Explanation

According to accounting standards (specifically IAS 8 and US GAAP ASC 250), the correction of a material error from a prior period requires both:

1. Restatement of prior period financial statements - The financial statements for the prior periods presented in the current financial statements must be restated to correct the error.

2. Disclosure in the notes - The current financial statements must include a note disclosure that:

   • Describes the nature of the error
   • Explains the impact on prior periods
   • Shows the correction made to each affected line item
   • Indicates that the prior period financial statements have been restated

Why not just one or the other?

• Option A (note disclosure only) is insufficient because it doesn't correct the actual financial statements, leaving users with incorrect historical information.
• Option B (restatement only) is insufficient because users need to understand why the financial statements changed and the nature of the correction.

Key Accounting Principles:

• Comparability: Restating prior periods ensures comparability across periods
• Transparency: Note disclosure provides transparency about the correction
• Materiality: This treatment applies specifically to material errors (immaterial errors can be corrected in the current period)

Practical Application: When a company discovers a material error in previously issued financial statements, it must:

1. Correct the error in the earliest period presented
2. Adjust subsequent periods for the cumulative effect
3. Include comprehensive disclosure in the notes to the financial statements