F1 5.03 IAS 10 Events after the Reporting Period

In this session we shall look at the requirements of IAS 10 Events after the reporting period.

IAS 10 tells us whether something that happens after the end of the reporting period:

• Should be ignored when preparing the financial statements
• Should be included in the financial statements
• Should not be included in the financial statements but should be included in a note to the financial statements

Events after the reporting period

Events after the reporting period refers to anything that occurs between the end of the financial reporting period and the date that the financial statements are authorised for issue. This is the period in which it is possible to update the financial statements and their notes.

Financial statements should include the date they are authorised as this informs users that the statements will not reflect any circumstances that may have arisen after that date.

Illustration

Hector Ltd has a year-end of 31st October. Its financial statements for the year ended 31/10/2019 were prepared and put before the Board of Directors on 16/03/2020 and the financial statements were authorised for issue on that date.

Types of events after the reporting period

IAS 10 splits events into two categories; Adjusting Events and Non-Adjusting Events.

Adjusting events

Adjusting events are anything that occurs that provides us with evidence of conditions that existed at the period end.

As the name indicates, financial statements should be amended for the effects of adjusting events.

Examples of adjusting events after the reporting period

1. The settlement of a Court Case that related to events before the period-end
2. The receipt of information about impaired asset (note that an impaired asset is one where its value has fallen unexpectedly); e.g.
   1. The bankruptcy of a customer after the reporting period usually confirms that the customer was credit impaired at the period-end
   2. The sale of inventories after the reporting period provides evidence about the net realisable value of inventories at the period-end
3. The determination after the reporting period of the cost of assets purchased, or the proceeds from assets sold, before the end of the reporting period
4. Bonuses payable to employees is profits for the year were above a certain level
5. The discovery of fraud or errors

Illustration 1

Nilus Ltd has a year-end of 31/12/2019.

On 31/03/2020, which is after the year end but before the financial statements were authorised for issue, Nilus Ltd lost a long-running Court Case and was ordered to pay £50,000 in damages.

This event would qualify as an Adjusting Event as it informs us that the company did owe money at its year-end. The financial statements for the year-ended 31/12/2019 would be amended to include:

• An expense of £50,000 in the Statement of Profit or Loss
• A liability of £50,000 in the Statement of Financial Position

Illustration 2

It is 30/06/2020 and Theseus plc is preparing its financial statements for the year ended 31/01/2020. At the year-end, Theseus plc was owed £60,000 by Ariadne Ltd and this is still outstanding at 30/06/2020.

On 28/02/2020 Ariadne Ltd went into liquidation due to its poor performance in recent years and Theseus plc was informed by the liquidators that they are unlikely to receive more than £10,000 from this debt.

The liquidation of Ariadne Ltd is classed as an adjusting event. The evidence indicates that the customer’s debt was impaired at the year-end as its performance and should be valued at £10,000 rather than £50,000. Theseus plc would therefore write-off £50,000 of the debt when preparing its financial statements leaving £10,000 still to be collected. The following entries would be made:

• Dr Irrecoverable debts £50,000
• Cr Sales ledger control £50,000
• NB. The effects of VAT have been ignored

Non-Adjusting Events

Financial statements should not be updated for non-adjusting events. If however, the non-adjusting event is judged to be material a note should be included in the Notes to the Financial Statements. This note would include:

• The nature of the event
• The estimated financial effects of the event (or a statement that they cannot be estimated)

A material event is one where the omission or misstatement of the information would affect decisions being made that are based upon the financial statements. They are therefore events that will make a significant change to the nature or operations of the company.

Examples of material non-adjusting events after the reporting period

1. A purchase or disposal of a major subsidiary
2. A plan to close down part of the business
3. Major purchasers or disposals of assets
4. Destruction of a major production plant by fire
5. Announcing a major restructuring of the business
6. Major ordinary share transactions (e.g. a large share issue)
7. Abnormally large changes in asset prices or foreign exchange rates
8. Changes in tax rates or tax laws that have a significant effect
9. Entering into significant commitments or contingent liabilities (e.g. issuing significant guarantees)
10. Commencing major litigation as a result of events that occurred after the reporting period

Illustration

It is 30/09/2020 and Polyxo Ltd is preparing its financial statements for the year ended 31/05/2020. At the start of August 2020 Polyxo Ltd’s factory was flooded which destroyed the company’s inventories and also caused significant damage to the structure of the factory.

As a result, Polyxo Ltd will be unable to produce any of its products for an estimated four months whilst repairs are made.

The event would be classed as a non-adjusting event as the damage was caused after the year-end. It is however a material non-adjusting event as it will have a major effect on Polyxo Ltd.

Poyxo Ltd’s financial statements will not be updated for the effects of the flood but a note to the financial statements will be included that describes the event and the estimated financial effects resulting from the flood.

Special Circumstances: Going Concern

If, after the end of the financial reporting period, management decides to liquidate the company, the company shall not prepare its financial statements on a going concern basis.

The decision to liquidate is always treated as an Adjusting Event event when it is made after the end of the reporting period.

Illustration

Crotus Ltd has a year-end of 28/02/2020. In April 2020, its largest customer went into liquidation and, as this customer accounted for over 70% of Crotus Ltd’s sales, the directors decided its business was no longer viable and would have to be closed down.

As Crotus Ltd is no longer a going concern its financial statements for the year-ended 28/02/2020 should not be prepared using the going concern basis – even though the decision to close the company down took place after the year-end.

Special Circumstances: Dividends

If a company declares dividends for a period after the reporting period, those dividends shall not be included in the financial statements of the period (they will instead be included in the financial statements of the next period).

So a company’s financial statements should include interim dividends declared in the financial period as interim dividends are paid at the same time as they are declared. It should not however include any final dividends for the financial period as these will be approved and paid after the end of the financial period. Instead, the notes to the financial statements will include information about the final dividend that has been proposed for the period.

Illustration

Hebe Ltd has a financial year-end of 31st May. In the year ended 31/05/2019 its directors declared interim dividends of £30,000 in total and proposed a final dividend of £20,000 that was agreed by the shareholders in July 2019 and paid in August 2019.

In the year ended 31/05/2020 the directors declared interim dividends of £40,000 and proposed a final dividend for the year of £50,000. The final dividend was agreed by the shareholders in July 2020 and paid in August 2020.

The dividends to be included in Hebe Ltd’s Statement of Changes in Equity for the year ended 31/05/2020 would total £60,000 (that is, the interim dividends declared in the year of £40,000 plus the final dividend for the year ended 31/05/2019 of £20,000 which was declared and paid during the year ended 31/05/2020).

The notes to the financial statements for the year ended 31/05/2020 would include a note about the proposed final dividend of £50,000 for the year ended 31/05/2020.