Question

lustrate the effects of the events after the reporting period described below on the recognition and measurement in the financial statements if Arthur Ltd.’s financial year ends 31 December 2018 i. Arthur Ltd was sued on December 31, 2018; it is not clear whether the probability of conviction in the ongoing trial is more than 50%. Shortly after December 31 2018 the entity is convicted.

ii. In January 2019, part of the manufacturing facilities and inventories of an Arthur Ltd is destroyed by a flood. The damages are not covered by insurance.

However, the entity’s management expects that it will be possible to continue the business activities.    [6 marks]

Answer 1

1. Since the event existed as on the reporting date, it should form a part of financial statement. However since the probability of Cash flow cannot be reliably measured, a contingent liability with provision is sufficient. (IAS 10 and IAS 37)

2. The incident happened after reporting period and it is possible to continue without business affected. Hence this downst effect the going concern assumption of accounting. And also it is a non-adjusting event as the damage didn't exist as on the reporting date. However since the amount of damage is significant ,sufficient disclosures must be made for users to understand and make better decisions regarding the future of the company. (IAS 10)