Lesson 14 of 20 · 6 min
What a prior-period adjustment is
A line correcting an earlier period, and often the only visible trace that a term was revised.
A prior-period adjustment is a statement line that belongs to a period other than the one the statement covers. It exists because something about an earlier period was recomputed, and the difference has to appear somewhere.
Its labels vary and are rarely self-explanatory: interest adjustment, rate adjustment, prior period interest, correction, or simply a second interest line with a different date range. What they have in common is that they cannot be verified from the current statement, because the inputs that produced them belong to a period this statement does not describe.
That is what makes the line worth attention out of proportion to its usual size. A prior-period adjustment is frequently the only evidence a borrower ever receives that a term was revised backward. There may be no notice, no explanation, and no statement of what changed — just a figure whose existence implies a recomputation.
What can be established about such a line, and what cannot:
- Establishable: that a period other than the current one was recomputed, and by how much in dollars.
- Establishable: which period, if the line carries a date range.
- Not establishable from the statement: which term changed — rate, spread, collateral value or day count.
- Not establishable from the statement: whether the recomputation is correct.
The only route to the last two is your own record of the period: the balance path, the rate you verified, and the day-count convention. With those, the adjustment can be reverse-engineered — a $66.75 adjustment on a $310,000 balance over 31 days on an Act/360 basis implies a rate change of about 25 basis points, which is a specific and checkable claim.
Key terms
- Prior-period adjustment
- A statement line correcting a period other than the one covered. Not verifiable from the statement it appears on.
- Reverse-engineering an adjustment
- Working backwards from the dollar figure to the implied change in a term, using your own record of the period.
- Audit trail
- Your retained record of rate, balance and collateral figures per period. Without it an adjustment cannot be interpreted at all.
Worked example
Reverse-engineering one adjustment
A statement shows 'Prior period interest adjustment: $66.75'. Your record: flat $310,000, 31 days, Act/360, verified rate 7.003%.
- Daily balance × days
- $9,610,000
- Adjustment ÷ (balance × days)
- 0.00000694
- Multiply by 360 to annualise
- 0.250%
- Implied revision
- 25 basis points
- Rate implied for the period
- 7.253%
- Checkable claim
- Yes — against the spread in your agreement
$310,000 × 31.
$66.75 ÷ $9,610,000.
An unexplained $66.75 became a specific statement about a 25 basis point revision, computable in four lines from records you kept.
Check yourself
A statement shows a $66.75 prior period interest adjustment. Your record shows a flat $310,000 balance over 31 days on an Act/360 basis. What rate change does that imply?
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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.