Events may
occur between the year-end (end of the reporting period) and the date when
financial statements are authorized for publication to the public. Such events
may provide evidence there existed certain conditions before the reporting
period which were not taking into account during the preparation of the
financial statements. IAS 10 Events after the Reporting Period provides
guidance as to which events should lead to adjustments in the financial
statements and which events shall be disclosed in the notes to financial
statements.
Date
of Authorization for Issue
Events
after Reporting Period are those that occur between the end of the reporting
period and when the financial statements are authorized for issue.
The
date of authorization for issue is usually taken to be the date when the board
of directors authorizes the issue of financial statements. Where management is
required to issue its financial statements to a supervisory board or
shareholders for approval, the authorization is considered to be complete upon
the management's authorization for issue of financial statements rather than
when the supervisory board or shareholders give their approval.
Events
after the Reporting Period
Events
after the end of reporting period may be classified into two types:
- Adjusting Events - Those
events that provide further evidence about conditions that existed at the
end of reporting period.
- Non-Adjusting Events - Those
events that reflect conditions that arose after the end of reporting
period.
Adjusting
Events
If
any events occur after the end of the reporting period that provide further
evidence of conditions that existed at the end of reporting period (i.e.
Adjusting Events), then the financial statements must be adjusted accordingly.
Examples
of Adjusting Events include:
- Settlement of litigation
against the entity after the reporting date, in respect of events that
occurred before the end of reporting period, may provide evidence of the
existence and amount of liability at the reporting date. A liability in
respect of the litigation may be recorded in the financial statements if
not recognized initially or the amount of liability may be adjusted in
accordance with IAS 37 Provisions, Contingent Liabilities and
Contingent Assets.
- Declaration of bankruptcy by
a long outstanding receivable after the reporting date may provide
evidence that the receivable was impaired at the reporting date.
Impairment may be recognized in the financial statements by reducing the
amount of receivable to its recoverable amount, if any.
- Detection of fraud or errors
after the reporting period may indicate that the financial statements are
misstated. Financial statements may be adjusted to reflect accounting for
those errors or frauds that relate to the present or prior reporting
periods in accordance with IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors.
Example 1
Ding Dong Limited financial year ends
on 31 December. On 20 December 2013,, Ding Dong was involved in a court case
with a customer who sued the company for delivering products where there was a
dispute over the exact ingredients included in the products manufactured by
Ding Dong. These products were delivered to the customer in October 2013. The
details of the case were heard by 22 December but the judge decided to reserve
her judgment until 8 January 2014. On 8 January 2014, the judge ruled in favour
of the customer, awarding it damages of GHS100,000.
Solution.
The event took place during the
reporting period and the settlement after the reporting period of the court
case confirms that Ding Dong Limited had a present obligation at the end of the
reporting period. The entity adjusts any previously recognized provision
related to this court case in accordance with IAS 37.
Example 2
Ding Dong Limited has an investment
worth GHS1,000,000 in its financial statements at 31 December 2013. Due to the
continuing recession, the investment reduced in value to GHS900,000 BY 15
January 2014.
Solution:
This is a non-adjusting event. The
decline in fair value does not normally relate to conditions of the investments
at the end of the reporting period, but reflects circumstances that have arisen
subsequently. Similarly, the entity does not update the amounts disclosed for
the investments as at the end of the reporting period, although it may need to
give additional disclosure.
Example 3
On January 2014, Ding Dong sold some
inventory for GHS80,000. This inventory had been included in the year-end count
as cost of GHS100,000.
Solution.
This is an adjusting event. The sale
of inventories after the reporting period can give evidence about the net
realizable value of the inventory at the end of the reporting period. Using the
IAS 2 inventory rule that inventory should be valued at the lower of cost and
net realizable value, The amount that should be included in the income
statement is GHS80,000
On 8 January 2014, one of the
accountants left Ding Dong suddenly. On further investigation, the company
realized that this employee had been paying himself money from the bank account
in relation to false rental invoices. The amount of the overpayment was found
to be GHS86,000.00. With the help of the police, the accountant was tracked
down and repaid all the money on 18 January 2014.
Solution
The discovery of fraud indicates
that the financial statement has been misstatement, that is some amount has
been included which in fact does not exist. The rental balance has been
overstated and the bank balance is understated. This has to be corrected.
Entity shall not adjust the
financial statements in respect of those events after the end of reporting
period that reflect conditions that arose after the end of reporting period
(i.e. Non-Adjusting Events).
Examples of Non-Adjusting Events
include:
Declaration of dividends after the
reporting date does not indicate existence of liability to pay dividends at the
reporting date and shall not therefore trigger the recognition of liability in
financial statements in accordance with IAS 37 Provisions, Contingent
Liabilities and Contingent Assets.
Destruction of assets of the entity
by floods occurring after the reporting period does not indicate that the
assets of the entity were impaired at the end of reporting period. Hence, the
financial statements should not be adjusted to account for the impairment loss
that arose after the end of reporting period.
Initiation of litigation against the
company arising out of events that occurred after the reporting period does not
indicate the existence of liability at the reporting date and shall not
therefore trigger the recognition of liability in the financial statements in
accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
The nature and estimate of the
financial impact of material non-adjusting events shall be disclosed in the
financial statements.
Non-Adjusting Events are considered
material if they could influence the economic and financial decisions of the
users of financial statements.
Examples of material non-adjusting
events include:
Management's plan to discontinue or
significantly curtail its activities in major geographic segments.
Initiation of a major litigation
against the company arising out of events that occurred after the reporting
period.
Major losses suffered as a result of
a natural disaster occurring after the end of reporting period.
References
Conor Foley, CPA Ireland, (Article) . Events After the Reporting Period
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