It is a fundamental principle of accounting that all available information must be considered when preparing financial statements. This must include information on relevant events which occur right up to the date on which the financial statements are authorised for issue.
The purpose of IAS 10 is to outline the circumstances when an entity should adjust its financial statements for events that occur after the Statement of Financial Position date and also the disclosures necessary after these events have occurred.
The standard also indicates that if these events after the reporting date suggest that the going concern assumption is no longer appropriate, then the entity should not prepare its accounts on the going concern basis.
That is, if management determines that it will liquidate the entity or to cease trading or that it has no other realistic alternative, then the financial statements should not be prepared on a going concern basis. Instead, the Statement of Financial Position should be adjusted onto a break-up basis.
Events after the reporting date are those events, both favourable and unfavourable, that occur between the reporting date and the date the financial statements are authorised for issue.
Events which occur between these dates may provide information which may help in the preparation of the statements.
The standard distinguishes between two types of such events.
- Adjusting Events
These are events that provide evidence of conditions that existed at the Statement of Financial Position date. As their title suggests, the financial statements should be adjusted to reflect these events.
IAS 10 gives examples of what it considers to be adjusting events:
- The settlement, after the Statement of Financial Position date, of a court case that confirms that the entity had a present obligation at the Statement of Financial Position date: The entity will accordingly adjust any previously recognised provision or create a new one.
- The receipt of information after the Statement of Financial Position date indicating that an asset was impaired at the Statement of Financial Position date, for example:
- The bankruptcy of a customer after the Statement of Financial Position date
- The sale of inventories after the Statement of Financial Position date may give evidence about their net realisable value at the Statement of Financial Position date
- The determination after the Statement of Financial Position date of the cost of assets purchased, or proceeds of assets sold, before the year-end.
- The discovery of fraud or errors that show the financial statements are incorrect.
- Non-Adjusting Events
These are events that are indicative of conditions that arose after the Statement of Financial Position date.
As their title would suggest, the entity should not adjust its financial statements to reflect these events.
However, the standard recognises that these events may be relevant to users of the accounts i.e. the events could influence the economic decisions that the users make. Thus, if the events are material, they should be disclosed in the notes to the accounts. The note should detail:
- The nature of the event; and
- An estimate of its financial effect, or a statement that such an estimate cannot be made
IAS 10 gives examples of what it considers to be non-adjusting events:
- A major business combination after the year end or the disposal of a major subsidiary
- Announcing a plan to discontinue an operation
- Major purchases of assets, disposals of assets, expropriation of major assets by government or
classification of assets as held for sale
- Destruction of a major production plant by fire
- Announcing or commencing a major restructuring
- Major ordinary share transactions after the year-end (other than bonus issues, share splits or reverse share splits, which must be adjusted for)
- Abnormally large change in asset prices or foreign exchange rates after the year-end
- Changes in tax rates/laws
- Commencing major litigation arising solely out of events that occurred after the Statement of Financial Position date
If an entity declares dividends to holders of equity shares after the Statement of Financial Position date, these dividends cannot be included as a liability at the Statement of Financial Position date.
However, such a declaration is a non-adjusting subsequent event and footnote disclosure is required, unless immaterial.
This is because the dividends do not meet with the criteria of a present obligation in IAS 37. The International Accounting Standards Board also discussed whether or not an entity’s past practice of paying dividends could be considered a constructive obligation and concluded that such practices do not give rise to a liability to pay dividends. However, the dividends are disclosed in the notes in accordance with IAS 1.
If an entity receives information after the Statement of Financial Position date about conditions that existed at the Statement of Financial Position date, then the disclosures should be updated to reflect the new information.
For example, if further information is received concerning a contingent liability that existed at the Statement of Financial Position date, the disclosures regarding that item as required under IAS 37 will have to be updated.
The entity must disclose the date when the financial statements were authorised for issue and who gave that authorisation.
If the financial statements can be amended after issue, this fact must be disclosed.
GOING CONCERN CONSIDERATIONS
If the entity’s financial position deteriorates after the year end to an extent that doubt is cast on the entity’s ability to continue as a going concern, IAS 10 requires that the entity should not prepare its financial statements on a going concern basis. If it is management’s intention to liquidate or cease trading, or that no realistic alternative exists, the accounts should be prepared on a “break-up basis”. In addition, disclosures prescribed by IAS 1 under such circumstances should also be complied with.