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Example 1: Settlement of a Contingency

In the financial statements for the year ended 31 December 2011, LD Ltd has a created a
provision for damages of $600,000 assuming a 60% probability that it will lose the legal case. The
court decided that case against LD Ltd on 10 February 2012. The financial statements are due for
issue on 25 February 2012. The company should adjust the provision upward by $400,000 to
present a $1 million liability for damages because the judgment has confirmed the amount and
existence of present obligation as at 31 December 2011.

Example 2: Indication of Existence of Impairment Loss


IL Ltd. has an amount due from FD Ltd. amounting to $20 million as at 30 March 2012. The
financial statements are expected to be issued on 14 May 2011. FD Ltd. declared bankruptcy and it
is certain that IL Ltd will receive nothing because all the assets will be exhausted in satisfaction of
government claims. IL Ltd. should record an impairment loss of $20 million in the financial
statements as at 31 December 2011 because the subsequent lack of recovery indicates that the
company's receivable from FD Ltd was worth zero as at 30 March 2012.
Scope
The requirements of this standard are applicable to account for Events after Reporting
Period and related disclosures.
Definitions
Events after the Reporting Period:
The events which take place after the reporting date but before the date of authorization of
financial statements for issue are called events after reporting period. These may be favorable or
unfavorable.
These are classified into two categories as:
Adjusting Events
Non-adjusting Events
Adjusting Events:
Those which take place after the reporting date but before the date of authorization of financial
statements for issue, and provide additional/further evidence related to the conditions
which existed at reporting date.
Non-adjusting Events:
Those which take place after the reporting date but before the date of authorization of financial
statements for issue, and are indicative of the conditions which arose after the reporting date.
Recognition & Measurement
1. Adjusting Events:
The entity is required to account for the adjusting events by adjusting their potential financial
impacts in financial statements before these are finalized and issued.
Application Examples:
Following are the examples of adjusting events, for which entity is required to adjust its financial
statements before issuance:
The receipt of information regarding the bankruptcy of acustomer after the reporting date,
which was stated as receivable at year end, provides evidence that the debt has become
irrecoverable and the entity should adjust the value of receivable reported in statement of
financial position.
Reduction in Net realizable Value of Inventory after the reporting date, stated at cost at year
end,indicated from the sale of inventory at low selling price after the reporting date, provides
evidence that the value of inventory has fallen down and entity needs to adjust the value of
inventory included in statement of financial position.
The receipt of information after the reporting date, confirming that the asset is impaired
existed at the reporting date.
The determination of purchase/selling price of an asset after the reporting date, bought or
sold during the current year.
The settlement of a court case after the reporting date, which was initiated during the
current year, will provides evidence that entity has an obligation at year end therefore, entity
should adjust the financial statements accordingly.
The identification of a fraud, or any error after the reporting date.
2. Non-adjusting Events:
In respect of non-adjusting events, no adjustment is required in financial statements instead IAS
10 requires such events to be disclosed in the notes to accounts if these are considered to
be material, otherwise these will be ignored.
Application Examples:
(a) Any loss which arises after the reporting date because of natural disasters such as fire or
flood.
(b) Any sale or purchase of asset after the reporting date.
(c) Sale or discontinuation of a business line after the reporting date.
(d) Fall in value of investment after the reporting date.
(e) Dividend declared after the reporting date
(f) Any business acquisition after the reporting date.
(g) The commencement of a court case due to the events which take place after the reporting
date.
(i) Any changes in the tax rates/laws after the reporting date, applicable to previous year
Note:
If an event takes place after the date of authorization of financial statements, it will be neither
adjusting nor non-adjusting instead it will be outside the scope of IAS 10.
Going Concern
IAS 10 requires, if an event occurs after the reporting date but before the date of authorization of
financial statements for issue and it materially/severally affects the going concern status of
the entity the such event will always be treated as adjusting event irrespective of the definition it
satisfy.
For such event, the entity will prepare its financial statements on break-up basis.
Disclosures
IAS 10 requires the entity to disclose the following:
The date of authorization of financial statements and related authority.
For Non-adjusting events the entity should disclose
The nature of such event and
Its financial impact

Worked Example:
AB Ltd engaged in manufacturing facility and has year end of 31 December 2012. Its date of
authorization of financial statements for issue was 10 February 2013 and the annual general
meeting is scheduled on 7 March 2013. The following events occurred as follows:
(a) The company's major warehouse and the inventory it contained, was completely damaged
because of a fire explosion took place on 12 January 2013. The warehouse and the inventory
were to have a carrying value $20 million and $12 million respectively on this date.
The company is expected to recover up to maximum of $18 million as it has not updated its
insurance cover. The operations of the entity were severally interrupted and the entity expects to
face losses for coming few years.
(b) A particular type of inventory held by AB Ltd at a different location was recorded at its cost of
$920,000 at 31 December 2012 in the statement of financial position. The entity sold 70% of this
inventory for $560,000 on 15 January 2013, incurring a commission expense of 15% of the
selling price of the inventory.
(iii) The government introduced tax changes on 13 March 2013, due to which the tax liability
recorded by entity at 31December 2012, will increase by $960,000.
Required
Explain the appropriate accounting treatment of the events in the financial statements of AB Ltd.
for the yearended 31 December 2012.
Solution:
(a) It will be treated as non-adjusting event as IAS 10 requires any event which gives rise to loss
due to a natural disaster such as fire, flood to be classified as non-adjusting event because such
events do not provide evidence of the conditions existed at reporting date. However, if this event
has affected the going concern status of the entity then it will be treated as adjusting event and
entity will have to prepare its financial statements as per break-up values.
The Insurance claim should be disclosed as a contingent asset in the notes to accounts.
(b)This will be treated as adjusting event as sale of inventory after the reporting date reflects that
the NRV of inventory is less than the cost. The NRV of 70% inventory is $476,000 calculated
using the selling price of $560,000 less commission expense of $84,000 ($560,000*15%), and it
has a cost of$644,000 ($920,000*70%). Therefore, the entity will need to adjust down the value
of inventory to its NRV of $680,000 ($476,000/70 * 100%)in the statement of financial position for
the year ended 31 December 2012.
(c)This will treated as outside the scope of IAS 10 as it has occurred after the date of
authorization of the financial statements for issue. If it had have occurred after the reporting date
but before the date of authorization of financial statements for issue, then in such situation it
would have been treated as non-adjusting event.
Introduction
Events may occur between the end of the reporting period and the date
when financial statements are authorized for issue which may present
information that should be considered in the preparation of 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.

Non-Adjusting Events

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.

Going Concern Exception

Entity shall not prepare financial statements on the going concern basis if
events after the reporting period indicate that the entity shall not be able to
continue as a going concern irrespective of whether such events are
indicative of conditions that arose after the end of reporting period or not.

If financial statements are not prepared on the going concern basis, it shall
disclose this fact in the financial statements along with any major
uncertainties that may cast considerable doubt regarding the entity's ability
to operate as a going concern.