An error found in last year's financial statements: what should you do? (NAS No. 1, Chapter 10)

March. Nodira, chief accountant of «Sabo Mebel» LLC, was keeping the books for 2026 when she noticed the inventory card of the company car. The card shows a useful life of 16 years. Yet the report of the commission that accepted the car at the start of 2025 says 8 years. So depreciation for 2025 was charged at half the correct amount, and the 2025 financial statements have already been approved and handed to the founders.

This is not an ordinary error within a month. An error of the current month found in the current month is corrected with a storno or an additional journal entry. For an error that has made its way into the statements of a closed year, Chapter 10 of NAS No. 1 sets a separate procedure. Below we go through that chapter paragraph by paragraph and show in figures what Nodira did.

First decide: is it an error, a change in estimate or a change in accounting policy?

Chapter 10 distinguishes three situations and gives a different route for each. So the first question is not "how much do we correct" but "which situation is this".

When the accounting policy may be changed is set by paragraph 52. First of all, the accounting policy is not changed during the calendar year. A change is allowed in the following cases: - a) when the organisation is reorganised (merged, divided, absorbed); - b) when the owners change; - c) when there are changes in the legislation of the Republic of Uzbekistan or in the regulatory legal acts governing accounting; - d) when new accounting methods are developed; - e) when the changes help present information in the organisation's financial statements more reliably.

The change must be justified and formalised in the manner of paragraph 51, i.e. by the relevant organisational and administrative documents of the head of the organisation (order, instruction and others).

If a change in accounting policy has a material effect, paragraph 110 requires the following to be disclosed in the notes: - a) the reasons for the changes; - b) the amount of adjustments for the reporting period and for the prior periods presented; - c) the amount of the adjustment recognised in net income or loss of the current period; - d) the amount of adjustments for periods before the reporting period included in the comparative data; - e) the amount of adjustments made to each reporting period for which additional data are given, and the amount of adjustments relating to periods before those included in the financial statements; if comparative information has been included or it is not possible to provide additional data, this fact is also disclosed; - f) the restated comparative data or the reasons why restating them is not appropriate.

NAS No. 1 gives no separate definition of the term "accounting estimate". In general terms it is a reasoned assumption about an amount that cannot be known exactly. A practical question helps to tell it apart from an error (author's comment): did you have the correct information at the time? In Nodira's case she did: the commission wrote 8 years, but 16 was copied onto the card. This is not updating an assumption on the basis of new information but copying data incorrectly. Had the commission inspected the car in 2026 and reset the life on new grounds, the situation would have been considered under paragraph 111.

What exactly do paragraphs 114–116 say?

Paragraph 114 (definition). "Material errors are errors found in the current reporting period that cause the financial statements of prior periods not to be regarded as reliable." In other words, the error was found this year, not yesterday, but relates to last year's statements.

NAS No. 1 does not define which error is "material" by a percentage or an amount. The criterion is in paragraph 32: if omitting or misstating information affects the economic decisions that users make on the basis of the financial statements, such information is material. So the organisation justifies its conclusion case by case.

Paragraph 115 (general rule). The full text of the paragraph: "The amount (value) of the correction of errors made in preparing the financial statements of prior periods is added to net profit or loss of the reporting period." It does not say whether the error is material or not: it speaks of "errors of prior periods" in general.

Paragraph 116 (material errors). The amount of the correction of a material error is reflected in two places: - a) "is reflected in the statements by changing the balance of distributed profit up to the beginning of the year"; - b) "last year's data for that period are changed; if the errors are not regarded as material (serious), they are excluded".

There are two subtle points in the official text, which we quote word for word. First: part (a) of paragraph 116 says "distributed profit", while the next paragraph, 117, calls the same thing "the balance of undistributed (retained) profit at the beginning of the year". Second: the word "excluded" at the end of part (b) refers to non-material errors, but what they are excluded from is not stated separately. Paragraph 116 opens with the words "The amount of the correction of material errors made in the prior period", so its procedure is for material errors. The standard does not separately explain how paragraphs 115 and 116 relate to each other, so it is advisable for the organisation to set out its approach in its accounting policy.

What goes into the notes: paragraphs 117 and 118

The standard gives two different lists for two situations. The lists are given in full.

Paragraph 117 applies when a material error is reflected in the opening balance of retained earnings in the balance sheet. The following are disclosed: 1. the nature of the material errors; 2. the amount of adjustments for the current period and for each period presented in the statements; 3. the amount of adjustments relating to the earliest periods made to the data of prior years; 4. the restated comparative data or the reasons why restatement is not possible.

Paragraph 118 applies when a prior-period error is corrected by adding it to net profit or loss of the current period. According to the first sentence of the paragraph, the comparative information for prior years "must be shown in corrected form in the financial statements prepared for the prior period", but to show net profit or loss of the current or any prior period "additional information must be given in a separate column" (in brackets: if material errors were corrected during those periods). At the same time as the correction, the following are disclosed: 1. the nature of the material (serious) error; 2. the amount of adjustments recognised as profit or loss of the current period; 3. the amount of adjustments relating to each period for which additional data are presented, and the amount of adjustments relating to the periods included in the additional data for periods before that period; if in practice additional data are not given, the reasons are disclosed.

Note: the first item of the paragraph 118 list also speaks of a "material (serious) error". So the standard also envisages a material error being corrected through current profit and gives the paragraph 118 list for that situation.

The «Sabo Mebel» example: understated depreciation

Initial data (all hypothetical; for simplicity the effect on corporate profit tax and other taxes is not considered):

Under the straight-line method the annual depreciation is determined from the depreciable amount and the useful life (NAS No. 5, paragraph 39):

Is it material? A quarter of the 2025 profit shown in the statements is due to the error: the correct profit should have been 45 000 000 soum, but 60 000 000 soum was reported. The founders discussed dividends on the basis of exactly this profit. Under the paragraph 32 criterion this information affects users' decisions, so management judged the error material and justified this in an accounting memo.

What changes under paragraph 116. The retained earnings balance at 1 January 2026 is reduced by 15 000 000 soum, and the 2025 comparative column in the 2026 statements is restated:

Depreciation for 2026 is charged using the correct life: 240 000 000 ÷ 8 = 30 000 000 soum. Check: dividing the corrected carrying amount by the remaining 7 years gives the same amount (210 000 000 ÷ 7 = 30 000 000). This way last year's error does not mix with 2026 profit.

Note under paragraph 117 (text written by Nodira):

What if the error were not material? Suppose «Sabo Mebel»'s 2025 net profit was 900 000 000 soum. Then 15 000 000 soum is about 1.7% of profit (15 000 000 ÷ 900 000 000). If management decides this does not affect users' decisions, under paragraph 115 the 15 000 000 soum is added to net profit or loss of the 2026 reporting period, i.e. it reduces 2026 profit by that amount. Part (b) of paragraph 116 says of non-material errors: "they are excluded". How the first sentence and the list of paragraph 118 (above) apply to a correction through current profit is best set out clearly in the organisation's accounting policy.

Journal entries: what NAS No. 21 contains and what it does not

Care is needed here: NAS No. 21 gives no separate standard journal entry for correcting a prior-year error.

Why the debit has been left open: - Paragraph 116 says a material error is reflected through the opening balance of retained earnings. Retained earnings are recorded on accounts 8710 and 8720 (NAS No. 21, paragraph 363), but the standard table in paragraph 365 does not give an entry linking 8720 with depreciation accounts. - Line 20 of the paragraph 412 table gives the entry 9430 / "Receivable accounts" for "Losses from prior years' operations". Its credit side is receivable accounts, not a depreciation account, so this line does not directly fit a depreciation error.

For this reason the organisation sets the debit account of the correcting entry in its accounting policy, and the entry itself is documented with an accounting memo: which year, which document, what amount and why.

Had Nodira found the error before 2025 was closed, say in December, Chapter 10 would not have been needed: the understated depreciation would have been topped up with an ordinary additional entry (9420 / 0211–0299, 15 000 000 soum). The three correction methods are covered in detail in a separate article: red storno, reversing entry and additional entry.

A short procedure: what to do when you find an error

1. Determine which year the error relates to and whether that year's statements have been approved.
2. Check against the primary documents whether it really is an error or a change in estimate based on new information.
3. Calculate the amount and justify materiality under the paragraph 32 criterion (in writing).
4. If material: paragraph 116 (opening profit balance and comparative data) and a note under paragraph 117. If corrected through current profit: paragraph 115 and a note under paragraph 118.
5. Document the journal entry with an accounting memo; if NAS No. 21 has no matching line, set the account in the accounting policy.
6. Remove the cause so the error does not recur: Nodira checked all cards against the commission reports.