# Understanding Financial Restatements: Definition, Legalities & Examples

![Restatement](https://www.investopedia.com/thmb/xtobjMct4NxiUqme17MT7w0WojE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Restatement_v1-37dcde69b97345a09f20f2103d5d91cc.jpg)

*— Investopedia / Jake Shi*

## What Is a Restatement?

A restatement is a revision of a company’s financial statements to correct errors when they are significant. Restatements are required when material inaccuracies are found. Accountants, along with guidance from the Financial Accounting Standards Board (FASB), play a key role in ensuring accuracy. While they help maintain reliable reporting, reinstatements can hurt a company’s financial standing and investor confidence. They can also bring about legal and regulatory risks.

### Key Takeaways

*   Restatements can be triggered by accounting errors, noncompliance with GAAP, fraud, or clerical mistakes, requiring companies to correct and reissue financial statements.  
    
*   Both internal and external parties, such as company auditors or the SEC, can detect the need for a restatement, emphasizing the importance of accurate financial reporting.  
    
*   Materiality is a key concept in deciding whether a restatement is necessary, and errors must be significant enough to potentially mislead financial statement users.  
    
*   Negative restatements often harm a company's reputation and investor confidence, potentially leading to share price declines and financial penalties.  
    
*   Publicly traded companies must file SEC Form 8-K within four days of determining that restatements are needed, ensuring transparency and timely communication with investors.

## Delving Into Financial Restatements

Company management and [independent auditors](https://www.investopedia.com/terms/i/independentauditor.asp) are responsible for ensuring that quarterly and annual financial statements accurately reflect the financial condition of a firm. Sometimes, internal auditors find errors that require changing past statements. Other times, third parties like the [SEC](https://www.investopedia.com/terms/s/sec.asp) might notice these errors.

[The Financial Accounting Standards Board](https://www.investopedia.com/terms/f/fasb.asp) (FASB) requires companies to issue a restatement to correct previous errors. [Accountants](https://www.investopedia.com/terms/a/accountant-responsibility.asp) decide if an error is "material" enough to require a restatement.  

"Material" is loosely defined and lacks specific percentage guidelines. An error is material if it could mislead people analyzing the statements.

If errors impact any part of a financial document, a restatement is likely needed. If new key information emerges after releasing a statement, a restatement may adjust the financials.

## The Risks Associated with Financial Restatements

Many restatements stem from innocent mistakes and simple misinterpretations. However, some can raise red flags, highlighting potential [fraud](https://www.investopedia.com/terms/f/fraud.asp) or incompetence. Over-reporting gains can mislead investors. It can lead investors to believe the company is in a stronger financial position than is actually the case. With inaccurate data, investors might make decisions they wouldn't have otherwise.

> **Fast Fact**
>
> Public companies must file SEC Form 8-K to alert the investment community of material changes, as well as reissue corrected financial statements.﻿﻿

Negative restatements often undermine investor confidence and lower share prices. Restatements can result in fines. For example, Hertz Global Holdings, Inc. paid a $16 million penalty after auditors found errors in its statements. In 2015, the company stated restatements would impact its 2011-2013 profits.

## Case Study: Real-World Restatement Example

In February 2019, Molson Coors Brewing Co. ([TAP](https://www.investopedia.com/markets/quote?tvwidgetsymbol=tap)) revealed it would restate its financial statements for [fiscal years](https://www.investopedia.com/terms/f/fiscalyear.asp) (FY) 2016 and 2017 after auditors discovered accounting blunders for [income taxes](https://www.investopedia.com/terms/i/incometax.asp) related to [deferred tax liabilities](https://www.investopedia.com/terms/d/deferredtaxliability.asp) (DTL).

In a filing with regulators, the beer maker blamed the errors on its [acquisition](https://www.investopedia.com/terms/a/acquisition.asp) of a remaining 58 percent stake in MillerCoors in 2016. Understating deferred tax liability (DTL) and income tax expense boosted net profits by nearly $400 million in 2016. Overall, the company said it understated the value of the taxes owed but not yet paid on its [balance sheet](https://www.investopedia.com/terms/b/balancesheet.asp) by $248m, and overstated its total [equity](https://www.investopedia.com/terms/e/equity.asp) by the same amount.

The finding did not inspire much confidence in Molson Coors Brewing’s accounting practices, as reflected by the sharp subsequent markdown in the company’s share price.

## Essential Requirements for Financial Restatements

When a publicly traded company determines it needs to amend its financial statements, it must file SEC [Form 8-K](https://www.investopedia.com/terms/1/8-k.asp) within four days to notify investors of non-reliance on previously issued financial statements. It also needs to file amended [10-Q forms](https://www.investopedia.com/terms/1/10q.asp) for the affected quarters and possibly amended [10-Ks](https://www.investopedia.com/terms/1/10-k.asp), depending on how many accounting periods are affected by the erroneous data.

Companies should also provide a breakdown of how past errors occurred, how they were corrected, and whether there will likely be any future ramifications in their latest financial statements. These comments usually appear in the [footnotes](https://www.investopedia.com/terms/f/footnote.asp).

## Critical Considerations for Financial Restatements

When companies issue restatements, investors are advised to ascertain to the best of their abilities the seriousness of the error reported. How much of an impact is it likely to have and, more importantly, was it an innocent mistake, or something that appears to be more sinister? Look for indications from management on how it plans to stop similar mistakes from happening in the future.

It is also worth remembering that 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 FAQs

### What Is the Difference Between Reclassification and Restatement?

A restatement is the restatement of a revised financial statement. The restatement is purposed to correct what was previously reported erroneously. A reclassification involves correcting the classification of a transaction or entry, moving it from one ledger to another. For example, one could reclassify an entry from a current asset to a long-term asset.

### What Is the Difference Between Revision and Restatement?

A revision is the correction of a reported amount in subsequent financial statements. However, the previously reported financial statement need not be reissued. With a restatement, on the other hand, the error must be material, prompting a revision and the issuance of a corrected financial statement.

### What Is the Restatement of Torts?

The Restatement of Torts is a resource published by the American Law Institute (ALI) explaining the law as it pertains to certain situations, specifically involving torts. There are two Restatement of Torts: Restatement of the Law Second, Torts, and Restatement of the Law Third, Torts, which is the most recent published version.

### What Is the Restatement of Contracts?

The Restatement of Contracts is a resource published by the American Law Institute (ALI) explaining the law as it pertains to contracts. In other words, they help courts clarify and interpret contract law.

## The Bottom Line

When financial reports contain material inaccuracies, companies must correct the accounting error and reissue a corrected version of the financial statement. The error could have resulted from oversight, simple mistakes, or something more sinister, such as fraud. Despite the underlying reason, errors can cause those examining the statements to make decisions based on inaccurate data.

> **Article Sources**
>
> 1.  Bakertilly. "[Restatements: the costly result of an error](https://www.bakertilly.com/insights/restatements-costly-result-error)." Accessed May 30, 2021.
>     
> 2.  Calc Bench. "[Are restatements and revisions the same thing?](https://knowledge.calcbench.com/hc/en-us/articles/226003228-Are-restatements-and-revisions-the-same-thing-#:~:text=A%20restatement%20is%20a%20case,reissues%20previously%20filed%20financial%20statements.&text=A%20revision%20on%20the%20other,in%20a%20subsequent%20financial%20statement.)" Accessed May 30, 2021.
>     
> 3.  USC Gould School of Law. "[Tort Law](https://lawlibguides.usc.edu/c.php?g=687841&p=4876675)." Accessed May 30, 2021.
>     
> 4.  Cornell Law School. "[Restatement of the Law](https://www.law.cornell.edu/wex/restatement_of_the_law#:~:text=Primary%20tabs,ALI%29%20to%20clarify%20the%20law.)." Accessed May 30, 2021.