SBR Notes IAS 10

IAS 10 — Events after the Reporting Period

Purpose of IAS 10: The financial statements are prepared as at the end of the reporting period, but often the accounts are not authorised by the directors until some months later. During this time events may take place within the entity that should be communicated to the shareholders.

IAS 10: Events after the reporting period has two main objectives:

• To specify when an entity should adjust its financial statements for events that occur or become apparent after the reporting period, but before the financial statements are authorised for issue, and

• To specify the disclosures that should be given about events that have occurred after the reporting period but before the financial statements were authorised for issue.

IAS 10 also includes a requirement that the financial statements should disclose when the statements were authorised for issue, and who gave the authorisation.

Definition: Events after the reporting period 'are those events, both favourable and unfavourable, that occur between the reporting date and the date on which the financial statements are authorised for issue'. There are two types of event after the reporting period:

·         Adjusting event

·         Non – adjusting event

Financial statements are prepared on the basis of conditions existing at the reporting date.

Events after the reporting period
Events which occur after the end year but before the financial statements are approved
Gives new evidence on condition which existed at the year end (Adjust financial statements)	Gives new evidence on condition which did not exist at the year end 1. But impacts going concern assumption (Adjust financial statements) 2. Any other, disclose ·         Nature ·         Estimate of financial effect

Adjusting events: An event after the reporting period that provides further evidence of conditions that existed at the end of the reporting period, including an event that indicates that the going concern assumption in relation to the whole or part of the enterprise is not appropriate. IAS 10 states that if an entity obtains information about an adjusting event after the reporting period, it should amend and update the financial statements to allow for this new information.

‘An entity shall adjust the amounts recognised in its financial statements to reflect adjusting events after the reporting period.’

This might seem common sense. If conditions existed at the end of the reporting period, it is reasonable to expect that the financial statements should recognise those conditions, even though the facts did not become known until later.

Examples provided by IAS 10 include:

• Similarly, evidence might be obtained after the end of the reporting period indicating that as at the end of the reporting period the net realisable value of some inventory was less than its cost, and the inventory should therefore be written down in value in the statement of financial position. The sale of inventory at less than cost soon after the end of the reporting period would provide such evidence.

• The bankruptcy of a customer after the reporting date - this confirms that an allowance is required against a receivables balance at the reporting date

• The discovery of fraud or errors - this shows that the financial statements are incorrect

• The settlement of a court case after the end of the reporting period, confirming that the entity had a present obligation as at the end of the reporting period as a consequence of the case.

• The determination after the end of the reporting period of the purchase cost of an asset, where the asset had already been purchased before the end of the reporting period, but the purchase price had not been finally agreed or decided. Similarly, the determination after the end of the reporting period of the sale price for a non-current asset, where the sale had been made before the end of the reporting period but the sale price had not yet been finally agreed.

Example: At 31 December Year 1, Entity G is involved in a court case. It is being sued by a supplier. On 15 April Year 2, the court decided that Entity G should pay the supplier $45,000 in settlement of the dispute. The financial statements for Entity G for the year ended 31 December Year 1 were authorised for issue on 17 May Year 2. The settlement of the court case is an adjusting event after the reporting period:

• It is an event that occurred between the end of the reporting period and the date the financial statements were authorised for issue.

• It provided evidence of a condition that existed at the end of the reporting period. In this example, the court decision provides evidence that the entity had an obligation to the supplier at the end of the reporting period.

Since it is an adjusting event after the reporting period, the financial statements for Year 1 must be adjusted to include a provision for $45,000. The alteration to the financial statements should be made before they are approved and authorised for issue.

Non-adjusting events: Non-adjusting events are those that are indicative of conditions that arose after the reporting period therefore the financial statements must not be updated to include the effects of the event. IAS 10 states quite firmly: ‘An entity shall not adjust the amounts recognised in the financial statements to reflect non-adjusting events after the reporting period’.

However, IAS 10 goes on to say that if a non-adjusting event is material, a failure by the entity to provide a disclosure about it could influence the economic decisions taken by users of the financial statements. For material non-adjusting events IAS 10 therefore requires disclosure in a note to the financial statements of:

• The nature of the event, and

• An estimate of its financial effect, or a statement that such an estimate cannot be made.

Examples provided by IAS 10 include:

• A major business combination after the reporting date or the disposal of a major subsidiary.

• Announcing a plan after the reporting date to discontinue an operation.

• Major purchases and disposals of assets after the reporting date.

• The destruction of a major plant by a fire after the reporting period. The ‘condition’ is the fire, not the plant, and the fire didn’t exist at the end of the reporting period. The plant should therefore be reported in the statement of financial position at its carrying amount as at the end of the reporting period. The fire, and the financial consequences of the fire, should be disclosed in a note to the financial statements.

• Announcing or commencing a major restructuring after the reporting date.

• Large changes after the reporting date in foreign exchange rates.

• A decline in market value of investments between the end of the reporting period and the date on which financial statements are authorize for issue. A fall in market value after the end of the reporting period will normally reflect conditions that arise after the reporting period has ended, not conditions already existing before then.

Dividends: IAS 10 also contains specific provisions about proposed dividends and the going concern presumption on which financial statements are normally based.

If equity dividends are declared after the end of the reporting period, they should not be recognised as a liability in the statement of financial position, because they did not exist as an obligation at the end of the reporting period.

Dividends proposed after the end of the reporting period should be disclosed in a note to the financial statements, in accordance with IAS 1.

Problems with events after the reporting period: Judgement is involved when deciding if an event is adjusting or non ­ adjusting.

Suppose that an item of property, plant and equipment is valued shortly after the year-end and that this valuation reveals a significant fall in value. It may be that the fall in value occurred over a period of several months before the year-end, in which case the loss would be an adjusting event. However, it may be that the fall in value occurred after the year-end as a result of a particular event, such as an interest rate rise.

Or an entity may enter into a transaction shortly before the year end and then reverse the transaction soon after the year end. The aim is to improve the position shown in the year end accounts. This is known as ‘window dressing’.

For example, a company may write cheques to suppliers on the last day of the year and enter the payments in the cash book. The cheques may not be sent out by post until the new financial year has started, so that the entity has not been required to pay actual money from its bank account. The effect of this may help to improve the reported liquidity position of the entity, as measured by its current ratio (ratio of current assets to current liabilities). If this ratio is already higher than 1.0, recording a payment to reduce cash and reduce trade payables will increase the ratio further. A higher current ratio indicates better liquidity.

Example: An entity has current assets of $20,000 and current liabilities of $15,000. On the last day of the year, the entity writes cheques to $5,000 of its trade payables but does not send the cheques to the suppliers until two weeks later.

After recording the payment transactions, current liabilities will be $10,000 and current assets will be $15,000, giving a current ratio of 1.5:1. Prior to the transaction, the current ratio was 1.3: 1.

Therefore, the effect has been to improve the liquidity position of the entity, because the current ratio has increased and it now appears that the entity has proportionally more assets to cover their liabilities.

Some commentators have argued that where transactions are deliberately intended to manipulate the reported financial position, disclosure should be required in the notes to the financial statements, in order to alert users. Disclosure of the facts and amounts would then allow the users to allow for the transaction when analysing the financial statements.

However, IAS 10 does not currently address this problem of ‘window dressing’ the financial statements and there is no requirement for such disclosures.

Going concern issues arising after reporting date: There is an exception to the rule that the financial statements reflect conditions at the reporting date. If, after the reporting date, management decides to liquidate the entity or cease trading (or decides that it has no realistic alternative to these actions), the financial statements cannot be prepared on a going concern basis.

• In accordance with IAS 1, management must disclose any material uncertainties relating to events or conditions that cast significant doubt upon an entity's ability to continue trading. This applies if the events have arisen since the reporting period.

• If the going concern assumption is no longer appropriate then IAS 10 states that a fundamental change in the basis of accounting is required. In this case, entities will prepare their financial statements using the 'break up' basis.

• If the financial statements are not prepared on a going concern basis, that fact must be disclosed.

Financial statement should not be prepared on going concern basis if management determines after the end of the reporting period that:

• It intends to liquidate the organization or cease trading

• It has realistic alternative but to do so

Deterioration in operating results and financial position after the reporting period may require reconsideration of going concern assumption.

Going concern considerations: IAS 1 states that management should assess whether the going concern assumption is appropriate. Management should take into account all available information about events within at least twelve months of the end of the reporting period. The following are indicators of a going concern uncertainty:

• A lack of cash and cash equivalents

• Increased levels of overdrafts and other forms of short-term borrowings

• Major debt repayments due in the next 12 months

• A rise in payables days - this may suggest that payments to suppliers are being delayed

• Increased levels of gearing

• Negative cash flows, particularly in relation to operating activities

• Disclosures or provisions relating to material legal claims

• Large impairment losses - this might suggest a decline in demand or productivity.

Where there is uncertainty, management should consider all available information about the future, including current and expected profitability, debt repayment finance and potential sources of alternative finance. If there is greater doubt or uncertainty, then more work will be required to evaluate whether or not the entity can be regarded as a going concern. Here, 'the future' means at least twelve months from the reporting date.

Example: Which of the following events after the reporting period provide evidence of the conditions existed at the end of the reporting period

1. Discovery of fraud

2. Sales of inventory at less than cost

3. Earthquake

4. Strike by workers

5. Announcing a plan discontinue an operation

6. Closure of one of 20 retail outlets

7. Right issue of equity shares

8. Exchange rate fluctuation

9. Out of court settlement of legal claim

10. Privatisation by government

Answer

1. Adjusting event

2. Adjusting event

3. Non adjusting event

4. Non adjusting event

5. Non adjusting event

6. Non adjusting event

7. Non adjusting event

8. Non adjusting event

9. Adjusting event

10. Non adjusting event

Disclosure: Non-adjusting events should be disclosed if they are of such importance that non-disclosure would affect the ability of users to make proper evaluations and decisions. The required disclosure is

(a) The nature of the event and

(b) An estimate of its financial effect or a statement that a reasonable estimate of the effect cannot be made.

A company should update disclosures that relate to conditions that existed at the end of the reporting period to reflect any new information that it receives after the reporting period about those conditions.

Companies must disclose the date when the financial statements were authorised for issue and who gave that authorisation. If the enterprise's owners or others have the power to amend the financial statements after issuance, the enterprise must disclose that fact.