Events may occur between the end of the reporting period and the date when financial statements are authorized for issue which may present information that should be considered in the preparation of financial statements. IAS 10 Events after the Reporting Period provides guidance as to which events should lead to adjustments in the financial statements and which events shall be disclosed in the notes to financial statements.
Date of Authorization for Issue
Events after Reporting Period are those that occur between the end of the reporting period and when the financial statements are authorized for issue.
The date of authorization for issue is usually taken to be the date when the board of directors authorizes the issue of financial statements. Where management is required to issue its financial statements to a supervisory board or shareholders for approval, the authorization is considered to be complete upon the management’s authorization for issue of financial statements rather than when the supervisory board or shareholders give their approval.
Events after the Reporting Period
Events after the end of reporting period may be classified into two types:
- Adjusting Events – Those events that provide further evidence about conditions that existed at the end of reporting period.
- Non-Adjusting Events – Those events that reflect conditions that arose after the end of reporting period.
If any events occur after the end of the reporting period that provide further evidence of conditions that existed at the end of reporting period (i.e. Adjusting Events), then the financial statements must be adjusted accordingly.
Examples of Adjusting Events include:
- Settlement of litigation against the entity after the reporting date, in respect of events that occurred before the end of reporting period, may provide evidence of the existence and amount of liability at the reporting date. A liability in respect of the litigation may be recorded in the financial statements if not recognized initially or the amount of liability may be adjusted in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
- Declaration of bankruptcy by a long outstanding receivable after the reporting date may provide evidence that the receivable was impaired at the reporting date. Impairment may be recognized in the financial statements by reducing the amount of receivable to its recoverable amount, if any.
- Detection of fraud or errors after the reporting period may indicate that the financial statements are misstated. Financial statements may be adjusted to reflect accounting for those errors or frauds that relate to the present or prior reporting periods in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
Entity shall not adjust the financial statements in respect of those events after the end of reporting period that reflect conditions that arose after the end of reporting period (i.e. Non-Adjusting Events).
Examples of Non-Adjusting Events include:
- Declaration of dividends after the reporting date does not indicate existence of liability to pay dividends at the reporting date and shall not therefore trigger the recognition of liability in financial statements in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
- Destruction of assets of the entity by floods occurring after the reporting period does not indicate that the assets of the entity were impaired at the end of reporting period. Hence, the financial statements should not be adjusted to account for the impairment loss that arose after the end of reporting period.
- Initiation of litigation against the company arising out of events that occurred after the reporting period does not indicate the existence of liability at the reporting date and shall not therefore trigger the recognition of liability in the financial statements in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
The nature and estimate of the financial impact of material non-adjusting events shall be disclosed in the financial statements.
Non-Adjusting Events are considered material if they could influence the economic and financial decisions of the users of financial statements.
Examples of material non-adjusting events include:
- Management’s plan to discontinue or significantly curtail its activities in major geographic segments.
- Initiation of a major litigation against the company arising out of events that occurred after the reporting period.
- Major losses suffered as a result of a natural disaster occurring after the end of reporting period.
Going Concern Exception
Entity shall not prepare financial statements on the going concern basis if events after the reporting period indicate that the entity shall not be able to continue as a going concern irrespective of whether such events are indicative of conditions that arose after the end of reporting period or not.
If financial statements are not prepared on the going concern basis, it shall disclose this fact in the financial statements along with any major uncertainties that may cast considerable doubt regarding the entity’s ability to operate as a going concern.
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BMW PLC has 100 automobiles in its inventory at the year end costing $11,000 each. New Safety Regulations announced after the year end have forced prices of automobiles to drop to just $8,000. Is this an Adjusting Event or Non-Adjusting Event after the Reporting Date?
Since the announcement of new regulations and the resulting impact on prices of automobiles occurred after the year end, they do not reflect circumstances that existed at the year end and should not therefore be regarded as an Adjusting Event.
The announcement of new regulations and the resulting impact on prices of automobiles reflect circumstances that existed after the year end and should therefore be regarded as a Non-Adjusting Event.