Question

Question 2 (3 marks) Vachon Industries Ltd, has a $5,000,000 note payable outstanding. The terms of the note require repayment of principal on June 30, 20X2. The company is now finalizing the financial statements for the year ended December 31, 20X1. On January 25, 20X2, before the financial statements are released, the company reaches an agreement with the lender to refinance the liability, with a new date June 30, 20X5. Vachon also has committed to donate $200,000 to support the provincial snowboarding association race programs for the year. No donation agreement has yet been signed, but a public announcement has been made, and the company and snowboarding association have met and agreed to the races the funding will support for the season and promotion of Vachon Industries Ltd. through its website. Required: a) If Vachon complies with IFRS, will the note payable be classified as current or long-term liability as at December 31, 20x1? b) Repeat a) assuming that Vachon complies with ASPE. c) How would your answer to part b) change if the note payable was due on February 20, 20X2 and common shares worth $5,000,000 were issued for cash February 28, 20X2 to replenish funds used to repay the note, assuming financial statements were issued March 31, 20X2? d) If Vachon complies with IFRS, will the $200,000 amount be recorded as a liability? Explain your rationale. Question 3 14 marks

Answer 1

IFRA 10 provides guidance on reporting of event after reporting period. Following guidance is available :

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 i.e. before the financial statement are authorised.

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

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 for material item:

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

Response to a :

Loan refinancing event have been completed after balance sheet date and it was not existing as on balance sheet date hence it will be treated as non-adjusting event and it would require disclosure in financial statement.

Response to b :

As per ASPE 3820, the guidance is similar to adjusting and non-adjusting event however a subsequent event  is an event that occurs between the balance sheet date and the date the financial statements are completed,

Based on description provided above it appears that financial statement have been finalised and thereafter refinancing have been completed. In view of this it will not even treated as "non-adjusting" event as well and no disclosure would be required in financial statement.

Response to c :

Answer will not change since all event is occuring after balance sheet finalised hence not falling within "event" which calls for adjustment.

Response to d :

The donation to support provincial snowboarding association -- it is assumed that commitment have been made prior to balance sheet date and subsequently public announcement have been made which indicates that the liability exist on reporting date though the agreement is yet to be completed. It indicates that it is more likely than not that this commitment will be fulfilled. In view of this financial statement should be adjusted.