The iron curtain method is a technique for determining whether a financial misstatement is material. Under this method, the cumulative effect of a misstatement in the balance sheet is considered, rather than just the impact of the misstatement in the current period. This tends to result in a larger proportion of misstatements being considered material, which calls for a financial statement correction.
For example, an accountant incorrectly set up the depreciation calculation on an expensive fixed asset five years ago. The annual impact of this error is $10,000, which is immaterial. However, under the iron curtain method, the error is material when the cumulative $50,000 impact of the error is considered. In this case, a financial statement correction is indicated.
The iron curtain method tends to overstate current year expenses, since it results in the recognition of more cumulative errors in the current period.
When making an evaluation under this method, be sure to consider whether there is a material impact on any part of the financial statements, including the income statement, balance sheet, statement of cash flows, or accompanying disclosures. A material impact anywhere in the financial statements is adequate grounds for a restatement.
If corrected financial statements are issued, the issuer should include a discussion of the nature of the error and the quantitative effects of the error on each affected financial statement line item.
