What Is a Restatement?
Let me explain to you what a restatement is—it's when a company revises one or more of its previous financial statements to fix an error. You need to know that restatements become necessary if there's a 'material' inaccuracy in those statements, which could come from accounting slip-ups, not following generally accepted accounting principles (GAAP), fraud, misrepresentation, or even just a clerical mistake.
Key Takeaways
Here's what you should remember: a restatement revises one or more past financial statements to correct an error. Accountants decide if a past error is 'material' enough for this step. An error counts as material if the wrong info would cause people reviewing the statements to draw false conclusions. The FASB mandates that companies issue restatements for previously recorded errors. Also, a reclassification means fixing how an entry is categorized.
Understanding Restatements
You have to understand that company management and independent auditors ensure quarterly and annual financial statements accurately show the firm's condition. Sometimes, those statements need amendments. Internal auditors might catch these mistakes, or it could be a third party like the Securities and Exchange Commission (SEC).
The Financial Accounting Standards Board (FASB) requires companies to issue restatements for past errors. Accountants figure out if an error is material enough to justify it.
'Material' is a flexible term without strict percentage rules. Generally, if the bad info leads statement users to wrong conclusions in a standard review, it's material.
If an error affects part or all of a financial document, you'll likely see a restatement. Plus, if key info arrives after the original release, a restatement might adjust the financials accordingly.
The Dangers of Restatements
Many restatements stem from honest mistakes or misinterpretations, but some signal fraud or incompetence. Overstating gains can mislead you as an investor, making the company seem stronger than it is. With that false data, you might make investment decisions you otherwise wouldn't.
Public companies file SEC Form 8-K to notify the investment community of material changes and reissue corrected statements—that's a fast fact you should note.
Negative restatements often erode investor confidence, dropping share prices. They can lead to fines too; take Hertz Global Holdings Inc. (HTZ), which paid a $16 million penalty after auditors found errors in past statements, affecting profits for 2011, 2012, and 2013.
Real-Life Example of a Restatement
Look at Molson Coors Brewing Co. (TAP) in February 2019—they restated financials for FY 2016 and 2017 due to accounting errors in income taxes tied to deferred tax liabilities (DTL).
In their regulatory filing, they pinned the errors on acquiring the remaining 58% stake in MillerCoors in 2016. Understating DTL and income tax expense inflated 2016 net profits by nearly $400 million. Overall, they understated taxes owed by $248 million and overstated total equity by the same amount.
This didn't build confidence in their accounting, and their share price dropped sharply afterward.
Restatement Requirements
When a publicly traded company needs to amend statements, it files SEC Form 8-K within four days to alert investors that prior statements are unreliable. It also files amended 10-Qs for affected quarters and possibly amended 10-Ks, based on how many periods the errors touch.
Companies provide details in their latest statements on how errors happened, how they fixed them, and any likely future impacts—usually in the footnotes.
Special Considerations
If you're an investor, assess the error's seriousness when a restatement hits. Figure out its potential impact and whether it was an innocent slip or something worse. Check management's plans to prevent repeats.
Remember, changes in financial estimates don't require restatements since they're forward-looking, not past events. You report those changes only on the next statement, without retroactive application.
Restatement FAQs
What's the difference between reclassification and restatement? A restatement corrects a revised financial statement for what was reported wrong. A reclassification fixes an entry's category, like shifting from current to long-term asset.
What's the difference between revision and restatement? A revision corrects a reported amount in future statements without reissuing the old one. A restatement, however, is for material errors, requiring a corrected statement issuance.
What is the Restatement of Torts? It's a resource from the American Law Institute (ALI) explaining tort law, with versions like Restatement of the Law Second, Torts, and the Third.
What is the Restatement of Contracts? This ALI resource clarifies contract law to help courts interpret it.
The Bottom Line
When financial reports have material inaccuracies, companies correct the errors and reissue statements. These could stem from oversight, mistakes, or fraud. Regardless, errors can lead examiners to base decisions on bad data.
