What is a Restatement
A restatement is the revision and publication of one or more of a company's previous financial statements; it is necessary when it is determined a previous statement contains a material inaccuracy. The need to restate financial figures can result from accounting errors, noncompliance with generally accepted accounting principles (GAAP), fraud, misrepresentation, or a simple clerical error. A negative restatement often shakes investors' confidence and causes the stock's price to decline.
BREAKING DOWN Restatement
If an issue or error is found that affects part of a financial document or the document as a whole, a restatement is often required. Additionally, if certain key information pertaining to the original statement is received after the first statement was released, a restatement may be issued to adjust the financials based on the new discoveries.
Errors may be discovered internally through regular internal auditing processes. For example, Hertz Global Holdings Inc. issued restatements in 2015 for multiple previous fiscal years after misstatements were discovered within the 2011 through 2013 financial statements.
Errors may also be discovered by third parties during standard examinations of a company’s business practices and reporting standards. One example includes errors discovered during a Securities and Exchange Commission (SEC) audit of a company’s financial dealings.
Changes Requiring a Restatement
For a restatement to be required, the error must be deemed material to the statement, or statements, in question. An error is considered material if the incorrect information would lead those receiving the statements to come to inaccurate conclusions as part of a standard analysis.
For example, if a company’s gains were over-reported, this may cause investors to believe the company is in a stronger financial position than is actually the case. Based on the inaccurate information, investors may perform actions, in regards to the previously made investments, that otherwise would not have been made.
Changes in certain financial estimates are not required, as these are based on anticipated events and not ones that have already occurred. These changes must only be reported on the next financial statement after the change is made and are not applied retroactively.
Restatement Filing Requirements
When a publicly traded company determines it needs to amend its financial statements, it must file SEC Form 8-K within four days to notify investors of nonreliance on previously issued financial statements. It also needs to file amended 10-Q forms for the affected quarters and possibly amended 10-Ks depending on how many accounting periods are affected by the erroneous data.