Restatement
A restatement is a necessary procedure when the former financial statements of a company are being revised in order to make it right this time. The revision is usually initiated by accountants in case there are doubts whether the financial statements were assessed accurately, meticulously and with no mistakes. The procedure is also launched in case a fraud took place, or a clerical error happened.
Material for Restatement
Financial statements are extremely important, they are records that demonstrate how a company is doing. There are three types of financial statements. One is the balance sheet, which reflects a company's assets, liability, etc. Another one is an income statement that reflects a company's earnings and expenses. The last one is the cash flow statement. This record shows the generating of cash for paying debt obligations, etc.
Everything mentioned before is conducted by management of a company or by independent auditors. They are in charge of ensuring that the statements are written out quarterly or annually in a meticulous way. There are cases in which it’s necessary to correct statements that were written before due to mistakes. Mistakes, in fact, may be found not by the company accountant, but by an independent auditor, or by the responsible for protecting investors agencies.
People, who are in charge of deciding whether the error took place and this is a material for warranting a restatement, are accountants. However, the word material is a vague description. Since there is no concrete number or instructions, it’s hard to assess whether an inaccuracy is a serious mistake, which is prone to becoming a material or not. The general instruction says that if people who use this inaccurate piece of information made wrong conclusions based on the information, then it’s enough to become a material.
Thus, in case of determining the error (it's recognized as an error in case it affected the record and contributed to the wrong conclusions) a restatement is prone to be arranged. Also, restatement may be initiated in case information that is crucial for the record was received later than expected. Thus, through restatement, the information will be included into the record.
Involved risks
Although restatements in most cases correct small mistakes or phrases that potentially may be misinterpreted, they also can reveal serious things which in their turn may lead to fraud, etc. For example, in case an over-reporting of the company’s revenue takes place, the consequences may be unfortunate. It may give a signal to investors that the company is liable enough to invest in it, whereas in reality the actual revenue isn’t reflected and the company pretends to be stronger than it actually is. It may result in collapse for every part of such a relationship.
Restatements are conducted in order to prevent such situations and protect investors from potential losses. It is an advantage of restatements for investors. However, restatements may turn out to be disadvantageous for companies in case many mistakes were spotted. It may lead to losing investors’ loyalty, or at least shake their confidence in the company. Moreover, it can result in shares’ price falling. In case errors were found by auditors, a fine may be imposed.
What a company need for Restatement
It’s not easy to carry out a restatement. There are different requirements for conducting the procedure for each country. For example, in the U.S. a company must take several steps to achieve the possibility to conduct it. Firstly, every company that has intention to run a restatement needs to file Form 8-K in order to inform investors that the last financial statements mustn’t be trusted since they have errors. Then, companies have to file Form 10-Q in order to make clear what quarters’ results are changed. Also, the report named 10-Ks is needed to be filed (it depends on the quantity of period, which information was misleading due to the errors).
Moreover, firms also have to inform investors and other interested people, what brought errors about, how they are going to manage errors and forecasts they have for future errors, in case there will be errors. There is a special place for such notes, it’s known as footnotes.
Cautions
Investors should pay a great attention to companies that are conducting a restatement and on a restatement itself. It may save much money in case an investor notes that something goes wrong on time. Sometimes, restatements are necessary since a small mistake occurred and a company has to revise every record it made taking the mistake into account. However, in some cases something more serious is hidden behind the restatement. Thus, the investor can’t be careless regarding such issues. To determine what lies behind the restatement, an investor should take a closer look at the decisions of management and how they are planning to handle the occurred error.
It’s worth noting that not every change in financial estimates necessarily needs to be introduced, since they are based on expecting events. Companies must introduce such changes after they are made, not before.