ias 10

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.