Answer: both adding a note disclosure regarding the error in the current financial statements and restating the financial statements for the prior periods presented in the current financial statements.

## 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

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