Restating a Company’s Prior Year Financial Statements

What happens if a company finds that an asset on the balance sheet had actually been destroyed two years previously or a project’s work in progress had been wrongly calculated in previous years? Is it possible to recognise the adjustment in the current year’s financial statements or is it necessary to restate the prior year(s)?

Keywords: Thailand, Audit, Revenue Department, Financial Statements, Financial Reporting Standards, Ministry of Commerce, Tax

Under both international and Thai financial reporting standards, material errors must be corrected retrospectively, i.e. in the period in which the error occurred. However, it is not simple to define what would be considered as material. A good starting point would be that an error in the financial statements that impacts the decisions made by the users of those financial statements would be considered material.

It is important that a company works closely with its auditor when evaluating how to recognise and disclose a material error. In most cases it is also the auditor that determines what is considered material.

Restatement

When restating financial statements as a result of a material error, a company needs to evaluate and restate the comparative amounts in the prior period(s) as if the error had never occurred.

The restated financial statements must then be audited and filed with the Department of Business Development, Ministry of Commerce. An explanation for the restatement is disclosed in the notes to the financial statements.

Impact and risks

The restatement of prior year(s) may result in a need to file a revised corporate income tax return. If additional taxes are payable there will be surcharges levied on the under paid tax. When a tax refund is requested, the Revenue Department will perform a tax audit on the company’s activities before any refund is paid. In some cases it will also be necessary to file revised VAT returns.

Shareholders may file a complaint with the legal department of the Ministry of Commerce. The department will review appropriate documentation to see whether there are reasonable grounds to request a statement from the company's directors.

Further, if the shareholders suffer a loss as a result of a material error, the shareholders may sue the company’s directors for damages.

It is also likely that the company and its management will suffer from a loss of credibility from investors, banks and other stakeholders.

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