Workbook on IAS 10 EVENTS AFTER THE REPORTING PERIOD
Introduction
Aim
The aim of this workbook is to provide an understanding of IAS 10, Events after the Reporting Period.
SUMMARY
In most countries, events after the Reporting Period tend to be recorded in the notes to the financial statements, if at all. Without a standard framework , the preparation of financial reports have lacked consistency.
IAS 10 details the post- Reporting-Period events and how they should be recorded under IFRS.
Post- Reporting-Period events happen during the period starting immediately after the Reporting Period and ending at the date of approval of the financial statements.
Establishing the exact date of approval is necessary to comply with the Standard.
There are 4 main types of material post-Reporting-Period events:
- Dividends declared in this period after the Reporting Period, but before approval of the financial statements should be noted, but not shown as a liability, at the balance sheet date.
- If the company can no longer be considered a going-concern during this period, the financial statements should not be prepared on a going-concern basis.
- Events that were unknown, or unclear, at the balance sheet date. If more information becomes available, it may cause the financial statements to be adjusted.
- Conditions that arose after the Reporting Period should not adjust the financial statements, but should be suitably noted.
EXAMPLES- conditions that arose after the Reporting Period
These include major acquisitions and disposals, material changes to banking facilities financing the bank and new share issues. Such events should be noted.
If material events occur after the approval of financial statements, they should be communicated to users in an appropriate manner. Such events are not covered by IAS 10 as they occur after the approval of the financial statements.
Objective
The objective of the Standard is to prescribe adjustments and disclosures for events after the Reporting Period.
Definitions
The following terms are used in this Workbook:
Events after the Reporting Period
Events after the Reporting Period may be favourable or unfavourable.
Two types of events can be identified:
1. Adjusting events
Adjusting events are those events that arise after the Reporting Period, but before approval, that require the balance sheet to be amended.
2. Non-adjusting events
Non-adjusting events are conditions that arose after the Reporting Period.
Approval
The date of approval is the end of the post-Reporting-Period period.
This date may vary depending on factors such as statutory requirements and the procedures followed in preparing, and finalising, the financial statements.
Generally when the financial statements are approved by the main board, this date is the end of the post-Reporting-Period period, regardless of subsequent approvals.
EXAMPLE final approval - 1
A bank is required to issue its financial statements to its shareholders for final approval.
In such cases, the financial statements are approved on the date of issue, not the date when shareholders approve the financial statements.
| EXAMPLE date of approval - 1
The period for post-Reporting-Period events ends on 10 February 2XX7 (date of board approval for issue). |
EXAMPLE final approval -2
The financial statements are approved when the main board approves them for issue to the supervisory board, not when the supervisory board gives subsequent approval.
Supervisory boards usually comprise representatives of shareholders, workers and other stakeholders in a company. Their role is non-executive. The management board is accountable to the supervisory board.
| EXAMPLE date of approval - 2
The financial statements are approved for issue on 12 February 2XX8 which is the end of the post-Reporting-Period period. |
Events after the Reporting Period include all events up to the date when the financial statements are approved for issue, even if those events occur after the public announcement of profit, or of other selected financial information.
Adjusting Events after the Reporting Period
An entity shall adjust the amounts recorded in its financial statements, to reflect adjusting events after the Reporting Period.
In the following examples, I/B refers to Income Statement and Balance Sheet (SFP).
| EXAMPLE confirmation of obligation Your entity has been sued for trademark infringement. You made a provision of $1 million for the lawsuit in your financial statements at 31st December 2XX4 which have not yet been approved.
On January 10th 2XX5, the court awards $0,6 million damages against your entity so the provision is adjusted to $0.6m |
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| I/B | DR | CR |
| Provision against legal costs | B | 0,4m |
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| Legal costs | I |
| 0,4m |
| Reduction of provision |
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| EXAMPLE crystallisation of liability
Your entity has been sued for anticompetitive behaviour. This has been denied by your entity, and no provision was made in your financial statements at 31st December 2XX4. On January 14th 2XX5, the court awards $5 million damages against your bank. If your financial statements have not been approved, you create a provision for $5 million in your financial statements to 31st December 2XX4. |
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| I/B | DR | CR |
| Legal costs | I | 5m |
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| Provision against legal costs | B |
| 5m |
| Creation of provision |
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The receipt of information, after the Reporting Period, indicating that an asset wa impaired at the balance sheet date, or that the amount of a previously recorded impairment loss for that asset needs to be adjusted. This will result in an adjusting event.
| EXAMPLE impairment -1 At 31st December 2XX4, part of your computer system is being repaired. It has a carrying value of $2 million in your financial statements.
On January 16th 2XX5, you are informed that the part is irreparable, and the scrap value is only $0,4 million.
If your financial statements have not been approved, you reduce the carrying value of the part to $0,4 million in your financial statements to 31st December 2XX4. |
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| I/B | DR | CR |
| Depreciation | I | 1,6m |
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| Accumulated depreciation | B |
| 1,6m |
| Fixed asset impairment provision |
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| EXAMPLE impairment -2
Management shall adjust the amounts recognised in an entity's financial statements to reflect adjusting events after the Reporting Period. Additionally, it shall update the disclosure related to the conditions that are clarified in the light of the new events.
Should management recognise a loss in its consolidated financial statements in respect of the sale of a subsidiary after the Reporting Period, where that subsidiary is sold at a loss?
Background T’s management is preparing its consolidated financial statements for the year ended 31 December 2XX2. T disposed of subsidiary X on 15 February 2XX3, incurring a loss of 700,000, which is material to T. T’s consolidated financial statements are due to be finalised on 28 February 2XX3. Management has confirmed that the individual assets held in X have been reviewed for impairment and no provision for impairment is required in the subsidiary’s single-entity financial statements. Management has also confirmed that no other significant events have occurred since 31 December 2XX2 to cause a reduction in the value of X. There has therefore been no material change in the value of X between year-end and the date of disposal.
Solution Yes, management shall adjust the consolidated financial statements because the event provides evidence of conditions that existed at the balance sheet date. The subsidiary must already have been impaired by the balance sheet date, because there has not been a significant event since then to cause a reduction in the subsidiary’s value. The disposal since year-end simply provides evidence of the impairment. Management shall therefore recognise an impairment of the subsidiary in the consolidated financial statements in accordance with IAS 36. |
| EXAMPLE existing loss Your entity has a client that owes you $8 million on 31st December 2XX4.
On January 9th 2XX5, your client goes into liquidation. You are informed that you will receive nothing from the liquidation.
If your financial statements have not been approved, you reduce the carrying value of financial statements receivable by $8 million in your financial statements to 31st December 2XX4 |
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| I/B | DR | CR |
| Accounts receivable | B |
| 8m |
| Bad debt provision | I | 8m |
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| Bad debt write off |
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| EXAMPLE evidence of realisable value Your entity has some loans receivable that originally cost $5 million. At 31st December 2XX4, they had a carrying value of $1 million, following the recording of loan-loss provisions of $4 million.
On February 8th 2XX5, these loans were sold for $1,7 million.
If your financial statements have not been approved, you increase the carrying value of loans receivable by $0,7 million in your financial statements to 31st December 2XX4. |
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| I/B | DR | CR |
| Loan-loss provision | I |
| 0,7m |
| Provision | B | 0,7m |
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| Increasing loans receivable carrying value |
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| EXAMPLE confirmation of value Your entity sold a subsidiary for $4 million on 1st January 2XX4. In addition, your bank will receive $1 million, if the business that you sold reaches its profit target for the year to 31st December 2XX4.
When preparing your financial statements for 31st December 2XX4, you are told that profit target has not been met. Therefore you produce the financial statements to reflect the sale proceeds as $4 million.
On January 28th 2XX5, you learn that the profit target had been met, and therefore you are owed $1 million more.
If your financial statements have not been approved, you increase the sale proceeds of the business sold by $1 million in your financial statements to 31st December 2XX4. |
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| I/B | DR | CR |
| Accounts receivable | B | 1m |
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| Profit on disposal | I |
| 1m |
| Increase of sale proceeds |
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| EXAMPLE determination of present legal, or constructive obligation Your entity has a profit-sharing system based on the audited profit in the financial statements of 31st December 2XX4.
On February 26th 2XX5, your auditors confirm the bank’s profit. The resulting profit-share that will be paid in March 2XX5 amounts to $2,4 million.
If your financial statements have not been approved, you increase salary costs by $2,4 million in your financial statements to 31st December 2XX4. |
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| I/B | DR | CR |
| Salary costs-bonuses | I | 2,4m |
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| Accrued bonuses | B |
| 2,4m |
| Accruing bonus |
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| EXAMPLE fraud and error Your entity has been compiling the financial statements of 31st December 2XX4.
On January 15th 2XX5, your auditors identify some fictitious fee income totaling $10 million. Expenses have also been overstated by $8 million, as part of the fraud.
If your financial statements have not been approved, you reduce fees by $10 million, and reduce expenses by $8 million, in your financial statements to 31st December 2XX4. |
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| I/B | DR | CR |
| Fee income | I | 10m |
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| Expenses | I |
| 8m |
| Accounts receivable | B |
| 10m |
| Accounts payable | B | 8m |
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| Corrections of fee income and expenses |
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Non-adjusting Events after the Reporting Period
Non-adjusting events require notes to the financial statements. The financial figures remain unaltered.
An example of a non-adjusting event after the Reporting Period is a decline in market value of investments, between the balance sheet and approval date.
The decline in market value does not normally relate to the value of the investments at the balance sheet date, but reflects circumstances that have arisen since that time.
EXAMPLE decline in value of investments
Your entity has invested heavily in Far-Eastern stocks that have performed well in the period to 31st December 2XX4.
On January 14th 2XX5, a series of earthquakes hit the region, causing major industrial devastation. Stock markets plummet, and remain very depressed until the date of approval of your financial statements.
You do not change the figures in your financial statements to 31st December 2XX4, but note the post-Reporting-Period decline of investments, and amounts involved.
Dividends
If an entity declares dividends to shareholders after the Reporting Period, the entity shall not record those dividends as a liability at the balance sheet date.
If dividends are declared after the Reporting Period, but before the financial statements are approved for issue, the dividends are disclosed in the notes to the financial statements.
EXAMPLE dividends
Your entity has prepared its financial statements for the period to 31st December 2XX4.
On January 24th 2XX5, your directors declare dividends totaling $7 million.
You do not change the figures in your financial statements to 31st December 2XX4, but quantify the post-Reporting-Period dividends in the note on retained earnings.
Going-concern
An entity shall not prepare its financial statements on a going-concern basis, if management determines after the Reporting Period either that it intends to liquidate the undertaking, or to cease trading, or that it has no realistic alternative but to do so.
EXAMPLE
Your bank is preparing its financial statements for the period to 31st December 2XX4.
On January 4th 2XX5, your directors decide to sell the bank’s assets and liquidate the bank.
The financial statements to 31st December 2XX4 should be produced on a liquidation basis, not a going-concern basis.
| EXAMPLE
Management shall not prepare the bank’s financial statements on a going concern basis if it determines after the Reporting Period to liquidate the bank or to cease doing business.
Should management adjust the bank’s financial statements because the shareholders decided after the Reporting Period to cease the bank’s core operations?
Background Management announced on 5 February 2XX3 its intention to cease the bank’s core operations. The financial statements were authorised for issue on 19 February 2XX3.
Solution Management shall prepare the bank’s financial statements on a liquidation basis rather than on a going concern basis.
Management shall make an assessment of the bank’s ability to continue as a going concern when preparing the financial statements. Although the decision to cease the bank’s core operations was made and announced after the Reporting Period, the financial statements shall be prepared on a basis other than going concern.
Consequently, the amounts recognised in the bank’s financial statements for 31 December 2XX2 shall be adjusted to conform to the liquidation basis of accounting. |
Deterioration in operating results and financial position, after the Reporting Period, may indicate a need to consider whether the going concern assumption is still appropriate.
If the going-concern assumption is no longer appropriate, IAS 10 requires a fundamental change in the basis of accounting, rather than an adjustment to the amounts recorded within the original basis of accounting.
EXAMPLE
Your entity has a client that owes you $45 million on 31st December 2XX4.
On January 19th 2XX5, your client goes into liquidation. You are informed that you will receive nothing from the liquidation.
Your entity is unable to raise funds to recover from this loss, and is certain to be liquidated.
The financial statements to 31st December 2XX4 should be produced on a liquidation basis, not a going-concern basis.
IAS 1 specifies required disclosures if:
(i) the financial statements are not prepared on a going-concern basis; or
(ii) management is aware of material uncertainties related to events, or conditions, that may cast significant doubt upon the undertaking’s ability to continue as a going-concern.
The events, or conditions, requiring disclosure may arise after the Reporting Period.
EXAMPLE
Your entity has a client that owes you $85 million on 31st December 2XX4.
On January 13th 2XX5, your client goes into liquidation. You are informed that you will receive nothing from the liquidation.
Your entity may be able to raise funds to recover from this disaster, but is unable to secure any commitment by the date that the financial statements are to be approved.
The financial statements to 31st December 2XX4 should be produced on a liquidation basis, not a going-concern basis, due to the uncertainty.
Disclosure
Date of Approval for Issue
An entity shall disclose the date when the financial statements were approved for issue, and who gave that approval.
EXAMPLE
‘These financial statements have been approved for issue by the Board of Directors on 28 February 2XX5.’ (Note at the foot of the balance sheet.)
If the bank’s owners, or others, have the power to amend the financial statements after issue, the undertaking shall disclose that fact.
It is important for users to know when the financial statements were approved for issue, because the financial statements do not reflect events after this date.
Updating Disclosure about Conditions at the Balance Sheet
Date
If an entity receives information, after the Reporting Period, about conditions that existed at the balance sheet date (adjusting events), it shall update disclosures that relate to those conditions, in the light of the new information.
In some cases, an entity needs to update the disclosures in its financial statements to reflect information received after the Reporting Period, even when the information does not affect the amounts that it records in its financial statements (non-adjusting events).
One example of the need to update disclosures is when evidence becomes available, after the Reporting Period, about a contingent liability that existed at the balance sheet date.
| EXAMPLE –updating disclosure Your entity has been sued for anticompetitive behaviour. This has been denied by your bank, and there was only a contingent liability in your financial statements at 31st December 2XX4.
On January 14th 2XX5, the court awards $7 million damages against your bank.
If your financial statements have not been approved, you create a provision for $7 million in your financial statements to 31st December 2XX4, to replace the contingent liability. |
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| I/B | DR | CR |
| Legal costs | I | 7m |
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| Provision against legal costs | B |
| 7m |
| Creation of provision to replace contingent liability |
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In addition to considering whether it should record, or change, a provision under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, a bank updates its disclosures about the contingent liability in the light of that evidence, by providing comprehensive notes.
Non-adjusting Events after the Reporting Period
If non-adjusting events after the Reporting Period are material, non-disclosure could influence the economic decisions of users taken on the basis of the financial statements.
To comply, an entity shall disclose the following for each material category of non-adjusting event after the Reporting Period:
(i) the nature of the event; and
(ii) an estimate of its financial effect, or a statement that such an estimate cannot be made.
The following are examples of non-adjusting events after the Reporting Period that would generally result in disclosure:
(i) a major business combination after the Reporting Period, or disposal of a major subsidiary;
(ii) announcing a plan to discontinue an operation, disposing of assets, or settling liabilities attributable to a discontinuing operation, or entering into binding agreements to sell such assets, or settle such liabilities;
(iii) major purchases and disposals of assets, or expropriation of major assets by government;
EXAMPLE
‘On January 5th 2XX5, the government announced that a new road would be built.
This road will result in the destruction of the entity's head office. Negotiations have started with the government for compensation.
The carrying value of the head office building, and the land on which it stands was $6,3 million, as at 31st December 2XX4.’
(iv) the destruction of a major operating unit by a fire after the balance sheet date;
(v) announcing, or commencing the implementation of, a major restructuring;
(vi) Provide a description of ordinary share transactions, or potential ordinary share transactions, that occur after the Reporting Period, especially those that would have changed significantly the number of ordinary shares or potential ordinary shares outstanding at the end of the period if those transactions had occurred before the end of the reporting period.
EXAMPLE
‘On January 20th 2XX5, the directors were notified that Big Investment Company had purchased 65% of the ordinary shares of the entity from Small Investment Company.
Big Investment Company has stated that it wishes to buy the remaining 35% of the ordinary shares, and intends to notify shareholders of the terms of the intended purchase over the next 2 months.’
An entity should disclose a description of such transactions, including when such transactions involve capitalisation, bonus issues, or share splits (or reverse share splits).
If the number of ordinary or potential ordinary shares outstanding increases as a result of a capitalisation, bonus issue or share split, or decreases as a result of a reverse share split, the calculation of basic and diluted earnings per share for all periods presented shall be adjusted retrospectively.
If these changes occur after the Reporting Period but before the financial statements are authorised for issue, the per share calculations for the reporting period and any prior period financial statements presented shall be based on the new number of shares.
The fact that per share calculations reflect such changes in the number of shares shall be disclosed. In addition, basic and diluted earnings per share of all periods presented shall be adjusted for the effects of adjustments resulting from changes in accounting policies accounted for retrospectively.
(vii) abnormally large changes, after the Reporting Period, in asset prices, or foreign exchange rates;
(ix) entering into significant commitments or contingent liabilities, for example, by issuing significant guarantees;
EXAMPLE - major guarantees
Following the preparation of your financial statements at 31st December 2XX4, but before their approval, your entity agrees to provide major guarantees to your subsidiary’s correspondent banker, in order to renew your facilities on more favourable terms.
You do not change the figures in your financial statements to 31st December 2XX4, but provide details of the guarantees and the assets provided as security.
(x) commencing major litigation arising solely out of events that occurred after the Reporting Period.
EXAMPLE –law suit
Following the preparation of your financial statements at 31st December 2XX4, but before their approval, your entity receives notice that the government intends to sue the company for $8 million for anti-competitive behaviour. (At the balance sheet date, your bank had no reason to anticipate this.)
You do not change the figures in your financial statements to 31st December 2XX4, but note the intention of the government.