If you find a material mistake in last year’s financial statements, the accounting standards usually require you to correct it in the next set of financial statements you prepare, not by passing a catch-up entry through this year’s profit. You restate the prior-year comparative figures as if the error had never happened, adjust opening retained earnings, and explain the correction in the notes. Separately, decide whether the tax return for that year needs revising with IRAS, and whether the old financial statements are so defective that directors should formally revise them with ACRA.
Raffles Corporate Services works with a panel of experienced Singapore law firms who offer cost-effective and efficient legal service and advice. This article is general information only and is not legal advice.
Is it really an error, or something else?
Before correcting anything, classify the change. The accounting treatment depends entirely on which of three categories it falls into. Under SFRS(I) 1-8 and FRS 8, Accounting Policies, Changes in Accounting Estimates and Errors, and the equivalent section of SFRS for Small Entities, the categories are treated very differently.
| Type of change | Typical examples | How it is reflected |
|---|---|---|
| Prior-period error | A supplier invoice that was never accrued, a sale recorded in the wrong year, a lease left off the balance sheet, an arithmetic or formula mistake, a misread contract | Material errors are corrected retrospectively: restate comparatives and opening balances |
| Change in accounting estimate | Revising the useful life of equipment, updating a bad debt allowance, changing a provision as new facts emerge | Prospectively: current and future periods only, no restatement |
| Change in accounting policy | Adopting a new standard, or choosing a different permitted measurement basis because it gives more relevant information | Usually retrospectively, under the transition rules or the general policy-change rules |
The key test for an error is whether the correct information was available, or could reasonably have been obtained, when the earlier financial statements were authorised for issue. If last year’s provision was a reasonable estimate based on what was known then, a different outcome this year is a change in estimate, not an error. If the invoice was sitting in someone’s inbox at year end, it is an error.
Not sure which framework your company uses? Our guide to SFRS(I) and SFRS for Small Entities explains the options.
Does the error have to be material?
The retrospective restatement requirement applies to material errors. An item is material if omitting or misstating it could reasonably be expected to influence decisions that users make on the basis of the financial statements. Size relative to profit, net assets and key balances matters, but so does the nature of the item. A small error in directors’ remuneration or a related party balance can be material even where a larger rounding difference elsewhere is not.
Immaterial prior-year errors can generally be corrected in the current year without restating. Keep a short note of the judgement, the amount and who agreed it, because your auditor or a future buyer will ask.
How do you correct a material prior-period error?
- Quantify the error by year. Work out which period it arose in and its effect on each line item, including the knock-on effect on tax and on later years.
- Correct it in the next financial statements authorised for issue. That is normally the current year’s set that you are preparing now.
- Restate the comparatives. Present last year’s figures as they should have been. If the error arose before the earliest period shown, adjust the opening balances of assets, liabilities and equity for that earliest period.
- Adjust opening retained earnings. The cumulative effect of the error on earlier years goes to opening equity, not to this year’s profit or loss.
- Label and disclose. Mark the comparative columns as restated and explain in the notes the nature of the error, the amount of the correction for each affected line item and the adjustment at the start of the earliest period presented.
- Check the extra statements. Companies reporting under SFRS(I) should check whether a restatement with a material effect requires an additional statement of financial position at the beginning of the comparative period.
If it is genuinely impracticable to work out the effect on a particular earlier period, the standards allow the restatement to start from the earliest period for which it is practicable. “Impracticable” is a high bar. It means you cannot do it after making every reasonable effort, not that it is time-consuming.
SFRS(I) 18, which replaces SFRS(I) 1-1 for annual periods beginning on or after 1 January 2027, brings changes to presentation and to the related standards, but the basic requirement to correct material prior-period errors retrospectively is unchanged.
Example: an unaccrued supplier invoice
Example: A trading company with a 31 December year end is preparing its FY2025 financial statements. The accountant finds a S$50,000 consultancy invoice for work done in November 2024. It arrived late, was never accrued at 31 December 2024, and was paid and expensed in March 2025. The amount is material to the company’s FY2024 profit.
| Line item | FY2024 as originally reported | Correction | FY2024 restated |
|---|---|---|---|
| Professional fees | S$30,000 | +S$50,000 | S$80,000 |
| Accrued liabilities at 31 Dec 2024 | S$20,000 | +S$50,000 | S$70,000 |
| Retained earnings at 31 Dec 2024 | S$400,000 | (S$50,000) | S$350,000 |
In the FY2025 ledger, the correcting entry is:
- Debit opening retained earnings S$50,000
- Credit professional fees (FY2025) S$50,000
This removes the expense from FY2025, where it does not belong, and charges it to the year it relates to through opening equity. For simplicity, the example ignores the tax effect, which a real restatement would also show. The comparatives in the FY2025 financial statements are labelled “restated”, with a note explaining the late accrual.
What does the error mean for tax?
Restating the accounts does not by itself correct anything with IRAS. The tax return for the year of the error was filed on the original figures, so consider that year’s return separately.
- Return still being reviewed, or assessment recent: IRAS’s Revise/ Object to Assessment digital service on myTax Portal lets a company submit a revised computation. IRAS says an objection to a Notice of Assessment must be filed within two months from the date of the notice.
- Tax overpaid because of an error: IRAS guidance states that a company may apply for error or mistake relief under section 93A of the Income Tax Act 1947, in writing, no later than four years after the end of the Year of Assessment in which the assessment was made, subject to conditions.
- Tax underpaid: IRAS has four years to raise an additional assessment, with no time limit where fraud is involved. Disclosing errors through a revised computation, before IRAS starts an audit or investigation, may be treated as a voluntary disclosure. See our guide to IRAS voluntary disclosure for companies.
In the example above, the S$50,000 expense belongs to FY2024, which is Year of Assessment 2025. The original YA 2025 computation understated expenses, so the company should consider revising that year, and must make sure the FY2025 computation does not also claim the same expense. Whether and when an accrued expense is deductible depends on the tax rules, not only the accounts, so review the computation with your tax preparer.
Do the old financial statements have to be revised with ACRA?
Not always. Restating comparatives in the next set of accounts is the normal accounting route. Separately, section 202A of the Companies Act 1967 lets directors revise financial statements that did not comply with the Act, including the accounting standards. ACRA’s guidance states that revised financial statements must be filed and sent to members within 30 days of the date the directors approve the revision.
| Situation | Usual approach |
|---|---|
| Error found while preparing this year’s accounts; old accounts not being relied on for a specific transaction | Restate comparatives in this year’s financial statements |
| Lenders, investors or a buyer are relying on last year’s accounts now | Consider a formal revision as well, with advice |
| Only the XBRL data or annual return form was keyed wrongly | Not an accounting restatement; correct the filing itself |
The filing steps are covered in our guide to filing a notification of revised financial statements with ACRA. When the restated comparatives flow into this year’s XBRL, follow our note on updating the XBRL comparison for restated figures.
What if the accounts were audited?
Tell your auditor as soon as you find a material error. The auditor will need to understand how it arose, test the restated comparatives and consider the effect on this year’s opinion. An error that the previous audit did not detect can also point to a control weakness that the auditor will want addressed. If your company was exempt from audit last year, the directors remain responsible for financial statements that comply with the standards. Our guide to audit exemption for small companies explains that position.
What should go into your correction file?
- Description of the error, how and when it was found
- Source documents, such as the late invoice, contract or bank record
- Calculation of the effect on each year and each line item
- Materiality assessment and who approved it
- Correcting journal entries and the restated comparatives
- Draft note disclosure
- Tax assessment of the effect and any revision or relief claim filed
- Board minutes approving the treatment and any revision of the old accounts
Frequently asked questions
Can we just put the correction through this year’s profit and loss?
Not for a material prior-period error. That would misstate both years: last year would stay wrong and this year’s profit would include an amount that does not belong to it. Immaterial errors can generally be corrected in the current year.
How far back do we restate?
You restate the comparative period shown in the financial statements. Errors from earlier years are dealt with by adjusting the opening balances of the earliest period presented, unless that is impracticable.
Is a changed bad debt allowance a prior-period error?
Usually not. If the original allowance was a reasonable estimate based on information available at the time, revising it is a change in estimate and goes through the current year. It becomes an error only if information that was available at the time was overlooked or misused.
Will restating the accounts trigger an IRAS penalty?
Restating the accounts is an accounting step. Any tax consequence depends on whether tax was under or overpaid and how the correction is made. Disclosing an underpayment promptly through a revised computation, before IRAS starts an audit or investigation, may qualify for voluntary disclosure treatment.
Do shareholders need to approve the restatement?
The restated comparatives form part of this year’s financial statements, which go through the normal approval and laying or circulation process. A formal revision of last year’s financial statements under section 202A is a directors’ decision, with the revised statements sent to members.
Need help correcting last year’s accounts?
If you have found a mistake in a prior year’s financial statements, contact the Raffles Corporate Services team at [email protected] or on WhatsApp at +65 8501 7133. We can quantify the error, prepare the correcting entries and restated comparatives, draft the note disclosure, revise the tax computation for the affected year and coordinate with your auditor. Where directors decide to revise the earlier financial statements, we can prepare the revised set and the ACRA filing.
Kevin Yeo, Raffles Corporate Services