errors for the same period, it can affect the economic decisions of users made on the basis of the accounting (financial) statements prepared for this reporting period.”

Option 4

“An error is considered significant if it, individually or in combination with other similar errors for the same reporting period (year) preceding the reporting period to which the identified error relates, amounts to more than 5 percent of the corresponding balance sheet item or the net profit (net loss) of the income statement in the event that an error or a set of errors affects the financial results.

The level of materiality is calculated on the basis of the accounting (financial) statements for the reporting year to which the identified error relates.

The decision on the level of materiality is made at the end of the current reporting year based on information about identified errors or their totality presented in the accounting certificate.

If the Company has previously recalculated comparative indicators (retrospective recalculation), then the level of materiality is calculated based on the recalculated data.”

As you can see, the wording varies from a simple quotation of PBU 22/2010 to much more detailed provisions that meet the ideas and needs of the company.

You can also select the text for your accounting policy using our Accounting Policy Designer

About accounting criteria of materiality

As you already know, in 2010 the Ministry of Finance approved the new PBU 22/2010 “Correcting errors in accounting and reporting.” They must be followed when correcting errors, starting with the preparation of annual financial statements for 2010. The general procedure for correcting errors according to the rules of the new PBU depends on whether the error is significant or not. And the organization must determine this on its own. This means that in your accounting policy you need to specify which errors you will consider significant.

Content

At the same time, I would like to draw attention to two very important, in my opinion, points.

Moment one. The use in paragraph 3 of PBU 22/2010 of the phrase “item(s) of financial statements,” on the one hand, means that the materiality of an error can be determined in relation not only to one, but also to a group of similar accounting articles. For example, the group of balance sheet items “Inventories” includes the items “Raw materials, supplies and other similar assets”, “Costs in work in progress” and so on.

However, on the other hand, this phrase also defines the limits of the basis for calculating the significance of the error. That is, it is impossible to determine the significance of the error in relation to the total of the balance sheet section, which includes the item in which the erroneous data was included, and even more so in relation to the balance sheet currency. After all, the total of the balance sheet section includes several groups of items, and the balance sheet currency generally includes all the assets or liabilities of the balance sheet. And it is clear that the level of materiality determined by the total of a section or balance sheet currency will be much less than that determined by an item or group of items. As a result, most errors will turn out to be insignificant. And this will damage the interests of reporting users, since it will make the reporting unreliable due to non-compliance with the basic requirement of paragraph 3 of PBU 22/2010. Namely: an error is considered significant if it, individually or in combination with other errors for the same period, can affect the economic decisions of users made by them on

basis of the financial statements prepared for this reporting period.

Second point. There is one exception to the rule by which materiality can be determined in relation not to one, but to a group of reporting items. This cannot be the group of balance sheet items “Retained earnings (uncovered loss)”, which includes retained earnings or uncovered losses of both the current year and previous years. By determining the materiality of an error for this group of items in its entirety, without highlighting the reporting year, we violate the right of reporting users to see all significant errors that affect the financial result of the reporting year. After all, then the level of materiality of the error will significantly increase, and with a high probability errors that affect the profit or loss of only the reporting year will not be taken into account. Which, again, will not allow fulfilling the mentioned requirement of paragraph 3 of PBU 22/2010 and will make the reporting unreliable.

With these remarks, I would like to refute the widespread illusion that the words “the organization determines independently” allow you to write whatever you want in the accounting policies. This is wrong. You can determine something yourself only taking into account and within the limits of the rules established by regulatory legal acts on accounting.

For the same reason, I am sure that it is wrong to write in the accounting policy: “The significance of the error in each specific case is determined by the chief accountant in agreement with the manager.” This formulation establishes only the procedure for determining a significant error, while PBU 22/2010 requires determining the level of materiality of the error. And there is nowhere to do this except in the accounting policy.

Example. Options for the formulation of accounting policies regarding the materiality of an error in accounting

Option 1. “An error is considered significant if, as a result of its correction, the indicator for an item in the financial statements will change by more than 5%.”

Option 2. “An error is considered significant if, as a result of its correction, the total of a group of balance sheet items containing the corrected indicator, or the value of a group of items of the Profit and Loss Statement and other forms of financial statements will change by more than 3%.”

In addition, the accounting policy must determine the level of materiality for other indicators. After all, you all know that in financial statements it is necessary to highlight information about individual assets, liabilities, income and expenses, if they are significant. This means that this should be a separate line for the indicator in the reporting form or the value of this indicator should be disclosed in the explanatory note. By the way, unlike the old Order on reporting forms, the similar new Order of the Ministry of Finance, which will come into force with the annual reporting for 2011, no longer contains such direct instructions. It is only said that the level of detail of indicators in reporting is determined by organizations themselves. However, it is clear that in this case one must be guided by the rules of PBU 4/99 “Accounting statements of an organization,” which contains this requirement.

In addition, the concept of “materiality” is found in many other PBUs. For example, the PBU for accounting for financial investments states that if expenses associated with the purchase of securities are not significant in relation to the cost of these securities, then they can be shown as other expenses.

The PBU for accounting for fixed assets states that if an object is a complex of structurally articulated parts, the terms of use of which differ significantly, then they can be accounted for as separate OS objects. A traditional example is a computer consisting of separate parts: a processor and a monitor. If these parts are taken into account as separate OS objects, then the cost of each of them will most likely be less than 20,000 rubles. and they will not be subject to property taxes. And in order to take advantage of the opportunity to account for these parts separately, you must write down in the accounting policy what difference in useful life will be significant.

Example. Excerpt from accounting policies on significant differences in useful lives

“If one object has several parts, the useful life of which differs significantly, that is, by more than 12 months, each such part is taken into account as an independent inventory object.”

So, we found out that the accounting policy must necessarily fix the level of materiality for various situations. What could it be like? The Ministry of Finance proposes to consider as such a value equal to 5 percent of the total of the relevant data. And the result of the corresponding data is either an indicator for a specific reporting line, or the result of a group of items or any section of the reporting form, or the balance sheet currency. Unless the PBU itself sets a limit for choosing this “total”, as is the case with PBU 22/2010. And for different forms of reporting, materiality may be different.

I advise you not to limit yourself to simply fixing in the accounting policy one general level of materiality, say, 5 percent of the reporting line indicator. It is better to think about what benefits you and determine the level of materiality for each specific type of situation: your own level of materiality for the timing of the use of parts of a structurally articulated operating system, a separate level of materiality for the amount of expenses for the acquisition of financial investments, and so on.

First published in the publication “The Main Book. Conference hall" 2011, N 1

Rabinovich A.M.

Find out more about the journal "General Ledger"

How to fix significant errors

Depending on when the accountant discovered a significant error, the procedure for correcting it will vary:

* Accounting statements are considered prepared after they are signed by the head of the economic entity (Clause 8, Article 13 of Federal Law No. 402-FZ).

** If a significant error was made before the beginning of the earliest previous reporting period presented in the financial statements for the current reporting year, the opening balances for the corresponding items of assets, liabilities and capital at the beginning of the earliest reporting period presented are subject to adjustment (clause 11 PBU 22/2010).

If it is impossible to determine the impact of a significant error on one or more previous reporting periods presented in the financial statements, the organization must adjust the opening balance for the relevant items of assets, liabilities and capital at the beginning of the earliest period for which recalculation is possible (clause 12 PBU 22/2010).

The impact of a material error on the previous reporting period cannot be determined if complex and (or) numerous calculations are required, during which it is impossible to identify information indicating the circumstances that existed on the date of the error, or it is necessary to use information received after the date of approval of the financial statements for such previous reporting period (clause 13 of PBU 22/2010).

As you can see, PBU 22/2010 provides three approaches to correcting significant errors. They are offered not as a choice, but taking into account the moment the error is discovered.

What is the level of materiality

The information in the report should not be distorted, otherwise users will make the wrong conclusion, miscalculate your capabilities - investors will invest their money and go broke, the tax office will find discrepancies and charge a fine, etc.

However, an accountant can make mistakes, but within certain limits. This limitation is called the level of materiality, i.e. the maximum value of distortions in the report. If you exceed the permissible value, then users will definitely not be able to make an intelligent decision.

A significant error was identified during the year

In April 2021, the organization accrued and paid an advance payment of corporate property tax in the amount of 1,000,000 rubles.

In June 2021, it turned out that by mistake the payment amount was overestimated by 200,000 rubles. (the error is significant).

The overpayment amount is offset against future payments.

Transactions are reflected in accounting using the following entries:

Materiality in the audit

In Russia, the concept of materiality is more often used by auditors than by accountants. In an applied sense, for the auditor, materiality determines the amount whose errors and distortions will not affect the reliability of the financial statements. Based on materiality, audit procedures are planned so as not to check documents for every fact of economic life - this would be too expensive.

If during the audit of Rosneft it turns out that the accountant made a mistake by 1000 rubles. when a million barrels of oil are written off, this is unlikely to affect the perception of the reporting as reliable.

I have extremely simplified the description of materiality in an audit - a complete picture can be obtained by reading ISA 320 “Materiality in planning and conducting an audit”, which is mandatory for use in Russia.

A significant error was identified before the statements were approved

In March 2021, it was revealed that in 2021 the write-off of advertising expenses in the amount of RUB 3,500,000 was erroneously not reflected. (the error is significant).

The error was discovered after the signing of the financial statements for 2019, after their submission to the tax authority and the participants of the Organization, but before the date of approval by the owners.

Transactions are reflected in accounting using the following entries:

***Accounting entries for income tax adjustments are not provided.

A new copy of the revised reporting is compiled, where the indicators are replaced with the correct ones.

The notes to the amended financial statements disclose that they replace the financial statements originally presented, as well as the basis for preparing the amended financial statements.

The corrected financial statements are submitted to all addresses to which the original ones were submitted. In this case, a copy of the financial statements in which the error has been corrected is submitted to the tax authority at the location of the organization no later than 10 working days from the day following the day of approval of the statements (clause 5 of Article 18 of Federal Law No. 402-FZ).

Workshop in 1C on correcting a significant error identified before the statements were approved

Procedure for applying the materiality level

To apply the level of materiality when preparing financial statements, you will need to go through 4 steps:

1. Select information that may be essential for users based on all the facts of economic life for the reporting period.
2. Determine the level of materiality of information based on quantitative and qualitative factors, as well as the degree of disclosure of important details.
3. Distribute the information received so that it clearly reflects the financial position of the company, its financial results and cash flows.
4. Check the reporting from the user's point of view, i.e. whether the information that the user needs to make a decision is disclosed.

Such a plan will help you think through the disclosure of information in your reporting as much as possible and avoid mistakes.

A significant error was identified after the statements were approved

In December 2021, the Organization identified a significant error made in 2021: when assessing a capital construction project put into operation in December 2021, part of the capitalized expenses (RUB 1,000,000) was erroneously reflected in account 97, instead of account 08. As a result, the amount was not included in the initial cost of the object, and remained taken into account in the debit balance of account 97.

The error is significant.

A similar mistake was made in tax accounting. The organization decided to correct it in the 2021 tax period, taking into account the opportunity provided by Art. 54 Tax Code of the Russian Federation. As of the reporting date (December 31, 2020), there are no temporary differences in this situation (assets are valued identically in accounting and accounting records, depreciation charges also coincided).

To correct errors from previous years, the following transactions are made in December 2021:

The entry for December 2021 additionally accrues the amount of depreciation for the object for the period 2021 (the accountant calculated depreciation for January - December 2021 in an underestimated amount, so the error in the reporting year was corrected in this part). Conventionally, we will accept the amount of additional annual depreciation – 20,000 rubles.

The mistake led to the incorrect reflection in the balance sheet of the value of fixed assets and the amount of inventories as of December 31, 2019.

The organization’s annual financial statements for 2021 included the following data (in thousands of rubles):

After adjustment:

Workshop in 1C on correcting a significant error identified after approval of reporting

Correction of significant errors in simplified accounting methods

We also note that by virtue of clauses 9, 14 of PBU 22/2010, organizations that have the right to use simplified methods of accounting, including simplified accounting (financial) statements, can correct such a significant error without retrospective recalculation by entries in the corresponding accounting accounts, including month of the reporting year in which the error was detected. Profit or loss arising as a result of correcting this error is reflected as part of other income or expenses of the current reporting period.

In the explanations to the annual financial statements, the organization must disclose the following information regarding significant errors of previous reporting periods corrected in the reporting period (clauses 15, 16 of PBU 22/2010):

• nature of the error;
• the amount of adjustment for each item in the financial statements - for each previous reporting period to the extent practicable;
• the amount of adjustment based on data on basic and diluted earnings (loss) per share (if the organization is required to disclose information on earnings per share);
• the amount of adjustment to the opening balance of the earliest reporting period presented.

If it is impossible to determine the impact of a material error on one or more previous reporting periods presented in the financial statements, then the explanations disclose the reasons for this, and also provide a description of the method of reflecting the correction of a significant error in the financial statements of the organization and indicate the period from which the corrections were made.

See also:

• Correcting accounting errors
• Correcting errors in NU
• Correcting VAT errors
• The procedure for correcting errors in 1C
• The amount of last year's expenses was underestimated: accounts receivable were not written off. Correction of a significant error before the statements are approved
• The original cost of the fixed asset is distorted. Correction of a significant error after approval of statements

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Significant errors and their corrections

If an organization, due to non-application of regulatory legal acts on accounting, has made an incorrect reflection (non-reflection) of the facts of economic life in accounting and financial statements. Errors are corrected in the manner established by PBU 22/2010 “Correcting errors in accounting and reporting” (approved by order of the Ministry of Finance of Russia dated June 28, 2010 No. 63n (clauses 2, 4 of PBU 22/2010).

An error is considered significant if it, individually or in combination with other errors for the same reporting period, can affect the economic decisions of users made on the basis of the financial statements prepared for this reporting period (clause 3 of PBU 22/2010).

Users of reporting - potential investors and counterparties, customers, lessors and creditors - must know whether to trust this organization with resources. Based on the reporting, they make a decision:

• does it make sense to buy securities issued by the organization (will it be able to make a profit that will be distributed as dividends, will it repay its bill);
• whether to entrust it with the execution of orders, whether to lease property, whether to provide loans (whether the organization will be able to fulfill its contractual obligations).

Thus, significant errors are significant distortions of reporting indicators, due to which the user can make an incorrect conclusion about the organization’s ability to make a profit and fulfill its obligations in a timely manner.

Significance of the error

PBU 22/2010 does not establish specific materiality criteria.

The taxpayer determines the materiality of the error independently, based on both the size and nature of the relevant article (articles) of the financial statements (clause 3 of PBU 22/2010).

An indicator can be considered significant if its non-disclosure affects the economic decisions of users made on the basis of financial statements. The significance of this indicator depends on the assessment of the indicator, its nature, the specific circumstances of its occurrence, i.e., a combination of qualitative and quantitative factors.

A certain level of materiality of the error must be fixed in the accounting policies.

Materiality as a percentage of the reporting line value

This is the traditional way of establishing the level of materiality. For example, errors that distort the value of any reporting line by 5 percent or more can be considered significant. Let us give an example of determining the significance of an error.

Example 1 An organization mistakenly wrote off as expenses the cost of unsold goods in the amount of 100 rubles. The same mistake was made in tax accounting. According to the accounting policy, errors that distort the value of any reporting line by 5% or more are considered significant.

The percentage of distortion of the value of lines 2300 “Profit (loss) before tax”, 2410 “Current income tax” and 2400 “Net profit (loss)” of the income statement amounted to 9.09%, i.e. more than 5%. The error is significant.

Materiality based on the average value of reporting indicators

The level of materiality can also be calculated in a fixed amount, for example, based on the average value of reporting indicators. In this case, the materiality level is recalculated annually.

Let us give an example of calculating the level of materiality of an error in a fixed amount.

Example 2 According to the accounting policy, the level of materiality of an error is calculated as 5% of the average value of five reporting indicators for the reporting year in which the error was made. The values ​​of these indicators for 2021 were:

1. Balance:

— on line 1150 “Fixed assets” — 5 million rubles;

— on line 1230 “Accounts receivable” — 3 million rubles;

— on line 1370 “Retained earnings (uncovered loss)” — 2 million rubles;

1. Income statement:

— on line 2110 “Revenue” — 24 million rubles;

— on line 2400 “Net profit (loss)” — 1 million rubles.

Total 35 million rubles. (5 million rubles + 3 million rubles + 2 million rubles + 24 million rubles + 1 million rubles).

The level of significance for an error made in the reporting for 2017 is 350 thousand rubles. (RUB 35 million: 5 x 5%).

Errors within 350 thousand rubles. are considered insignificant, and errors exceeding 350 thousand rubles are considered significant.

Procedure for correcting significant errors

The procedure for correcting significant errors depends on the period when they were identified - before the approval of the statements by the organization’s participants or after (section II of PBU 22/2010).

Correction of an error is documented in an accounting certificate, in which you must indicate:

• when and what mistake was made;
• which reporting lines, and in what amount, the error affected and why it was considered significant;
• when an error is detected;
• what transactions corrected the error;
• which reporting lines have been adjusted, including retrospectively.

Errors made in the reporting year and identified before the reporting was signed by the head of the organization

In accounting, any errors (both significant and immaterial) made in the reporting year and identified before the signing of the statements by the head of the organization are corrected:

• if they were identified before December 31 of the reporting year - records on the date the error was identified, i.e. in the month of the reporting year in which the error was identified (clause 5 of PBU 22/2010);
• if they are identified on December 31 of the reporting year or later - records as of December 31 of the reporting year (clause 6 of PBU 22/2010).

Thus, all errors of the current reporting period identified before the date of signing by the head of the organization of the annual financial statements for this year are taken into account when drawing up the current statements of this year.

There are several ways to correct accounting data.

Corrections can be made by reverse entries, the “red reversal” method, or additional accrual of any amounts that were not previously taken into account.

To correct the error:

• draw up an accounting statement indicating: when and what kind of error was made, when the error was identified, what entries were used to correct it;
• reverse incorrect entries;
• make correct notes.

Example 3 In December 2021, the following significant error was identified: for the period from January to November 2021, depreciation in the amount of RUB 100,000 was not accrued on the fixed asset.

In this case, in December 2021 - the month the error was discovered - additional depreciation amounts are accrued, which is reflected in the accounting records by entries in the credit of account 02 “Depreciation of fixed assets” in correspondence with the production cost accounts (clause 5 of PBU 22/2010, Instructions for using the Chart of Accounts).

In December 2021 - as of the date the error was discovered

Debit 20 Credit 02

— 100,000 rub. – the error was corrected, additional depreciation on equipment was accrued for the period from January to November 2021 (basis: accounting certificate-calculation).

Example 4 An organization in March 2021 assessed property tax for the first quarter of 2021 in the incorrect amount - 60,000 rubles. instead of 40,000 rubles.

This error was identified in February 2021 before the 2021 reporting was signed.

To correct the error, the following entries were made as of December 31, 2021:

REVERSE Debit 26 Credit 68

— 60,000 rub. — the entire amount of incorrectly accrued property tax for the first quarter of 2021 was reversed;

Debit 26 Credit 68

— 40,000 rub. — property tax was assessed for the first quarter of 2016.

Errors identified at the end of the reporting year after signing the reports

If an error is discovered after the reporting is signed, it is corrected depending on the date it was discovered.

Let's consider the algorithm of actions if an error from the previous reporting year was identified after the date of signing the financial statements for this year, but before the date of presentation of the statements to its users.

A significant error of the previous reporting year, identified after the date of signing the financial statements for this year, but before the date of submission of such statements to shareholders of a joint-stock company, participants of a limited liability company, a state authority, local government or other body authorized to exercise the rights of the owner, etc. p., is corrected by entries in the relevant accounting accounts for December of the reporting year (the year for which the annual financial statements are prepared) (clause 7 of PBU 22/2010).

If the specified financial statements were presented to any other users, then they must be replaced with statements in which the identified significant error has been corrected (revised financial statements).

The fact that users are presented with a revised form can be reflected on the title page. For this purpose, the column “Adjustment number” is provided. For example, if the statements are corrected for the first time, then “1” is reflected in this column.

Example 5 Bonuses for production shop workers in 2021 were accrued in the correct amount, but incorrectly posted Debit 26 “General expenses” Credit 70 “Settlements with personnel for wages” instead of posting Debit 20 “Main production” Credit 70.

As a result, the amount of bonuses is incorrectly reflected in the income statement for 2015 (instead of line 2120 “Cost of sales” on line 2220 “Administrative expenses”).

The error was identified in March 2021 after the reporting was submitted to the organization's participants for approval.

To correct the error, the following entries were made as of December 31, 2021:

REVERSE Debit 26 Credit 70

— incorrect posting for accrual of bonuses was reversed;

Debit 20 Credit 70

— the correct entries for accrual of bonuses have been made.

In the amended version of the financial results statement, signed by the head and presented to the organization’s participants, the amount of bonuses is reflected in line 2120 “Cost of sales”.

If an error from the previous reporting year is identified after the reporting is submitted to its users, but before the date of its approval by the owners

A significant error of the previous reporting year, identified after the presentation of the financial statements for this year to the shareholders of the joint-stock company, members of the LLC, government body, local government body or other body authorized to exercise the rights of the owner, etc., but before the date of approval of such statements in in accordance with the procedure established by the legislation of the Russian Federation (for example, at a general meeting of shareholders), it is also corrected by entries in the relevant accounting accounts for December of the reporting year (the year for which the annual financial statements are prepared) (clause 8 of PBU 22/2010).

At the same time, the revised financial statements disclose information that they replace the originally presented financial statements, as well as the basis for preparing the revised financial statements.

The revised statements are submitted to all addresses to which the original statements were submitted.

How to correct an error from the previous reporting year that was discovered after the financial statements for this year were approved

A significant error of the previous reporting year, identified after the approval of the financial statements for this year, is corrected (clause 9 of PBU 22/2010):

• entries on the relevant accounting accounts in the current reporting period. In this case, the corresponding account in the records is the account for retained earnings (uncovered loss), i.e. account 84 “Retained earnings (uncovered loss);
• by recalculating the comparative indicators of the financial statements for the reporting periods reflected in the financial statements of the organization for the current reporting year, except in cases where it is impossible to establish the connection of this error with a specific period or it is impossible to determine the impact of this error on a cumulative basis in relation to all previous reporting periods.

Restatement of comparative financial statements is carried out by correcting the financial statements as if the error of the previous reporting period had never been made (retrospective restatement).

Retrospective restatement is carried out in relation to comparative indicators starting from the previous reporting period presented in the financial statements for the current reporting year in which the corresponding error was made.

In the event of correction of a significant error of the previous reporting year, identified after the approval of the financial statements, the approved financial statements for previous reporting periods are not subject to revision, replacement and re-presentation to users of the financial statements (clause 10 of PBU 22/2010).

If a significant error was made before the beginning of the earliest previous reporting period presented in the financial statements for the current reporting year, the opening balances for the relevant items of assets, liabilities and capital at the beginning of the earliest reporting period presented (usually three years) are subject to adjustment ( clause 11 of PBU 22/2010).

If it is impossible to determine the impact of a significant error on one or more previous reporting periods presented in the financial statements, the organization must adjust the opening balance for the relevant items of assets, liabilities and capital at the beginning of the earliest period for which recalculation is possible (clause 12 PBU 22/2010).

Note that the impact of a significant error on the previous reporting period cannot be determined if complex and (or) numerous calculations are required, during which it is impossible to identify information indicating the circumstances that existed on the date of the error, or it is necessary to use information obtained after the date of approval of the accounting reporting for such a previous reporting period (clause 13 of PBU 22/2010).

Simplified error correction procedure

Organizations that have the right to use simplified methods of accounting, including simplified accounting (financial) reporting (for example, small businesses), can correct a significant error of the previous reporting year, identified after the approval of the financial statements for this year, in the manner established by paragraph 14 of the PBU 22/2010 for minor errors, without retrospective recalculation.

An error of the previous reporting year, which is not significant, discovered after the date of signing the financial statements for this year, is corrected by entries in the corresponding accounting accounts in the month of the reporting year in which the error was identified. Profit or loss arising as a result of correcting this error is reflected as part of other income or expenses of the current reporting period in account 91 “Other income and expenses”.

Example 6 In January 2021, after the balance sheet was reformed, the financial statements were signed and presented to users, an error made in September 2021 was discovered. The financial statements have not yet been approved by the owners of the organization.

As a result of the error, the amount of office rental expenses was underestimated. The amount of the error was 500,000 rubles. In addition, VAT on rent in the amount of RUB 90,000 was not reflected. This error is considered significant.

Corrective entries were made in the accounting records as of December 31, 2021:

Debit 26 “General business expenses” Credit 60 “Settlements with suppliers and contractors”

— 500,000 rub. — the additional amount of rent for September 2016 was accrued;

Debit 19 “Value added tax on purchased assets” Credit 60 “Settlements with suppliers and contractors”

— 90,000 rub. – “input” VAT on rent for September 2021 is taken into account;

Debit 68 “Calculations with the budget for taxes and fees” subaccount “Calculations for VAT” Credit 19 “Value added tax on purchased assets”

— 90,000 rub. – accepted for deduction from the budget of VAT on rent for September 2021;

Debit 90 “Sales” subaccount “Cost of sales” Credit 26 “General expenses”

— 500,000 rub. — the amount of previously unaccounted rent for September 2021 was written off;

Debit 90 “Sales” subaccount “Profit/loss from sales” Credit 90 “Sales” subaccount “Cost of sales”

— 500,000 rub. – the subaccount “Cost of sales” of account 90 is closed;

Debit 99 “Profit and loss” Credit 90 “Sales” subaccount “Profit/loss from sales”

— 500,000 rub. – the “Profit and Loss” sub-account is closed;

Debit 84 “Retained earnings (uncovered loss)” Credit 99 “Profit and losses”

— 500,000 rub. – the amount of net profit has been adjusted.

In the “Financial Results Report” form for 2021, the value on line 2120 “Cost of sales” must be increased by 500,000 rubles. and make changes to other form indicators, for example, to lines 2100 “Gross profit (loss)”, 2220 “Profit (loss) from sales”, etc.

Example 7 Let's use the conditions of the previous example. Let us assume that the error was identified in June 2021 after the reporting was signed, submitted and approved. In this case, the error should be corrected in June 2021 as follows:

Debit 84 “Retained earnings (uncovered loss)” Credit 60 “Settlements with suppliers and contractors”

— 500,000 rub. — the additional amount of rent for September 2016 was accrued;

Debit 19 “Value added tax on purchased assets” Credit 60 “Settlements with suppliers and contractors”

— 90,000 rub. – “input” VAT on rent for September 2021 is taken into account;

Debit 68 “Calculations with the budget for taxes and fees” subaccount “Calculations for VAT” Credit 19 “Value added tax on purchased assets”

— 90,000 rub. – accepted for deduction from the budget of VAT on rent for September 2021.

In this case, the reporting for 2021 is not adjusted.

The net profit indicator for 2021 will be recalculated (changed) (retrospective recalculation) on line 1370 “Retained earnings (uncovered loss)” of the balance sheet for 2021 and on line 2400 “Net profit (loss)” of the Income Statement for 2017.

Information regarding significant errors in the explanatory note

In the explanatory note to the annual financial statements, the organization is required to disclose the following information regarding significant errors of previous reporting periods corrected in the reporting period:

• nature of the error;
• the amount of adjustment for each item in the financial statements - for each previous reporting period to the extent practicable;
• the amount of adjustment based on data on basic and diluted earnings (loss) per share (if the organization is required to disclose information on earnings per share);
• the amount of adjustment to the opening balance of the earliest reporting period presented (clause 15 of PBU 22/2010).

If it is impossible to determine the impact of a significant error on one or more previous reporting periods presented in the financial statements, then the explanatory note to the annual financial statements discloses the reasons for this, and also provides a description of the method for reflecting the correction of a significant error in the financial statements of the organization and indicates the period starting from which corrections were made (clause 16 of PBU 22/2010).

Audit Department of RIGHT WAYS LLC