How should changes due to prior period errors be applied?

Changes due to prior period errors should be applied retrospectively. This approach ensures that the financial statements reflect the accurate financial position and performance of the entity as if the error had not occurred. By applying this method, prior periods' financial statements are adjusted to correct the error, providing users of the financial statements with consistent and comparable information across periods.

Retrospective application is essential because it helps maintain the integrity of financial reporting, allowing stakeholders to make informed decisions based on corrected historical data rather than just current or future implications of the error. This aligns with the principles of consistency and transparency, prioritizing the accuracy of historical financial statements.

The other alternatives do not provide the comprehensive correction necessary for prior period errors. Changes made only for future transactions could lead to misleading impressions, as past financial performance would remain inaccurately reported. Prospectively without restatement means ignoring the impact of past errors on previous periods, undermining the reliability of the financial statements. Lastly, applying adjustments retrospectively only for material amounts can create inconsistencies in reporting and potentially obscure significant issues that need to be addressed, irrespective of their materiality. Thus, retrospective application is the most appropriate and effective approach for addressing prior period errors.