EVENTS AFTER THE BALANCE SHEET DATE

<< ELEMENTS OF FINANCIAL STATEMENTS

PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS >>

Advance Financial Accounting (FIN-611)

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)

133

Advance Financial Accounting (FIN-611)

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.

134

Advance Financial Accounting (FIN-611)

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.

135

Advance Financial Accounting (FIN-611)

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:

136

Advance Financial Accounting (FIN-611)

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:

Decline in market value of investments between the balance sheet date and the

date when the financial statements are authorized for issue.

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:

137

Advance Financial Accounting (FIN-611)

(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.

138

Advance Financial Accounting (FIN-611)

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.

139

Table of Contents: