Question

Alberto Bhd is a large manufacturing company. After the date of the balance sheet, but prior to the financial statements being authorised for issue, the following material events occurred:

1) It was discovered that an account receivable existing at the balance sheet date will now not be received.

2) Alberto Bhd announced a bid to take over its competitor.

3) Some material errors were discovered in the financial statements, which indicate that the financial statements are incorrect.

4) The factory workers at the company have started a strike action for an indefinite length of time. The factory has to temporarily stopped production as a result of the workers’ action.

Required:

Define an adjusting event and non-adjusting event after the balance sheet date, and explain how each event should be accounted for in accordance with IAS 10 / MFRS 110 Events after the Reporting Period.         

For each of the events described in the Albatross Bhd case, state whether they should be accounted for as an adjusting or non-adjusting event after the balance sheet date. Justify your answer with reference to IAS 10 / MFRS 110 Events after the Reporting Period.

Answer 1

Hi There,

Here is my View on the questions asked on IAS 10.

Summary of IAS 10 :

Event after the reporting period: An event, which could be favourable or unfavourable, that occurs between the end of the reporting period and the date that the financial statements are authorised for issue.

Adjusting event: An event after the reporting period that provides further evidence of conditions that existed at the end of the reporting period, including an event that indicates that the going concern assumption in relation to the whole or part of the enterprise is not appropriate.

Non-adjusting event: An event after the reporting period that is indicative of a condition that arose after the end of the reporting period.

Accounting

• Adjust financial statements for adjusting events - events after the balance sheet date that provide further evidence of conditions that existed at the end of the reporting period, including events that indicate that the going concern assumption in relation to the whole or part of the enterprise is not appropriate.
• Do not adjust for non-adjusting events - events or conditions that arose after the end of the reporting period.
• If an entity declares dividends after the reporting period, the entity shall not recognise those dividends as a liability at the end of the reporting period. That is a non-adjusting event.

Going concern issues arising after end of the reporting period

An entity shall not prepare its financial statements on a going concern basis if management determines after the end of the reporting period either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so.

Disclosure

Non-adjusting events should be disclosed if they are of such importance that non-disclosure would affect the ability of users to make proper evaluations and decisions. The required disclosure is (a) the nature of the event and (b) an estimate of its financial effect or a statement that a reasonable estimate of the effect cannot be made.

A company should update disclosures that relate to conditions that existed at the end of the reporting period to reflect any new information that it receives after the reporting period about those conditions.

Companies must disclose the date when the financial statements were authorised for issue and who gave that authorisation. If the enterprise's owners or others have the power to amend the financial statements after issuance, the enterprise must disclose that fact.

(1) It was discovered that an account receivable existing at the balance sheet date will now not be received:

As per IAS 10,An event, which could be favourable or unfavourable, that occurs between the end of the reporting period and the date that the financial statements are authorised for issue can be either be Adjusting/Non - adjusting events. In the given case, Accounts receivable existing on the date of balance sheet has not been received as on the date of reporting date of balance sheet which is not material in nature and does not have any substantial effect on the financial statements and therefore it is an non - adjusting event and no adjustment is required in the balance sheet.

(2)Alberto Bhd announced a bid to take over its competitor :

In the given case, Alberto announced a bid which is to takeover its comptitor which is very material in nature but after the reporting period that provides no further evidence of conditions that existed at the end of the reporting period, including an event that indicates that the going concern assumption in relation to the whole or part of the enterprise is not appropriate so it a non adjusting event but it is material in nature and it can e disclosed in Directors responsibility statement where the stakeholders will get an information over the major activity of the business.

(3)Some material errors were discovered in the financial statements, which indicate that the financial statements are incorrect :

An event after the reporting period that provides further evidence of conditions that existed at the end of the reporting period, including an event that indicates that the going concern assumption in relation to the whole or part of the enterprise is not appropriate are adjustable events. In the given case,material errors in financial statements indicate that financial statements are Incorrect which is very material and requires the adjustments of errors found on the balance sheet.

(4 )Factory workers at the company have started a strike action for an indefinite length of time. The factory has to temporarily stopped production as a result of the workers’ action:

An entity shall not prepare its financial statements on a going concern basis if management determines after the reporting date that either:

(a) it intends to liquidate the entity or to cease trading; or

(b) that it has no realistic alternative but to do so

In the given case, Continous workers strie leads to temporarily stopped production which leads to uncertainity of business operations and may finally affects the Going concern of the business. Therefore it is an Adjustable events and has to be reported in the Financial Statements as on the date of balacne sheet.