IAS 10 – Events After the Reporting Period | Push Digits Chartered Accountants

IAS 10 – Events After the Reporting Period

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IAS 10 Events After the Reporting Period

Introduction

The purpose of this standard is to provide guidance regarding:

  • when an entity’s financials should be adjusted for events that occurred after the reporting period;
  • the disclosures with respect to the date when an entity’s financials were authorized by the entity’s management and auditor for the issue and about events that occurred after the reporting period.

This standard requires that financial statements of an entity should not be prepared using the going concern assumption if events occurring after the end of the reporting period indicates that the going concern assumption is no longer appropriate.

Scope

This standard is applicable to events that occur after an entity’s reporting date but before the date of authorization of financial statements for issue, and related disclosures.

Definitions of Important Terms

Events after the Reporting Period

These can be defined as events, whether favorable or unfavorable, that take place between the reporting date and the date at which an entity’s financials are authorized for issue.

Adjusting Events

These are events that occur after the reporting date but before financial statements have been authorized for issue, and provide evidence of conditions that existed at the reporting period end/ reporting date.

Non-Adjusting Events

These are events that occur after the reporting date but before financial statements have been authorized for issue, and are indicative of any condition that arose after the reporting date.

Recognition and Measurement

Adjusting Events after the Reporting Period

The standard requires an entity to adjust amounts and add or change the information presented in its financial statements to reflect adjusting events that occurred after the entity’s reporting date but before the authorization of the financial statements for issuance.

Following are the examples of events for which an entity must adjust amounts in its financial statements before it is authorized for issuance:

  • An entity is involved in a court case that gets settled after the end of the entity’s reporting period. The court proceedings and the settlement itself confirm that the entity had an obligation to settle at the end of its reporting period. As a result, the entity is required to adjust any provision that was previously recognized in relation to the said case in accordance with the guidance provided in IAS 37 Provisions, Contingent Liabilities, and Contingent Assets or to recognize a new provision.
  • An entity receives information after the end of its reporting period that one of its assets was impaired before its reporting date or that previously recognized impairment loss for an asset needs to be adjusted. For example, the sale of inventories after the reporting date may provide evidence about their net realizable value (NRV) at the reporting date.
  • The determination of purchase/ sale price of an asset after the end of the reporting period, which was purchased/ sold during the reporting period.
  • An entity pays a bonus or profit to its employees after the end of the reporting period. If the entity had a constructive or legal obligation at the reporting date to make such payments due to past events before that date.
  • The identification of fraud, or any error after the end of the reporting period.

 Non-Adjusting Events after the Reporting Period

For non-adjusting events after the end of the reporting period, the standard does not require an entity to adjust or make changes to its financial statements. However, the standard requires these events to be properly disclosed in the entity’s notes to the financial statements, if they are classified as significantly material, with the following details:

  • Description of the nature of the event; and
  • Financial implications on the entity

For example, an entity experiences a decline in the fair value of one of its investments after the reporting period but before the authorization of financial statements for issue. If the said decline is caused by conditions that arose after the reporting period but before the entity’s financials are authorized by the management for issue then in such a case the entity would not make any adjustment to the amounts recognized and presented in its financial statements.             

Another example of a non-adjusting event can be an entity announcing/ declaring dividends to holders of its equity instruments after the end of the reporting period, the entity will not record the said dividends as a liability in its books at the end of its reporting period because of the non-existence of an obligation at that time.  However, an entity would be required to disclose this declaration in its financial statements in accordance with the requirements of IAS 1 Presentation of Financial Statements.

Further are some more examples of non-adjusting events occurring after the reporting period:

  • A major change in an entity’s business structure;
  • Discontinuation or sale of a business line;
  • Major purchase, disposal, or reclassification of assets;
  • A significant change in ownership;
  • Abnormal changes after the reporting period in foreign exchange rates or asset prices;
  • Changes in tax laws or tax rates announced or enacted after the reporting date that has a significant impact on current tax as well as deferred tax assets and liabilities;
  • Entity entering in a major contract; and
  • Major loss arising due to a catastrophe such as fire, flood, etc.

Going Concern  

An entity should not prepare its financials using the going concern assumption if the entity’s management realizes after the period-end that it either has intentions to stop trading or liquidating the entity or it has no other option but to do so. 

The decline in an entity’s financial performance and position after the end of the reporting date may indicate the need for the entity’s management to assess whether preparing financials ongoing concern basis is still relevant and appropriate. If preparing financials using the going concern assumption is no longer appropriate then an entity is required to make a change in the basis on which its financials are prepared rather than making adjustments to amounts presented in its financials prepared using the going concern assumption.

IAS 1 requires disclosure related to the going concern assumption in the following cases:

  • Entity’s financial statements are not prepared using the going concern assumption; or
  • Entity’s management is aware of materially significant uncertainties related to conditions or events that have the potential of casting significant doubt on the entity’s capability to continue as a going concern. The conditions or events requiring proper disclosure in the entity’s notes to the financial statements may arise after the reporting date.

Disclosures

The entity should give proper disclosures regarding the following in the notes to its financial statements:

  • The date of authorization of the financial statements;
  • The authority that is responsible for authorizing the financial statements;
  • The entity’s owner(s) having the authority to amend or adjust financial statements after it is issued;
  • Adjusting events occurring after the reporting period end whose conditions existed at the reporting date; and
  • The nature and potential financial impact of material non-adjusting events occurring after the reporting period end.

Non-disclosure of the above-mentioned information could reasonably be expected to influence the decision-making of the users of the financial statements.

Example 1

ABC Ltd is a manufacturing facility and it has year-end of March 31. The date of authorization of its financial statements for the financial year ended March 31, 2020 was May 7, 2020 and the annual general meeting is scheduled to take place on 8 June 2013. Following events occurred during the period between the end of the reporting period and the date financial statements were authorized for issue:

a) One of the company’s major warehouses together with all the inventory it contained, both were completely damaged due to a fire explosion that took place on April 14, 2020. Both the inventory and the warehouse had a carrying value of $15 million and $25 million respectively at the reporting date. The company is expected to recover around $20 million in total because of its insurance cover. The entity’s operations were severally disrupted and as a result, the entity expects to experience losses in the next 3 financial years.

b) A specific inventory item held by the entity at another location was recorded at its cost of $1,020,000 at 31 March 2020 in its statement of financial position. The entity sold 60% of the inventory for $580,000 on 12 April 2020, incurring selling and commission expense of 10% of the total sale amount of the said inventory.

c) The government introduced new tax laws on June 15, 2020, due to which the tax liability recorded by the entity in its accounts at March 31, 2020, will increase by $540,000.

Solution:

a) It will be classified as a non-adjusting event in accordance with the guidance provided in IAS 10. The standard clearly states that loss caused by any natural disaster such as floods, fire and earthquake, etc. after the reporting date will only be disclosed in the financial statements as the natural disasters are non-adjusting events because events such as these do not provide any evidence of conditions existing at its period-end. However, if the aforementioned event impacts the entity’s going concern status then it will be classified and treated as an adjusting event and the entity would then be required to make a fundamental change in the basis on which its financial statements were originally prepared. The entity should disclose its Insurance claim as a contingent asset in the notes to its financial statements.

b) It will be treated as an adjusting event as inventory sold after the reporting period reflects that the net realizable value (NRV) of the said inventory is less than its cost. The NRV of 60% inventory is $522,000 computed using total sale amount of $580,000 less selling and commission expense of $58,000 ($580,000*10%), and it has a cost of $612,000 ($1,020,000 x 60%). As a result, the entity will have to write down its inventory value to its NRV of $870,000 ($522,000/70 * 100%) in the entity’s balance sheet for the financial year ended March 31, 2020.

c) This event is not within the scope of IAS 10 as it occurred after the date financial statements were authorized for issue.

Example 2

XYZ Limited’s financial year ends on June 30. The company’s financial statements were authorized for issue on July 16, 2020. On June 15, 2020, XYZ was involved in a court case with a client company who sued the company over the ingredients included in the products manufactured by XYZ. These products were delivered to the client company by XYZ in April 2020. The case was heard on June 18, 2020 but the judge reserved his judgment until 8 July 2020. On July 8, 2020, the judge ruled in favor of the client entity and ordered XYZ to pay damages of $150,000.

Solution

This is an adjusting event in the light of the guidance provided in paragraph 9 (a) of IAS 10. The fact that the court case took place before the end of the reporting period and the decision of the case which resulted in the entity paying damages came after the reporting period but before the date of authorization of the financial statements for issue confirms that XYZ Limited had an obligation in connection to the court case at the end of the reporting date. Therefore, the entity should adjust any previously recognized provision related to the said case in accordance with IAS 37 or recognize a new provision to reflect the damages paid after the reporting period.

Example 3

ABC Limited has an investment worth $1,000,000 presented on its financial statements for the financial year ended March 31, 2020. The fair value of the said investment reduced in value to €900,000 by April 15, 2020.

Solution

As per IAS 10, the change in the fair value of an investment after the end of the reporting date is a non-adjusting event. The decline in fair value is due to conditions that arose after the reporting date. The entity would not be required to adjust the amounts related to the said investment in its financial statements. However, ABC Ltd should give additional disclosure regarding the aforementioned.

Example 4

EDF Limited is a company that provides janitorial services and it has year-end of September 30.  The date of authorization of its financial statements for the financial year ended September 30, 2020 was October 28, 2020. On October 7, 2020, one of the accountants left EDF Ltd suddenly. After the company investigated the matter, it found out that this employee had been stealing money from the bank on account of false office rental invoices. The amount of overpayment in relation to office rent was found to be $56,000. With the help of local police, the accountant was tracked down and repaid the aforementioned amount on 19 October 2020.

Solution

This is an adjusting event as the discovery of fraud shows that the entity’s financial statements for the financial year ended September 30, 2020 are incorrect because the rental expense is overstated and therefore needs to be adjusted to reflect correct balances at the reporting date.

Example 5

EDF Limited presented trade receivables of $45,000 in its financial statements for the financial year ended September 30, 2020. One of XYZ’s customers owed it $15,000 at the reporting date. The said customer was declared to be bankrupt on 6 October 2020. The company has no prospect whatsoever of recovering the aforementioned amount from this bankrupt customer.

Solution

The bankruptcy of the customer did occur after the end of the reporting period but evidence of the conditions leading to the bankruptcy existed at the end of the reporting period. Therefore, it can be said that the bankruptcy of the customer is an adjusting event and the entity needs to adjust the amount of its trade receivables presented on its financial statements for the year ended on September 30, 2020.

Example 6

EDF Limited declared a dividend of $100,000, in relation to the financial year ended 30 September 2020, was declared in October 2020 and paid on October 19, 2020. The entity’s accounts department included the dividend paid to its shareholders after the reporting period in its financial statements for the year ended September 30, 2020.

Solution

IAS 10 requires an entity to not recognize the declaration of the dividend after the reporting period as a liability at the end of the reporting period. Therefore, the accounting treatment by the company’s accounts department is incorrect and the accounts department should reverse the transaction and include the dividend in the next year’s financial statements.

Example 7

EDF Limited’s financial statements for the year ended September 30, 2020 were authorized for issue on October 28, 2020. At September 30, 2020, the entity had significant unhedged foreign currency exposures. By October 12, 2020, the entity experienced a significant loss on these exposures because of a material weakening of the entity’s functional currency against the foreign currencies to which it is exposed.

Solution

Loss caused due to deterioration in the exchange rate after the end of the reporting period is a non-adjusting event as it is indicative of conditions that arose after the reporting period. The decline in exchange rates does not usually relate to conditions that existed at the reporting date but reflect circumstances that have arisen subsequently (the exchange rate at the end of the reporting period took account of conditions that existed at that date).

 

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