IAS 10 – EVENTS AFTER REPORTING DATE
- When an entity should adjust its financial statements for events after the reporting period; and
- The disclosures that an entity should give about the date when the financial statements were authorized for issue and about events after the reporting period.
The Standard also requires that an entity should not prepare its financial statements on a going concern basis if events after the reporting period indicate that the going concern assumption is not appropriate.
Event after the reporting period occurs between the end of the reporting period and the date that the financial statements are authorized for issue. These include:
- Adjusting events provide evidence of conditions that existed at the end of the reporting period.
- Non-adjusting events are those that are indicative of conditions that arose after the reporting period.
- Adjust financial statements for adjusting events
- Do not adjust for non-adjusting events
- If an entity declares dividends after the reporting period, the entity shall not recognize those dividends as a liability at the end of the reporting period. That is a non-adjusting event.
- An entity shall not prepare its financial statements on a going concern basis if management determines after the reporting period either that it intends to liquidate the entity or to cease trading.
ADJUSTING EVENTS – EXAMPLES
Adjusting events, as is evident by the name, require adjustments in the financial statements. Following are some examples:
- Invoices received in respect of goods or services received before the year end
- The resolution after the reporting date of a court case giving rise to a liability
- Evidence of impairment of assets, such as news that a major customer is going into liquidation or the sale of inventories below cost
- Discovery of fraud or errors showing that financial statements were incorrect
- Determination of employee bonuses/profit shares
- The tax rates applicable to the financial year are announced
- The auditors submit their fee
- The sale of a non-current asset at a loss indicates that it was impaired at the reporting date
- The bankruptcy of a customer indicates that their debt was irrecoverable at the reporting date
- The sale of inventory at less than cost indicates that it should have been valued at NRV in the accounts
- The determination of cost or proceeds of assets bought/sold during the accounting period indicates at what amount they should be recorded in the accounts
NON-ADJUSTING EVENTS – EXAMPLES
Usually non-adjusting events do not require adjustments. However, if the event is of such importance that its non-disclosure will affect the economic decision making of users it should be disclosed in the notes to the accounts. Some examples of non-adjusting events are as follows:
- Business combinations
- Discontinuance of an operation
- Major sale/purchase of assets
- Destruction of major assets in natural disasters
- Major restructuring
- Major share transactions
- Unusual changes in asset prices/foreign exchange rates
- Commencing major litigation
- A purchase or sale of a non-current asset
- The destruction of assets due to fire or flood
- The announcement of plans to discontinue an operation
- An issue of shares
If an entity declares dividends to holders of equity instruments after the reporting period but before the financial statements, the entity shall not recognise those dividends as a liability at the end of the reporting period. This is because no obligation exists at that time. Such dividends are disclosed in the notes.
An entity shall not prepare its financial statements on a going concern basis if management determines after 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.
Non-adjusting events should disclose the nature and financial effect of the event if its non-disclosure would affect the judgment of users in making decisions.
Companies must disclose the following
- When the financial statements were authorized for issue
- Who gave that authorization
- Who has the power to amend the financial statements after issuance
IAS 37 – PROVISONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
The objective of this IAS is to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets.
- A provision is a liability of uncertain timing or amount.
- An obligating event is an event that creates a legal or constructive obligation that results in an enterprise having no realistic alternative to settling that obligation.
- A legal obligation is an obligation that derives from:
- A contract (through its explicit or implicit terms);
- Legislation; or
- Other operation of law.
- A constructive obligation is an obligation that derives from an enterprise‘s action where:
- By an established pattern of past practice, published policies or a sufficiently specific current statement, the enterprise has indicated to other parties that it will accept certain responsibilities; and
- As a result, the enterprise has created a valid expectation on the part of those other parties that it will discharge those responsibilities.
- An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.
- A restructuring is a program that is planned and controlled by management, and materially changes either:
- The scope of a business undertaken by an enterprise; or (b) The manner in which that business is conducted.
A provision shall be recognized when:
- An entity has a present obligation (legal or constructive) as a result of a past event;
- It is possible than an outflow of resources embodying economic benefits will be required to settle the obligation; and
- A reliable estimate can be made of amount of the obligation.
If these conditions are not met, no provision shall be recognized.
In rare cases it is not clear whether there is a present obligation. In the cases, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists at the reporting date.
A past event that leads to a present obligation is called an obligating event. For an event to be an obligating event, it is necessary that the entity has no realistic alternative to settling the obligation created by the event. This is the case only:
- Where the settlement of the obligation can be enforced by law; or
- In the case of a constructive obligation, where the event (which may be an action of the entity) creates valid expectations in other parties that the entity will discharge the obligation.
The amount recognized as a provision shall be the best estimate of the expenditure required to settle the present obligation at the reporting date. This means that:
- Provisions for one-off events (restructuring, environmental clean-up, settlement of a lawsuit) are measured at the most likely amount.
- Provisions for large populations of events (warranties, customer refunds) are measured at a probability-weighted expected value.
- Both measurements are at discounted present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the liability.
In reaching its best estimate, the enterprise should take into account the risks and uncertainties that surround the underlying events. Expected cash outflows should be discounted to their present values, where the effect of the time value of money is material.
If some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement should be recognized as a reduction of the required provision when, and only when, it is virtually certain that reimbursement will be received if the enterprise settles the obligation. The amount recognized should not exceed the amount of the provision.
In SOFP, reimbursement should be shown as an asset and provision should be shown at gross amount however, in statement of profit or loss they can be netted off.
Re-measurement of provisions
- Review and adjust provisions at each reporting date
- If outflow is no longer probable, reverse the provision to income statement.
Application of recognition and measurement rules
Some specific requirements on applying recognition and measurement rules are as follows:
- Future operating losses
Provisions shall not be recognized for future operating losses.
- Onerous contracts
If an entity has a contract that is onerous, the present obligation under the contract shall be recognized and measured as a provision.
The following are examples of events that may fall under the definition of restructuring:
- Sale or termination of a line of business
- Closure of business locations
- Changes in management structure
- Fundamental re-organization of company
Restructuring provisions should be accrued as follows:
Sale of operation: Accrue provision only after a binding sale agreement. If the binding sale agreement is after reporting date, disclose but do not accrue
Closure or re-organization: Accrue only after a detailed formal plan is adopted and announced publicly. A board decision is not enough.
Restructuring provision on acquisition (merger): Accrue provision for terminating employees, closing facilities, and eliminating product lines only if announced at acquisition and, then only if a detailed formal plan is adopted 3 months after acquisition.
A management or board decision to restructure taken before the reporting date does not give rise to a constructive obligation at the reporting date unless the entity has, before the reporting date:
- Stated to implement the restructuring plan; or
- Announced the main features the restructuring plan to those affected by it in a sufficiently specific manner to raise a valid expectation in them that the entity will carry out the restructuring.
If an entity starts to implement a restructuring plan, or announces its main features to those affected, only after the reporting date, disclosure is required under IAS 10 Events after the Reporting Date, if the restructuring is material and non-disclosure could influence the economic decisions of users taken on the basis of the financial statements.
Restructuring provisions should include only direct expenditures caused by the restructuring, not costs that associated with the ongoing activities of the enterprise such as: –
- Retraining or relocating continuing staff;
- Marketing; or
- Investment in new systems and distribution networks
A contingent liability is:
- A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise; or
- A present obligation that arises from past events but is not recognized because:
- It is not probably that an outflow of resources embodying economic benefits will be required to settle the obligation; or
- The amount of the obligation cannot be measured with sufficient reliability.
- An enterprise should not recognize a contingent liability.
- A contingent liability is disclosed in financial statements, unless the possibility of an outflow of resources embodying economic benefits is remote.
Where an enterprise is jointly and severally liable for an obligation, the part of the obligation that is expected to be met by other parties is treated as a contingent liability.
The enterprise recognizes a provision for the part of the obligation for which an outflow of resources embodying economic benefits is probable, except in the extremely rare circumstances where no reliable estimate can be made.
Contingent liabilities may develop in a way not initially expected. Therefore, they are assessed continually to determine whether an outflow of resources embodying economic benefits has become probable. If it becomes probable that an outflow of future economic benefits will be required for an item previously dealt with as a contingent liability, a provision is recognized in the financial statements of the period in which the change in probability occurs (except in the extremely rare circumstances where no reliable estimate can be made.)
A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise.
- An enterprise should not recognize a contingent asset.
- A contingent asset is disclosed in financial statements, where an inflow of economic benefits is probable.
Contingent assets usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefits to the enterprise. An example is a claim that an enterprise is pursuing through legal processes, where the outcome is uncertain.
Contingent assets are not recognized in financial statements since may result in the recognition of income that may never be realized. However, when the realization of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.
Contingent assets are assessed continually to ensure that developments are appropriately reflected in the financial statements. If it has become virtually certain that an inflow of economic benefits will arise, the asset and the related income are recognized in the financial statements of the period in which the change occurs. If an inflow of economic benefits has become probable, an enterprise discloses the contingent asset.
Examples of Provisions
|Accrue a Provision?
|Restructuring by sale of an operation
|Accrue a provision only after a binding sale agreement
|Restructuring by closure or re-organization
|Accrue a provision only after a detailed formal plan is adopted and announced publicly. A Board decision is not enough
|Accrue a provision (past event was the sale of defective goods)
|Accrue a provision if the company’s policy is to clean up even if there is no legal requirement to do so (past event is the obligation and public expectation created by the company’s policy)
|Offshore oil rig must be removed and sea bed restored
|Accrue a provision when installed, and add to the cost of the asset
|Abandoned leasehold, four years to run
|Accrue a provision
|ACCA firm staff training for recent changes in tax law
|No provision (there is no obligation to provide the training)
|A chain of retail stores is self-insured for fire loss
|No provision until a an actual fire (no past event)
|Self-insured restaurant, people were poisoned, lawsuits are expected but none have been filed yet
|Accrue a provision (the past event is the injury to customers)
|Major overhaul or repairs
|No provision (no obligation)
|Onerous (loss-making) contract
|Accrue a provision