IAS 10 | Assessment Questions


Question 1: Authorization of financial statements

Difficulty:  ✭ ✭ ✭ 

ABC PLC has recently issued financial statements for the year ended 31 December 2014.

Following timeline of events preceded the issuance of financial statements:

DateEvent
31 December 2014Year End.
10 January 2015Preparation of financial statements.
20 January 2015Approval by the Audit Committee for presentation of financial statements to the Board of Directors for their approval.
25 January 2015Public announcement of key financial results.
26 January 2015Approval by Board of Directors for the presentation of financial statements at the Annual General Meeting (AGM) for approval by the shareholders.
28 January 2015Approval of financial statements by shareholders at the AGM.
30 January 2015Issuance of copies of annual report to shareholders.


What is the last relevant date for the consideration of the Events After Reporting Period of the issued financial statements?

10 Jan
10 Jan

Correct Answer is 26 January.



Subsequent events shall be considered until the financial statements are authorized for issue on 26 January 2015.


20 Jan
20 Jan

Correct Answer is 26 January.



Subsequent events must be considered until the financial statements are authorized by the highest management authority.


25 Jan
25 Jan

Correct Answer is 26 January.



Events after the reporting period must be considered until the financial statements are authorized for issue by management even if they take place after the public announcement of results.


26 Jan
26 Jan

Correct!



Where management authorizes financial statements for submission to shareholders for approval, events after the reporting period need to be included only until the date of management's authorization rather than shareholders' approval.


28 Jan
28 Jan

Correct Answer is 26 January.



Subsequent events must be considered only until the date of management's authorization of financial statements.



Question 2: Subsequent Events

Difficulty:  ✭ ✭ ✭ 


DEF PLC is in the process of issuing its financial statements for the year ended 30 June 2014.

In a meeting of Board of Directors held on 31 August 2014, the directors authorized the issue of financial statements to shareholders.

Consider the impact (if any) of the following events after the reporting period on the financial statements of DEF PLC for the year ended 30 June 2014 assuming they have not already been accounted for:

a)In a meeting held on 10 July, the Board of Directors announced a final dividend of $0.5 per share for the year ended 30 June 2014.

How should the final dividend be accounted for in the financial statements for the year ended 30 June 2014?

Adjust
Adjust
Disclose
Disclose
Ignore
Ignore

Correct Answer is DISCLOSE.



As the final dividend was declared after the year end, DEF PLC has no obligation to pay dividends AT THE YEAR END which is why the dividend must not be recognized in the current financial statements.



Declaration of dividends however is a significant event which must be disclosed in the financial statements in accordance with IAS 10.

b) During the year, a customer had sued DEF PLC for damages that he claims to have suffered as a direct result of the faulty goods supplied to him by DEF PLC.

At the year end, the litigation was in process and the Court had not reached a verdict. The Company's legal advisors suggested that the chance of an adverse opinion against DEF PLC was very low as the contract with the customer explicitly states that the company shall not be liable to such claims. Consequently, no liability was recognized in the financial statements and neither was the contingency disclosed.

On 28 August 2014, the court issued a verdict against DEF PLC and ordered the payment of damages amounting $5 million to the claimant within 30 days.

The CFO is of the view that the financial statements need not be adjusted because the obligation to pay damages to the customer arose after the year end upon the decision of the court.

How should the liability for payment of damages be accounted for in the financial statements for the year ended 30 June 2014?

Adjust
Adjust
Disclose
Disclose
Ignore
Ignore

Correct Option is Adjust.



The decision of the Court against DEF PLC provides evidence of conditions existing at the year end, i.e. the liability to pay damages to the customer existed at 30 June 2014. The decision of the Court just confirmed this fact.



The argument of the CFO is not valid because the liability did not arise because of the decision of the Court but the supply of faulty goods to the customer (i.e. the obligating event) which had occurred before the year end.

c) DEF PLC suffered losses on their sales in the first week of July 2014 due to a decrease in the prices of their products.

The reduction in price was caused by falling demand of the Company's products due to the unexpected launch of technologically superior products by its competitor on 30 June 2014.

The CFO is of the view that because the sales were transacted after the year end, the associated loss should be recognized in the next accounting period in line with the matching principle.

How should the decrease in inventory prices be accounted for in the financial statements for the year ended 30 June 2014?

Adjust
Adjust
Disclose
Disclose
Ignore
Ignore

Correct Option is Adjust.



The loss incurred after the year end is indicative of the conditions existing at the year end (i.e. the selling price of inventory had already decreased by the year end).



Consequently, inventory cost shall be adjusted downwards in line with its Net Realizable Value in accordance with IAS 2.

d) JFK PLC, a customer of DEF PLC, was declared bankrupt on 5 July 2014 due to its deteriorating liquidity position after the withdrawal of financial support by its bank since the past 3 months.

DEF PLC was owed a material amount by JLK PLC as at 30 June 2014 which will not be recoverable.

How should bankruptcy of the customer be accounted for in the financial statements for the year ended 30 June 2014?

Adjust
Adjust
Disclose
Disclose
Ignore
Ignore

Correct Option is Adjust.



The loss of bad debt incurred so soon after the year end indicates that the trade receivables were impaired at the year end. As a result, the receivables balance of JFK PLC must be written off in the financial statements.



e) On 24 July 2014, a major earthquake disrupted the entire operations of DEF PLC. The Company suffered great loss due to the damage caused to its factories and other business premises.

The Company's insurance policy does not cover the risk of loss arising from natural disasters. The Company does not have sufficient internal funds or the availability of external finance to rebuild the infrastructure necessary for it to resume its business operations. Consequently, DEF PLC is unlikely to operate as a going concern in the foreseeable future.

How will the change in going concern status of DEF PLC be reflected in its financial statements for the year ended 30 June 2014?

Adjust
Adjust
Disclose
Disclose
Ignore
Ignore

Correct Option is Adjust.



Even though going concern problems did not exist at the year end, the basis of preparation of financial statements must be amended (e.g. using break-up value basis) because IAS 10 specifically requires the preparation of financial statements on an alternative basis if events after the reporting period indicate that the going concern assumption is no longer appropriate.