What is adjusting events after reporting period and non-adjusting event after reporting period?

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IAS 10 Events after the Reporting Period prescribes when an entity should adjust its financial statements for events after the reporting period and the disclosures that an entity should give about the date when the financial statements were authorised and about events after the reporting period.

Revised December 2003. Effective 1 January 2005.

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Events occurring between the reporting date and the date on which the financial statement are authorised for issue should be classified as either adjusting or non-adjusting events.

• Adjusting events provide further evidence of conditions that existed at the reporting date, and result in adjustment to the financial statements.
• Non-adjusting events are indicative of a condition that arose after the end of the reporting period and do not result in adjustment to the financial statements. They should be disclosed if of such importance that non-disclosure would affect the ability of the users to make proper evaluations and decisions.
• Where events after the reporting period indicate that the going concern assumption is not appropriate, these are adjusting events.
• A dividend declared after the reporting period is a non-adjusting event.

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Overview of IAS 10

• Issued: in 1978; re-issued in 1999 and 2003, followed by amendments
• Effective date: 1 January 2005
• What it does:
  • IAS 10 sets the rules when an entity should adjust its financial statements for events after the reporting period together with the necessary disclosures.
  • It defines both adjusting and non-adjusting events.
  • There are 4 main types of material events after the reporting period:
    1. Dividends declared in this period after the reporting period, but before approval of the financial statements;
    2. Going concern assumption no longer applies after the reporting period;
    3. Events that were unknown, or unclear, at the reporting date;
    4. Conditions arising after the reporting period, not existing prior the end of the reporting period

Main rules of IAS 10

Event after the reporting period is favorable or unfavorable event that occurs between :

• The end of the reporting period and
• The date that the financial statements are authorised for issue.

There are two types of events after the reporting period:

1. Adjusting events
2. Non-adjusting events.

Adjusting events

Adjusting event is the event that arose after the end of the reporting period, but provides further evidence of conditions that existed at the end of the reporting period.

Accounting treatment: financial statements should be adjusted for adjusting events.

Going concern: If a management indicates after the end of the reporting period that it intends to liquidate the business or cease trading or there is no other realistic alternative, then the financial statements should NOT be prepared under going concern basis.
 

Non-adjusting event

Non-adjusting event is an event after the reporting period that indicates conditions arising after the end of the reporting period.

Accounting treatment: do not adjust financial statements for non-adjusting events. The following disclosure shall be made:

• The nature of the event, and
• An estimate of its financial effect or a statement that such an estimate cannot be made.

Accounting for dividends: If an entity declares dividends to shareholders after the end of the reporting period, the entity shall not account for those dividends as for a liability at the reporting date.

If dividends are declared after the end of the Reporting Period, but before the financial statements are approved for issue, the dividends are disclosed in the notes to the financial statements.

Articles about IAS 10

Examples related to IAS 10

ABC has been sued for the damages caused, but just before the year-end the lawyers believe that the change of losing the case is remote and thus no provision has been created.

On 15 February, the court approved CU 1 mil. damages agains ABC. How should this event be recognized in the financial statements?

Solution:

It depends on the date when the financial statements have been approved and authorized for an issue.

If it is after 15 February, then the event is adjusting, because the new information indicated that ABC was liable for the damages caused prior the end of the reporting period.

The journal entry is:

• Debit P/L – Legal expenses for damages: CU 1 mil.
• Credit Provision: CU 1 mil.

If the financial statements were authorized for an issue before 15 February, then by definition it is NOT the event after the reporting period and it out of scope of IAS 10.
 

Bad debts

DEF has a receivable towards major client amounting to CU 500 as at 31 December 20X1.

On 10 January 20X2 there is a big fire in the client’s premises and as a result, the client is not able to pay the full amount to DEF and DEF will suffer a loss of 50%.

How shall this transaction be reported in the financial statements?

Solution:

This is a non-adjusting event, because the credit loss arose as a result of fire occurring after the end of the reporting period. DEF needs to make appropriate disclosures in its financial statements.
 

Dividends

KLM has prepared its financial statements for the year ended 31 December 20X1.

On 30 January 20X2, KLM’s directors declare dividends amounting to CU 2 million.

How shall this transaction be reported in the financial statements for the year ended 31 December 20X1?

Solution:

This is a non-adjusting event. KLM does not change the figures in its financial statements for the year 20X1, but discloses the post-reporting-period dividends in the note on retained earnings.
 

Going concern

XYZ has a trade debtor that owes CU 50 million on 31 December 20X1.

On 21 January 20X2, the debtor goes into liquidation. XYZ is informed that it will receive nothing from the liquidation.

XYZ is unable to raise funds to recover from this loss, and is certain to be liquidated.

How shall this situation be reflected in the financial statements for the year ended 31 December 20X1?

Solution

The financial statements to 31 December 20X1 should be produced on a liquidation basis, not a going-concern basis.

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In April 2001 the International Accounting Standards Board (Board) adopted IAS 10 Events After the Balance Sheet Date, which had originally been issued by the International Accounting Standards Committee in May 1999. IAS 10 Events After the Balance Sheet Date replaced parts of IAS 10 Contingencies and Events Occurring After the Balance Sheet Date (issued in June 1978) that were not replaced by IAS 37 Provisions and Contingent Assets and Contingent Liabilities (issued in 1998).

In December 2003 the Board issued a revised IAS 10 with a modified title—Events after the Balance Sheet Date. This revised IAS 10 was part of the Board’s initial agenda of technical projects. As a result of the changes in terminology made by IAS 1 Presentation of Financial Statements in 2007, the title of IAS 10 was changed to Events after the Reporting Period.

Other Standards have made minor consequential amendments to IAS 10. They include IFRS 13 Fair Value Measurement (issued May 2011), IFRS 9 Financial Instruments (issued July 2014) and Definition of Material (Amendments to IAS 1 and IAS 8) (issued October 2018).