Prior Period Adjustment
What is Prior Period Adjustment (PPA)?
A prior period adjustment (PPA) is a revision to an employee's previous payroll (time, salary, or classification). Although workers and employers make every effort to report and measure payroll correctly, mistakes take place. And, in many cases, these mistakes are not found until after timesheets have been submitted. Then after the PPA role starts, it's played by the employee and employer together to rectify the wrong done.
- PPAs are made on any period financial statements – say balance sheets, income statements, etc. – of your accounting systems in practice, wherever the impact is there. In other words, if a mistake is made earlier on any basis when it is corrected, it shall have a big or smaller impact on the new balance in hand of your company accounts.
- Those effects on the financial documents should be referred to the company financial periods in your PPAs / restatements relevant: previously issued financial statements, prior years accounting activities, retained earnings, the balance of retained earnings, net income; anything else you find relevant, be reviewed for corrections, as PPAs have a cumulative effect(s) on many things altogether
- The income taxes, other applicable taxes should also be referred to for corrections due to PPAs’ effect on those
- Hence it is necessary to highlight such adjustments in your (to-be) issued financial statements if any.
- Although financial advisors, accountants, chief financial officers (CFOs), your payroll worker officials, payroll service providers, and your internal (pre)auditing people/team (s) do take care of prior avoidance for errors, then again inadvertent mistakes do happen, therefore Financial Accounting Standards Board (FASB) regulations are there for correction of an error(s), and this is open to be done as a vital good practice, known as prior period adjustments (PPAs).
- PPAs are also commonly known as Restatements, as you restate what was stated before as incorrect.
When Prior Period Adjustments are needed?
Whenever there are material errors in the timesheet of employees’ pay and/or benefit(s), PPA is required.
As per FLSA – Fair Labor Standards Act – specified workers are provided with the benefits and as well as the safeguards which affect the way the employees are getting paid. There are several situations where PPA becomes inevitable for you. Those scenarios are mentioned being here, as appended below:
When an employee is erroneous, though inadvertently, placed in payroll as an employee who is exempt and that was a non-exempt employee who could get paid against overtime for the additional hour's input, this situation requires a Prior Period Adjustment to take over
Wrong overtime or regular hours input shared by the worker(s) due to any reason, this does not mean it happens deliberately but on the other hand, the employee might have mistakenly made that inaccuracy, but that needs rectification via prior period adjustment
What can be the potential reasons behind PPAs?
Following may be the potential reasons behind prior period adjustments:
- Mathematical errors
- Human error(s)
- Accounting regulations’ application mistakes
- Failure in understanding law concerning financials
- Misinterpretation of figures and facts, that might be even unintentional
- Failure in calculations regarding expenses or revenues
- Fraud by misuse of information
- Any other potential deliberate/unintended wrong in the prior or existing period presented
How prior period adjustment errors might be fixed?
Following are the methods by way of which prior period adjustment errors may be made clear / rectified:
- Through cancellation of employee’s previous role for errors rectification, as the case may be
- Routine looking into the preceding timesheets of workers and make adjustments wherever and whenever necessary
- When the salary/pay amount is facing miscalculations, for future course of action there needs to be a right done for every wrong done at the part of your HR payroll division/payroll service provider(s), if hired
How can you prevent the prior period adjustments?
You can, however, prevent the prior period adjustments by way of the following:
Reminders on week basis
Just before time-card deadlines approach nearer; your workers must be reminded to fill the timesheets, for a double-check, right before the evaluation of the payroll for PPAs, if any
- Law interpretation of the workers, and by you as well, is of pivotal importance for the good of themselves as well as the benefit(s) of organizations(s) they are working with.
- Comprehension about exempt versus non-exempt employees and the changing regulations from time to time and state to state needs to be understood by you and your employees.
- Make sure your team has got ample access to the right resources for guidelines to take from.
- Software encompassing payroll help is a step towards employee and company betterment in terms of avoiding PPAs.
- We do NOT say computers are not prone to errors, but the programming once set runs as per routine but that too needs monitoring by a system admin or the service providers for your ease of working and the same time input to some other valuable production or strategic decision making
- Human errors, minimized and the manual hectic is dealt with due to automation of your processes
- For timely reporting, HR Software is of help a great deal!
- And too, By way of those, your team as a whole may be able to generate their salary timesheets
- Vital report generation by HR Software - like payroll sheets, payroll register, deductions summaries, reports requiring cash flows, etc. are of immense importance for you and your workers to go for its double-check for the information as well as errors’ remedy, before the payroll is run for the month.
Summarizing Prior Period Adjustment
Remember that you just need to keep strong checks in terms of the mistakes made, which do happen due to any reason, in payroll encompassing employees’ salaries and benefits; and hence improve the situation by improving the calculations in due course of time to avoid non judicious practice, mal reputation and/or litigation penalties, etc.
Apart from a deliberate mistake or fraudulent practice, prior period adjustments/restatements tell accounting systems that compassion, as well as comprehension, is possible, even in the calculation(s) of figures.