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Advance Financial Accounting (FIN-611)
VU
LESSON 27
IAS 10 ­ EVENTS AFTER THE BALANCE SHEET DATE
Before starting discussion on the IAS 10 that is about the events that occur after the
balance sheet date, let us differentiate between the:
Draft Financial Statements and
Published Financial Statements
Draft financial statements:
Draft financial statements are one that are prepared by the accounts department,
audited by the external auditors and put in front of the board of directors for approval.
Published financial statements:
Published financial statements are one that has been approved by the board of
directors and has also been published for issuance to the shareholders of the company.
Here we must also discuss different dates that are pertinent to the IAS 10 for better
understanding.
Balance Sheet Date
Date of the Board of Director's Meeting (BOD)
Date of the Annual General Meeting (AGM)
Balance sheet date:
It is the closing date on which the balance sheet is prepared. This is the closing date of
the accounting year.
Date of BOD meeting:
It is the date in which the directors approve the financial statements of the company.
This date is obviously after the balance sheet date but before the date of annual
general meeting (AGM). The BOD meeting should be held at least 21 days before the
date of the annual general meeting. Because members of the company should receive
21 days notice of the AGM along with the published financial statements.
Date of AGM:
It is the date that should not be after the expiry of four months (in Pakistani scenario
according to the requirements of the securities and exchange commission of Pakistan-
SECP) and six months (in international scenario according to the provisions of IAS-1)
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Advance Financial Accounting (FIN-611)
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Note:
The BOD holds meeting after the balance sheet date but before the annual general
meeting.
Events after the balance sheet date
These are those events, favorable and unfavorable, that occur between the balance
sheet date and the date when the financial statements are authorized for issue. Two
types of events can be identified:
(a)
Those events that provide evidence of conditions that existed at the
balance sheet date (adjusting events after the balance sheet date); and
(b)
Those events that are indicative of conditions that arose after the balance
sheet date (non-adjusting events after the balance sheet date).
Following figure will help to under stand the events after the balance sheet date;
31 Dec 2008
1 Jan 2008
25 March 2009
Accounting
Period
Events after the balance sheet
date.
Adjusting events
Non-adjusting events
In this figure balance sheet date is December 31, 2008 and the date of BOD meeting is
March 25, 2009. So the events that occur in between these two dates will be the events
after the balance sheet date.
Explanation:
A Good Stock costing Rs. 100,000 was written down to NRV of Rs. 97,500 at the
Balance Sheet date. After the Balance Sheet date it is sold for Rs. 96,000.
The condition of stock at the balance sheet date has not changed till sale and the future
event provides evidence regarding the decline in its value. Thus, it is an adjusting
event after the balance sheet date.
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Advance Financial Accounting (FIN-611)
VU
On the other hand, a Good Stock costing Rs. 200,000 was written down to NRV of Rs.
197,000 at the balance sheet date. After the balance sheet date the stock was spoiled
and sold for only Rs.10, 000 as scrap.
In this case the condition of spoilage did not exist at the balance sheet date. This
spoilage is indicative of condition that arose after the balance sheet date. So, this is a
non-adjusting event after the balance sheet date.
Example-1:
Classify the following events after the balance sheet date as adjusting or non-
adjusting:
(a)
Creative Textile (Private) Limited decided to takeover Saga Sports (Private)
Limited after the balance sheet date.
(b)
QSA Surgical announces a plan to discontinue its Marala Branch after the
balance sheet date.
(c)
Sale of inventory after the balance sheet date below its cost and also below its
NRV (Inventory was measured at NRV on the Balance Sheet Date).
(d)
Changes in tax rates after the balance sheet date having a significant effect on
current and deferred tax assets and liabilities.
(e)
A doubtful customer defaults after the balance sheet date; provision for such
customer has been made @ 10%.
Asset purchased on 27th December 2004, invoice has been received on 5th
(f)
January 2005. The year ends on 31st December 2004.
(g)
The discovery of fraud that shows that the financial statements are incorrect.
Solution:
Adjusting events after the balance sheet date.
(c), (e), (f), (g)
Non-adjusting events after the balance sheet date.
(a), (b), (d)
The process involved in authorizing the financial statements for issue will vary
depending upon the management structure, statutory requirements and procedures
followed in preparing and finalizing the financial statements.
In some cases, an entity is required to submit its financial statements to its
shareholders for approval after the financial statements have been issued. In such
cases, the financial statements are authorized for issue on the date of issue, not the
date when shareholders approve the financial statements.
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Advance Financial Accounting (FIN-611)
VU
Example-2:
The management of an entity completes draft financial statements for the year to 31st
December 2005 on 28th January 2006. On 18th February 2006, the board of directors
reviews the financial statements and authorizes them for issue. The entity announces
its profit and selected other financial information on 19th February 2006. The financial
statements are made available to shareholders and others on 1st March 2006. The
shareholders approve the financial statements at their annual meeting on 15th April
2006 and the approved financial statements are then filed with a regulatory body on
17th April 2006.
The financial statements are authorized for issue on 18th February 2006 (date of board
authorization for issue).
In some cases, the management of an entity is required to issue its financial statements
to a supervisory board (made up solely of non-executives) for approval. In such cases,
the financial statements are authorized for issue when the management authorizes
them for issue to the supervisory board.
Example-3:
On 18th February 2002, the management of an entity authorizes financial statements
for issue to its supervisory board. The supervisory board is made up solely of non-
executives and may include representatives of employees and other outside interests.
The supervisory board approves the financial statements on 26th February 2002. The
financial statements are made available to shareholders and others on 1st March 2002.
The shareholders approve the financial statements at their annual meeting on 15th
April 2002 and the financial statements are then filed with a regulatory body on 17th
April 2002.
The financial statements are authorized for issue on 18th February 2002 (date of management
authorization for issue to the supervisory board).
RECOGNITION AND MEASUREMENT:
Adjusting Events after the Balance Sheet Date:
An entity shall adjust the amounts recognized in its financial statements to reflect
adjusting events after the balance sheet date.
Example-4:
A customer was considered doubtful at the balance sheet date. A provision for such
customer was made @ 50%. After the balance sheet date, customer was declared as
insolvent based on his financial position on year end.
Required: What will be the accounting treatment?
Solution:
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Advance Financial Accounting (FIN-611)
VU
This is an adjusting event after the balance sheet date and should be recognized in the
financial statements. At the balance sheet date, 100% provision shall be made against
that debtor i.e. provision is to be increased by further 50%.
Example-5:
A customer was doubtful at the balance sheet date. A provision for such customer was
made @ 5%. After the balance sheet date, customer paid 85% of the total amount.
Required: What will be the accounting treatment?
Solution:
This is an adjusting event. This event shall be recognized in the financial statements.
At the balance sheet, provision shall be made @ 15% i.e. Additional 10% provision
shall also be recorded.
Non-adjusting Events after the Balance Sheet Date:
An entity shall not adjust the amounts recognized in its financial statements to reflect
Non-adjusting events after the balance sheet date.
Example-6
An asset, whose book value is Rs. 89,000, was destroyed by fire after the balance sheet
date.
Required:
(i)
Identify event type
(ii)
What will be accounting treatment?
Solution:
(i)
This is non-adjusting event as the condition arose after the balance sheet date.
(ii)
An entity shall not recognize such event in the financial statement. It shall only
be disclosed.
Examples are:
a)
Decline in market value of investments between the balance sheet date and the
date when the financial statements are authorized for issue.
b)
Loss of stock after the date of financial statements.
The following are the examples of non-adjusting events after the balance sheet date
that would generally result in disclosure:
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Advance Financial Accounting (FIN-611)
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(a)
A major business takeover after the balance sheet date or disposing of a major
subsidiary;
(b)
Announcing a plan to discontinue an operation;
(c)
Major purchases of assets, classification of assets as held for sale, other
disposals of assets, or expropriation of major assets by government;
(d)
The destruction of a major production plant by a fire after the balance sheet
date;
(e)
Announcing, or commencing the implementation of, a major restructuring;
(f)
Abnormally large changes after the balance sheet date in asset prices or foreign
exchange rates;
(g)
changes in tax rates or tax laws enacted or announced after the balance sheet
date that have a significant effect on current and deferred tax assets and liabilities;
(h)
Entering into significant commitments or contingent liabilities, for example, by
issuing significant guarantees; and
(i)
Commencing major litigation arising, solely out of events that occurred after
the balance sheet date.
Dividends
If an entity declares dividends to holders of equity instruments after the balance sheet
date, the entity shall not recognize those dividends as a liability at the balance sheet
date.
If dividends are declared (i.e. the dividends are appropriately authorized and no
longer at the discretion of the entity) after the balance sheet date but before the
financial statements are authorized for issue, the dividends are not recognized as a
liability at the balance sheet date because they do not meet the criteria of a present
obligation in
IAS-37. Such dividends are disclosed in the notes in accordance with
IAS-1 Presentation of Financial Statements.
Example-7:
Mobitel Private Limited announces dividend to its shareholders amounting to
Rs.1,500,000 after the Balance Sheet Date. The closing balance of Retained Earnings is
Rs. 7,000,000 including above dividend.
Required: Effect of the above on Financial Statements.
Solution:
It shall be disclosed in the notes to the accounts as follows:
Proposed Dividend
Dividend proposed for the year is Rs.1,500,000.
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Advance Financial Accounting (FIN-611)
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Going Concern
An entity shall not prepare its financial statements on a going concern basis if
management determines after the balance sheet date either that it intends to liquidate
the entity or to cease trading, or that it has no realistic alternative but to do so.
Deterioration in operating results and financial position after the balance sheet date
may indicate a need to consider whether the going concern assumption is still
appropriate. If the going concern assumption is no longer appropriate, the effect is so
pervasive that this Standard requires a fundamental change in the basis of accounting,
rather than an adjustment to the amounts recognized within the original basis of
accounting.
Example-8:
Elahi (Private) Limited is in the course of finalizing its financial statements for the year
ended 30th June 2004.
Due to market competition and loss of customers, company intends to cease its
business and liquidate the company.
Should the company prepare financial statement on a going concern basis or not?
Solution:
The company should not prepare the financial statement on a going concern basis. It
must also disclose the fact that financial statements are not prepared on a going
concern basis. The amounts appearing in Financial Statements would also be adjusted
appropriately according to new basis of accounting i.e. current market values.
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Table of Contents:
  1. ACCOUNTING FOR INCOMPLETE RECORDS
  2. PRACTICING ACCOUNTING FOR INCOMPLETE RECORDS
  3. CONVERSION OF SINGLE ENTRY IN DOUBLE ENTRY ACCOUNTING SYSTEM
  4. SINGLE ENTRY CALCULATION OF MISSING INFORMATION
  5. SINGLE ENTRY CALCULATION OF MARKUP AND MARGIN
  6. ACCOUNTING SYSTEM IN NON-PROFIT ORGANIZATIONS
  7. NON-PROFIT ORGANIZATIONS
  8. PREPARATION OF FINANCIAL STATEMENTS OF NON-PROFIT ORGANIZATIONS FROM INCOMPLETE RECORDS
  9. DEPARTMENTAL ACCOUNTS 1
  10. DEPARTMENTAL ACCOUNTS 2
  11. BRANCH ACCOUNTING SYSTEMS
  12. BRANCH ACCOUNTING
  13. BRANCH ACCOUNTING - STOCK AND DEBTOR SYSTEM
  14. STOCK AND DEBTORS SYSTEM
  15. INDEPENDENT BRANCH
  16. BRANCH ACCOUNTING 1
  17. BRANCH ACCOUNTING 2
  18. ESSENTIALS OF PARTNERSHIP
  19. Partnership Accounts Changes in partnership firm
  20. COMPANY ACCOUNTS 1
  21. COMPANY ACCOUNTS 2
  22. Problems Solving
  23. COMPANY ACCOUNTS
  24. RETURNS ON FINANCIAL SOURCES
  25. IASBíS FRAMEWORK
  26. ELEMENTS OF FINANCIAL STATEMENTS
  27. EVENTS AFTER THE BALANCE SHEET DATE
  28. PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
  29. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 1
  30. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 2
  31. BORROWING COST
  32. EXCESS OF THE CARRYING AMOUNT OF THE QUALIFYING ASSET OVER RECOVERABLE AMOUNT
  33. EARNINGS PER SHARE
  34. Earnings per Share
  35. DILUTED EARNINGS PER SHARE
  36. GROUP ACCOUNTS
  37. Pre-acquisition Reserves
  38. GROUP ACCOUNTS: Minority Interest
  39. GROUP ACCOUNTS: Inter Company Trading (P to S)
  40. GROUP ACCOUNTS: Fair Value Adjustments
  41. GROUP ACCOUNTS: Pre-acquistion Profits, Dividends
  42. GROUP ACCOUNTS: Profit & Loss
  43. GROUP ACCOUNTS: Minority Interest, Inter Co.
  44. GROUP ACCOUNTS: Inter Co. Trading (when there is unrealized profit)
  45. Comprehensive Workings in Group Accounts Consolidated Balance Sheet