When should a reporting entity recognise events after the reporting period in the financial statements that are being finalised?
What are the disclosures that should be given about the date when the financial statements were authorised for issue and about the events after the reporting date?
The answers look a bit colorful but are spot on and short……
The three important terms were it is all about are:
1. Events after the reporting period:
are those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue. (IAS 10 3 Definitions)
2. Adjusting events:
are events occurring after the reporting date that provide evidence of conditions that existed at the end of the reporting period. (IAS 10 3 Definitions)
Examples of adjusting events include:
- events that indicate that the going concern assumption in relation to the whole or part of the entity is not appropriate;
- settlements after reporting date of court cases that confirm the entity had a present obligation at reporting date;
- receipt of information after reporting date indicating that an asset was impaired at reporting date;
- bankruptcy of a customer that occurs after reporting date that confirms a loss existed at reporting date on trade receivables;
- sales of inventory after reporting date that give evidence about their net realisable value at reporting date;
- discovery of fraud or errors that show the financial statements are incorrect.
3. Non-adjusting events:
are events occurring after the reporting date that do NOT provide evidence of conditions that existed at the end of the reporting period. (IAS 10 3 Definitions)
Examples of non-adjusting events, that would generally result in disclosure, include:
- major business combinations or disposal of a major subsidiary; Events after the Reporting period
- major purchase or disposal of assets, classification of assets as held for sale or expropriation of major assets by government; Events after the Reporting period
- destruction of a major production plant by fire after reporting date; Events after the Reporting period
- announcing a plan to discontinue operations; Events after the Reporting period
- announcing a major restructuring after reporting date; Events after the Reporting period
- major ordinary share transactions; Events after the Reporting period
- abnormally large changes, after the reporting date. in asset prices or foreign exchange rates; Events after the Reporting period
- changes in tax rates or tax law; Events after the Reporting period
- entering into major commitments such as guarantees; Events after the Reporting period
- commencing major litigation arising solely out of events that occurred after the reporting date. Events after the Reporting period
Recognition and measurement
An entity shall adjust the amounts recognised in its financial statements and/or relevant disclosures to reflect such events.
Non – adjusting events
An entity shall not adjust the amounts recognised in its financial statements to reflect non-adjusting events after the reporting period.
An entity shall not recognise those dividends that are declared after reporting date as a liability at the end of the reporting period. However, the fact that a dividend is proposed or declared after the end of the reporting period but before the financial statements are authorised for issue is disclose.This is because no obligation exists at the reporting date.
IAS 12 requires disclosure of the tax consequences of such dividends as well as disclosure of the nature and amounts of the potential income tax consequences of dividends.
An entity shall not prepare its financial statements on a going concern basis if management determines after the reporting date that either:
Presentation and disclosures
An entity shall present and disclose information that enables users of the financial statements to evaluate the effects of events after reporting period:
In the Notes to the financial statements: Events after the Reporting period
Also many entities disclose that no event after the reporting date occurred like this: ‘There were no significant events identified after the balance sheet date that are required to be disclosed.’
Specific types of dividends
Share dividends, share splits or reverse splits occurring after the reporting date are also non-adjusting events. Their impact on EPS is explained below. [IAS 10 22(f)]
Current vs non-current classification
Generally, the classification of long-term debt as current or non-current reflects circumstances at the reporting date. Refinancings, amendments, waivers etc that are agreed after the reporting date are not considered in determining the classification of debt, but are disclosed as non-adjusting events if material. Events after the Reporting period
However, if an entity expects, and has the discretion at the reporting date, to refinance or to reschedule payments on a long-term basis, then the debt is classified as non-current. [IAS 1 72–76]
EPS is restated to include the effect on the number of shares of certain share transactions that occur after the reporting date even though the transactions themselves are non-adjusting events. [IAS 10 22(f), IAS 33 64] Events after the Reporting period
Disclosure of the subsequent-events date
Disclosure is required in the financial statements of the date on which the financial statements were authorised for issue and who gave such authorisation. If the shareholders have the power to amend the financial statements after issue, then the entity discloses that fact. [IAS 10 17] Events after the Reporting period
Commonly, two different dates of authorisation for issue of the financial statements (‘dual dating’) should not be disclosed, because only a single date of authorisation for issue of the financial statements complies with IFRS. [IAS 10 17] Events after the Reporting period
Discovery of a fraud after the reporting date
A fraud may be discovered after the financial statements have been authorised for issue. In our view, if information about the fraud could reasonably be expected to h ave been obtained and taken into account by an entity preparing financial statements when those financial statements were authorised for issue – e.g. in the case of a fraud within the entity itself – then subsequent discovery of such information is evidence of a prior-period error in those financial statements. [IAS 8 5, IAS 10 9(e)] Events after the Reporting period
In other circumstances, an external fraud may be discovered after the reporting date but before the financial statements are authorised for issue. Commonly, in concluding whether the discovery of the fraud should be treated as an adjusting or a non-adjusting event related to reporting the fair value of financial assets in the scope of the financial instruments standards in financial statements that have not yet been authorised for issue, management should first identify whether there is a question of existence, valuation or both. Events after the Reporting period
Commonly, if the discovery of a fraud raises issues about the existence of the financial assets involved, then it should be treated as an adjusting event for financial statements that have not yet been authorised for issue. If, however, the fraud raises issues related only to the valuation of financial assets that do exist, then in our view it should be treated as a non-adjusting event for reporting the fair values of financial assets. Events after the Reporting period
If it is impracticable to separate the existence and the valuation issues, then the entire effect should be treated as an issue related to the existence of assets.
See also the IFRS Foundation