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Structure and
4
U N I T
Assets
Learning Objectives
The objective of this chapter is to provide an
understanding of the structure of balance sheet and
classification of assets. After reading this chapter,
you will develop understanding of the following:
Notes to accounts
Accounting Standards (Ind ASs), Schedule III (Division II) and some other laws that are
applicable to the company requires disclosure of specified information for each item of
asset, equity and liabilities. Companies disclose that information in notes to accounts. Notes
are numbered for cross-referencing. Notes to Accounts also include disclosure of accounting
policy, clarificatory notes and disclosure of items of assets and liabilities that cannot be
recognised in the balance sheet as per the applicable Accounting Standards (Ind ASs).
Due to space constraints, in this text, disclosure requirements have not been discussed
in detail. Readers may refer to schedule III (Division II) reproduced in Chapter 8 to get an
understanding of disclosures required under the Companies Act, 2013.
Self-Test Questions
Self-test question 4.1
Indicate whether the following statements are true (T) or false (F):
(i) Balance sheet is a stock statement.
(ii) Balance sheet is a snapshot statement, because it does not provide information on assets,
liabilities and equity in great detail.
(iii) Balance sheet is similar to a geographical map, which provides adequate details of the
geography of a particular location without cluttering information.
(iv) The degree of relevance of information provided in notes to accounts is lower than the
information provided on the face of the balance sheet.
(v) Information in balance sheet is useful in assessing the productivity of capital invested in
the entity.
(vi) In a way, equity shareholders and lenders own a firm jointly, and therefore, their claim
on assets of the firm is proportional.
SUMMARY
Balance sheet is a snapshot statement of the assets, liabilities and equity at the balance sheet
date. In order to avoid cluttering of information, details of different categories of assets, liabilities
and equity are not provided on the face of the balance sheet. Detailed break up of every item on
the face of the balance sheet is provided in notes to accounts. Notes to accounts also disclose
additional information for better understanding the information provided on the face of the
balance sheet. Entities classify assets and liabilities into current and non-current categories in
order to enhance the usefulness of the information.
Self-Learning
54 Material
Balance Sheet Structure
BALANCE SHEET STRUCTURE and Assets
Balance sheet has two segments. Assets are presented in the upper segment and equity
and liabilities are presented in the lower segment. Table 4.1 presents the balance sheet NOTES
structure.
TABLE 4.1
Balance Sheet Structure
(Amount in ` crores)
Particulars HUL Infosys Suzlon
ASSETS
Total Assets 14,751 79,885 14,226
EQUITY AND LIABILITIES
Equity (Owners’ claim) 6,490 68,017 1,022
Liabilities (Outsiders’ claim) 8,261 11,868 13,204
Total 14,751 79,885 14,226
Notes:
(i) Figures for HUL (Hindustan Unilever Limited) are taken from the stand-alone balance sheet as at
March 31, 2017.
(ii) Figures for Infosys (Infosys Limited) are taken from the stand-alone balance sheet as at March 31, 2017.
(iii) Figures for Suzlon (Suzlon Energy Limited) are taken from the stand-alone balance sheet as at
March 31, 2017.
Observations
Although the information provided in Table 3.1 above is very inadequate for
financial analysis, it is enough to conclude that the financial health of Suzlon is quite
weak, as almost 93 percent of its assets (in value) is financed by liabilities, which are to
be settled by the company, sooner or later, and that will result in outflow of economic
resources. The financial health of HUL and Infosys is quite strong. In case of HUL
only 56 percent of assets is financed by liabilities and the same is 15 percent in case of
Infosys.
Self-Test Questions
Self-test question 4.2
Indicate whether the following statements are true (T) or false (F):
(i) Balance sheet reflects the relationship between assets, liabilities and equity as depicted by
the accounting equation.
(ii) Even limited information on total assets, total liabilities and equity is helpful in broadly
assessing the financial health of the entity.
(iii) In a way, the balance sheet provides information on resources held by the entity at the
balance sheet date and the sources of financing those resources.
(iv) In a way, balance sheet provides information on assets held by the entity at the balance
sheet date and claims on those assets.
Table 4.2 presents the broad categories of assets, equity and liabilities.
Self-Learning
Material 55
Financial Accounting TABLE 4.2
Balance Sheet Structure
(Amount in ` crores)
NOTES
HUL Infosys Suzlon
ASSETS
Non-current assets 5,340 32,203 6,901
Current assets 9,411 47,682 7,325
Total 14,751 79,885 14,226
EQUITY
Equity share capital 216 1,148 1,005
Other equity 6,274 66,869 17
Total 6,490 68,017 1,022
LIABILITIES
Non-current liabilities 1,059 82 4,339
Current liabilities 7,202 11,786 8,865
Total 8,261 11,868 13,204
Grand total 14,751 79,885 14,226
Note: The figures are based on stand-alone balance sheets as at March 31, 2017 of respective companies.
Table 4.2 provides more information than what Table 3.1 provides. Table 3.2 provides
information on what proportion of assets is ‘current assets’ and what proportion of liabilities
is ‘current liabilities’. Balance sheet also presents information on financial and no-financial
assets separately.
The notes to accounts provide further breakup of each class of assets and disclose
information about each item of non-current assets.
SUMMARY
Current assets are those assets that the management expects to consume or realise within a short
period. However, an asset held for sale (e.g., stock-in-trade) is always classified as current asset,
irrespective of the period for which the entity expects to hold. Current liabilities are those liabilities
that the management expects to settle within a short period. Operating liabilities are normally part
of the working capital and are used in the company’s normal operating cycle and, therefore, they
are classified as current liabilities. Assets and liabilities, which cannot be classified as current, are
classified a non-current.
This chapter discusses the structure of balance sheet of non-finance companies. Non-finance
companies classify assets and liabilities into current and non-current categories, which is
not appropriate for financial institutions, because they do not supply goods or services
within a clearly identifiable operating cycle.
They present assets and liabilities in increasing or decreasing order of liquidity,
which provides information that is reliable and more relevant than a current/non-current
presentation. Table 4.5 below provides the structure of balance sheet of the State Bank of
India Ltd. as at March 31, 2017
The government is contemplating a separate format for the presentation of financial
statements by non-banking finance companies. Formats for presenting financial statements
by banking companies and insurance companies are provided by respective laws applicable
to them.
TABLE 4.5
Balance Sheet of SBI (stand-alone) as at March 31, 2017
Particulars Amount (` crores)
CAPITAL AND LIABILITIES
CAPITAL 797
Reserves and surplus 1,87,489
Deposits 20,44,751
Borrowings 3,17,694
Other liabilities and provisions 1,55,235
Total 27,05,966
ASSETS
Cash and balances with Reserve Bank of India 1,27,998
Balances with banks and money at call and short notice 43,974
Investments 7,65,990
Advances 15,71,077
Fixed assets (PP&E and Intangible Assets) 42,919
Other assets 1,54,008
Self-Learning Total 27,05,966
58 Material
Balance Sheet Structure
ASSETS AND THEIR CLASSIFICATION and Assets
Table 4.6 presents types of assets and their classification.
NOTES
TABLE 4.6
Assets and Their Classification
S. No. Assets Current Non-current
NON-FINANCIAL ASSETS
1. Property, Plant and Equipment
2. Capital work-in-progress
3. Investment Property
4. Goodwill and other intangible assets
5. Intangible assets under development
6. Biological Assets other than bearer plants
7. Raw material (inventory)
8. Work-in-progress (inventory)
9. Finished goods (inventory)
10. Stock-in-trade (inventory)
11. Stores and spares (inventory)
12. Loose tools (inventory)
13. Current Tax Assets (Net)
14. Non-current assets held for sale
15 Other non-financial assets
FINANCIAL ASSETS
16. Investments in financial assets (Financial asset)
17. Trade receivables (Financial asset)
18. Loans (Financial asset)
19. Margin money deposit with banks against guarantee (Financial
asset)
20. Cash and cash equivalents (Financial asset)
Note: Assets at serial numbers 7, 8, 11 to 13, 15 to 19, 21 and 22 are classified into current and non-current
based on the management’s judgement whether those will be consumed within twelve months after the balance
sheet date or normal operating cycle, whichever is longer.
Non-Financial Assets
Notes:
(i) The information is based on the stand-alone balance sheets of the companies as at March 31, 2017.
(ii) The table provides information on ‘net block’, which is the gross block of assets that the company holds
at the balance sheet date, less accumulated depreciation and accumulated impairment loss up to that
date.
(iii) Gross block is the acquisition cost of the assets that the company holds as at the balance sheet date,
if the company has adopted the cost model. All the three companies listed in the table have adopted
the cost model. Entities have an option to use the fair value model.
(iv) Companies provide information on additions and adjustments to gross block, and additions and
adjustments to accumulated depreciation and impairment loss. Adjustments are usually required when
the company disposes of an item of asset or write back the impairment loss recognised in earlier periods.
Observations
As it is evident from Table 4.6, different companies operating in different industries require
different infrastructure. Infrastructure requirements differ among entities in the same
industry, as the requirement also depends on the entity’s strategy. For example, investment
in plant and machinery will be much lower of an FMCG company that has outsourced
manufacturing than investment in plant and machinery by another FMCG company that
manufactures products in-house.
Self-Test Questions
Self-test question 4.4
Indicate whether the following statements are true (T) or false (F):
(i) Items of property, plant and equipment are classified as non-current assets.
(ii) In a way, property, plant and equipment (PP&E) provide infrastructure for operation, and
therefore, it is not a part of working capital.
(iii) The carrying amount of property, plant and equipment as a percentage of the total carrying
amount of all the assets varies in a narrow range among the firms operating in the same
industry.
(iv) For companies using the cost model for measuring property, plant and equipment (PP&E),
gross block presented in the balance sheet is total acquisition cost of all the items of
PP&E acquired over the life of the company.
(v) An item of furniture that the entity does not intend to use for more than one financial
year is not classified a property, plant and equipment.
Capital Work-In-Progress
When an item of PP&E is being constructed in-house and it is not ready for use at the
Self-Learning balance sheet date, all the expenses incurred till the balance sheet date are accumulated
60 Material under capital work-in-progress. Similarly, when an item of PP&E is not yet installed or
not ready for use, the cost of the same is carried in the balance sheet as capital work-in- Balance Sheet Structure
progress. The amount accumulated under capital work-in-progress is transferred to PP&E and Assets
when the item is ready for use.
NOTES
Capital advance
Amount paid in advance to the entity that has been awarded contract to produce or supply
an item of PP&E (called capital advance) is not included in capital work-in-progress. It is
included in other non-current asset.
Self-Test Questions
Self-test question 4.5
Indicate whether the following statements are true (T) or false (F):
(i) Capital advance is included in capital work-in-progress.
(ii) A printing press that is installed but not ready for use at the balance sheet date, as test
run is not complete, is included in property, plant and equipment and not in capital work-
in-progress.
(iii) A building under construction is included in capital work-in-progress.
(iv) Furniture received, but yet to be allocated to different employees is included in capital
work-in-progress.
(v) Capital work-in-progress is classified as ‘non-current asset’.
Investment Property
Investment property is the property (land or a building—or part of a building—or both),
which the entity holds to earn rentals or for capital appreciation or both. The entity does
not use it in the production or supply of goods or services or for administrative purposes;
or holds it for sale in the ordinary course of business.
Self-Test Questions
Self-test question 4.6
Indicate whether the following statements are true (T) or false (F):
(i) An entity, which is in the business of leasing out buildings on short-term basis, classifies
all the buildings that it intends to lease out as investment property.
(ii) An entity provides residential accommodation to its employees and recovers a nominal
amount towards rent should classify residential quarters that are allotted to employees
or earmarked for future allotment as ‘investment property’.
(iii) A piece of land in a fast developing locality, which is acquired by the entity on March
31, 2018, but it is undecided about its future use, should be presented as ‘investment
property’ in the balance sheet date dated March 31, 2018.
(iv) Investment property is classified as ‘non-current asset’.
(v) A newly constructed office building, which is temporarily let out for six-months, should
be presented as ‘investment property’ in the balance sheet and not as ‘property, plant
and equipment’.
Intangible Assets
An intangible asset is an identifiable non-monetary asset without physical substance.
Monetary assets are money held and assets to be received in fixed or determinable
amounts of money. For example, ‘trade receivables’, which is the total amount receivable
from sale of goods and services, is a monetary asset. Therefore, trade receivable is not an
intangible asset.
An intangible asset is identifiable if, it can be sold, transferred, licensed, rented or
exchanged separately from the entity or it arises from contractual or other legal rights. Self-Learning
Material 61
Financial Accounting Examples
Common examples of intangible assets are computer software, goodwill, patents, copyrights,
product brand, motion picture films, customer lists, fishing licences, customer or supplier
NOTES relationships, customer loyalty, market share and marketing rights.
GAAP does not permit recognition of internally generated intangible assets, other than
computer software, in the balance sheet. However, it allows recognition of intangible assets
that are acquired directly or in a transaction involving business combination. For example,
although FMCG companies create and manage product brands by investing significant
amount on product promotion, it is not permitted to recognise product brand generated
by such investment.
Goodwill
Goodwill is the established reputation of a business. It is an amorphous intangible asset,
which includes all intangible assets that cannot be identified separately, such as relationship
with customers, employees, government, local community, and vendors. GAAP does not
permit recognition of internally generated goodwill. It allows recognition of goodwill
from a transaction involving business combination. It is measured at excess of purchase
consideration over the fair value of net assets (fair value of assets minus fair value of
liabilities).
Self-Test Questions
Self-test question 4.7
Indicate whether the following statements are true (T) or false (F):
(i) P Limited (PL), which purchased a product brand called ‘baboon’ from T Limited (TL)
on December 15, 2017, should recognise the brand in its balance sheet dated March 31,
2018.
(ii) S Limited, which earns royalty from its subsidiaries for use of the highly valued corporate
brand ‘Soman’ that is built over 100 years, should recognise the corporate brand in its
balance sheet.
(iii) Goodwill arising from a business combination transaction is recognised in the balance
sheet.
(iv) ‘Trade receivables’ is an intangible asset, because it is not a tangible asset.
(v) Computer software is an intangible asset.
Self-Test Questions
Self-test question 4.8
Indicate whether the following statements are true (T) or false (F):
(i) A pharmaceutical company which is engaged in basic research and spends, on an average,
10 percent of revenue towards research expenses, should capitalise research expenses
and recognise it under the heading ‘intangible assets under development’ on the ground
of materiality.
(ii) New Age Limited (NAL), which is spending significant amount to develop the prototype
of a sophisticated equipment invented by it, which if installed in a housing society or an
office complex with an area of up to five acres will purify the air in the complex, should
capitalise the expenditure even though it is not sure of the economic viability of the
product.
(iii) Most companies do not recognise assets from expenses incurred during development
phase, as it is difficult to meet the conditions set out in GAAP for capitalising those
expenses.
Self-Test Questions
Self-test question 4.9
Indicate whether the following statements are true (T) or false (F):
(i) Biological assets are included in property, plant and equipment.
(ii) Livestock is not included in property, plant and equipment because it is not a bearer
plant.
(iii) Grape vine is not included in property, plant and equipment because it is not a bearer
plant.
Inventories
Inventories are assets: (a) held for sale in the ordinary course of business; (b) in the process
of production for such sale; or (c) in the form of materials or supplies to be consumed in
the production process or in the rendering of services.
Inventories include: (a) Goods purchased and held for resale including, for example,
merchandise purchased by a retailer and held for resale, or land and other property held
for resale by a real estate developer. (b) Finished goods produced, or work in process (WIP)
being produced, by the entity; (c) Materials (e.g., raw material and components, stores and
spares) and supplies awaiting use in the production process; and (d) Lose tools.
Some use the terms ‘work-in-process’ and ‘work-in-progress’ interchangeably. Others
reserve the term ‘work-in-progress’ for ‘capital work-in-progress’.
Self-Test Questions
Self-test question 4.10
Indicate whether the following statements are true (T) or false (F):
(i) Capital work-in-progress is a component of inventories.
(ii) Inventory items are always classified as current assets.
(iii) Some items of stores and spares, which meet the definition of property, plant and
equipment (PP&E), are not included in inventories.
(iv) An item of property, plant and equipment, which the entity holds for sale, is included in
inventories.
(v) Residential apartments that a real estate developer holds for sale are classified as
inventories.
Self-Test Questions
Self-test question 4.12
Indicate whether the following statements are true (T) or false (F):
(i) An item of property, plant and equipment (PP&E) that the entity holds for sale is classified
as current asset.
(ii) A particular group of plant and machinery that is used to produce a particular product
that has to be discontinued from April 1, 2020 as per new environmental norms, should
be presented as ‘non-current assets held for sale’, in the balance sheet dated March 31,
2018, as the board of directors, in its meeting held on December 20, 2017, decided to
sell the assets included in that group immediately after April 1, 2020.
(iii) Stock-in-trade is always classified as current asset.
(iv) Work-in-process (WIP) is always classified as current asset.
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Material 65
Financial Accounting
SUMMARY
Property, plant and equipment (PP&E) are tangible items, which an entity: (a) holds for use in the
NOTES production or supply of goods or services, for rental to others, or for administrative purposes; and (b)
expects to use during more than one period. Investment property is the property, which the entity
holds to earn rentals or for capital appreciation or both. The entity does not use it in the production
or supply of goods or services or for administrative purposes; or holds it for sale in the ordinary
course of business. Capital work-in-progress represents the cost of items PP&E under construction
and those, which are yet to be ready for use. An intangible asset is an identifiable non-monetary
asset without physical substance. Internally developed intangible assets, other than computer
software, are not recognised in the balance sheet. Goodwill arises from a transaction involving
business combination. Intangible assets under development represents expenditure incurred during
development phase and not recognised as expense. Bearer plants are included in PP&E. Biological
assets, other than bearer plants, such as livestock, are presented as a separate line item in the
balance sheet. Inventories are assets: (a) held for sale in the ordinary course of business; (b) in the
process of production for such sale; or (c) in the form of materials or supplies to be consumed in
the production process or in the rendering of services. The amount excess of the tax already paid in
respect of current and prior periods over the amount of tax due for those periods is recognised as
current tax asset. Items of PPP&E held for sale are not included in PP&E and presented separately
as ‘assets held for sale’.
Financial Assets
Trade Receivables
‘Trade receivables’ is the total amount receivable from sale of goods and services.
Loans
There is a difference between loan and advance. Loan is repayable, in cash or by issuing
another financial asset like cheque drawn on a bank, usually with interest. Examples of
loan are security deposit, loan to employees, loan to vendors, and loan to subsidiaries.
On the other hand, amount paid in advance before it is due (e.g., advance to suppliers
of goods and services) is not repayable in cash or by issuing another financial asset. The
counter party settles the advance by delivering goods or rendering services.
Loan is a financial asset. Advance paid against future delivery of goods and services
is a non-financial asset.
Self-Test Questions
Self-test question 4.13
Indicate whether the following statements are true (T) or false (F):
(i) Advance to employees for purchase of a house is classified as loan and is a financial asset.
(ii) Security deposit with a customer, for example, in capital infrastructure projects, is classified
as loan.
Self-Learning
66 Material (iii) Loan is a financial asset while advances paid to vendors and other are non-financial assets.
Margin Money Balance Sheet Structure
and Assets
While issuing guarantee, the bank asks the client to deposit some money as counter security.
The money so deposited is called the margin money. For example, a bank may stipulate that
NOTES
a client has to deposit 25 percent of the guarantee amount in fixed deposit for a tenure
that matches with the validity period of the guarantee.
Cash equivalent
Cash equivalents are short-term, highly liquid investments that are readily convertible Key Terms
to known amounts of cash and which are subject to an insignificant risk of changes in Margin money, cash,
value. cash equivalent
Cash equivalent includes cheques in hand; bank balances (in savings accounts and
current accounts); an investment in a debt security that has a short maturity of, say, three
months or less from the date of acquisition (e.g., investment in treasury bills issued by
the government); and term deposits with banks that have an original maturity of three
months or less.
Bank balances (including term deposits) held as margin money or security against
borrowings are neither in the nature of demand deposits, nor readily available for use by
the entity, and accordingly, do not meet the definition of cash equivalents.
Self-Test Questions
Self-test question 4.14
Indicate whether the following statements are true (T) or false (F):
(i) Investments in equity instruments, which the entity intends to sell within three months
from the date of purchase, are classified as cash equivalents.
(ii) Bank deposits of original maturity of three years, but less than three months after the
balance sheet date are classified as cash equivalent.
(iii) Bank balances held as margin money are always classified as non-current asset.
(iv) Cheques in hand are included in cash equivalent.
(v) Cash and cash equivalent are current assets.
Self-Learning
Material 67
Financial Accounting
SUMMARY
Common financial assets are investments in financial assets, trade receivables, loans, cash and
NOTES cash equivalents, and bank deposits. Cash equivalents are short-term, highly liquid investments
that are readily convertible to known amounts of cash and which are subject to an insignificant
risk of changes in value. Bank deposits with original maturity of three months or less are included
in cash equivalents.
Self-Test Questions
Self-test question 4.15
Indicate whether the following statements are true (T) or false (F):
(i) Deferred tax asset is classified as ‘non-current asset’.
(ii) A temporary difference reverses in future years, while a permanent difference does not
reverse in future years.
(iii) Provision for bad debt is not allowed as a deduction in computing taxable income, but
bad debt is allowed as a deduction when the amount receivable is written off; and this
results in recognition of deferred tax asset.
(iv) Both temporary and permanent differences result in recognition of deferred tax asset/
deferred tax liability.
SUMMARY
Deferred tax asset and deferred tax liability arise due to temporary differences between tax
accounting and financial accounting. Temporary differences reverse in future, while permanent
differences do not reverse. Deferred tax asset also arises from accumulated carry forward losses
and tax credits. Deferred tax asset is classified as non-current asset.
Analytical Questions
1. ‘A’ has entered into an irrevocable agreement to purchase machinery from
‘B & Co.’ for `1,00,000. Should ‘A’ recognise the asset and the corresponding liability?
2. ‘A & Co.’ while launching its new product, ‘Zoom’ toothpaste, incurred expenditure of `1
million on advertisement. The Managing Director of the company proposes that the expenditure
be shown as an asset on the balance sheet; however, the accountant disagrees. Who is right?
3. “Users of financial statements assume that the enterprise is a going concern.” Comment as
this statement.
4. The CESC has installed a transformer within the premises of the factory owned by Mr. A. who
paid an amount of `50,000 to the CESC towards the cost of the transformer and installation
charges. As per the agreement, the ownership of the transformer lies with CESC. Should this
expenditure of `50,000 be treated as an asset?
5. Human resource is not shown as an asset in the balance sheet though managers claim that it
is the most important asset of an enterprise. What could be the reasons for not recognising
human resource as an asset on the balance sheet?
6. An analyst asserts: “If the normal operating cycle of a firm is significantly long, classification
of assets into current and non-current does not provide any meaningful insight”. Do you agree
Self-Learning with this statement? Justify your answer.
70 Material
7. Swaroop Limited (SL) manufactures and sells compressors of various capacities, including Balance Sheet Structure
large compressors that are used in oil exploration. The auditor of the company argues that it and Assets
has no well-defined normal operating cycle for the following reasons:
(a) Its collection period (i.e., the period between the dispatch of goods and collection of
receivables) is erratic. It varies between two months and nine months. NOTES
(b) Its production cycle varies between two months to eighteen months although the
production cycle for each type of compressor is well defined.
(c) The auditor proposes that the classification of assets into current or non-current should
be based on the 12-month criterion. Do you agree? Explain your position on this issue.
ANNEXURE
EVENTS OCCURRING AFTER THE BALANCE SHEET DATE
1. ADJUSTING EVENTS
To a significant extent, financial reporting information is based on estimates, judgements and models
of the financial effects on an entity of transactions and other events and circumstances that have
happened or that exist, rather than on exact depictions of those effects. Management develops its
perception about the economic consequences of transactions and other events based on information
collected by it using reasonable efforts. Information gathered by it is likely to be incomplete, because
collection of complete information may involve more than reasonable costs and efforts, and the time
required to collect the complete information may delay publishing the financial statements. Therefore,
management takes into consideration additional evidence (about the conditions at the balance sheet
date) provided by events unfolded after the balance sheet date but before approval by the board
of directors for issuance of financial statements. Events that provide additional evidence are called
adjusting events. For example, bankruptcy of a customer after the balance sheet date is an adjusting
event and the net amount that the entity expects to recover from the customer is adjusted taking
into account the information related to bankruptcy and the receivable from the customer, which is
recognised in the balance sheet, is measured at that adjusted amount.
2. NON-ADJUSTING EVENTS
Events that are indicative of conditions that arose after the balance sheet date are non-adjusting events.
Assets and liabilities are not adjusted for non-adjusting events. For example, a fire in a factory on the
first day of the next accounting year is a non-adjusting event. The carrying amount of assets in the
factory should not be adjusted for the damage caused by the fire. There is an exception to the rule.
If the non-adjusting event destroys the fulcrum of the business and invalidates the “going concern”
assumption, the assets and liabilities are measured based on the assumption that the entity was not a
going concern at the balance sheet date. For example, if a company had only a manufacturing facility,
which is destroyed by fire after the balance sheet date and the company did not have any insurance
cover for the risk of fire, the survival of the company is difficult and the management has to reassess
the validity of the assumption that the company was a going concern at the balance sheet date.
Companies disclose non-adjusting events, if material, in the financial report, usually in the board
of director’s report. The disclosure provides information about the nature of the event and estimate
of its financial effect. If a company is unable to make an estimate of the financial effect, it should
state that such an estimate could not be made.
The following are the examples of non-adjusting events, which should be disclosed in the Board
of Director’s report:
(i) Major business combination after the balance sheet date;
(ii) Announcing a plan to discontinue an operation;
(iii) Major purchase or disposal of assets, or acquisition of major assets by the government;
(iv) Commencement of a major restructuring;
(v) Major change in exchange rates;
(vi) Major change in tax rates;
(vii) Issuance of significant guarantees on behalf of third parties; and
(viii) Commencement of major litigation arising of events that occurred after the balance sheet date.
Self-Learning
Material 71