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Recognition and Measurement

Adjusting Events after the Balance Sheet Date

8. An entity shall adjust the amounts recognised in its financial statements to reflect

adjusting events after the balance sheet date.

9.The following are examples of adjusting events after the balance sheet date that require an

entity to adjust the amounts recognised in its financial statements, or to recognise items that

were not previously recognised:

(a)

the settlement after the balance sheet date of a court case that confirms that the entityhad a present obligation at the balance sheet date. The entity adjusts any previously

recognised provision related to this court case in accordance with FRS 1372004

Provisions, Contingent Liabilities and Contingent Assets or recognises a new provision.

The entity does not merely disclose a contingent liability because the settlement

provides additional evidence that would be considered in accordance with paragraph 17

of FRS 1372004.

(b)the receipt of information after the balance sheet date indicating that an asset was

impaired at the balance sheet date, or that the amount of a previously recognised

impairment loss for that asset needs to be adjusted. For example:

(i)the bankruptcy of a customer that occurs after the balance sheet date usually

confirms that a loss existed at the balance sheet date on a trade receivable and

that the entity needs to adjust the carrying amount of the trade receivable; and

(ii)the sale of inventories after the balance sheet date may give evidence about

their net realisable value at the balance sheet date.

(c)the determination after the balance sheet date of the cost of assets purchased, or the

proceeds from assets sold, before at the balance sheet date.

(d)the determination after the balance sheet date of the amount of profit-sharing or bonus

payments, if the entity had a present legal or constructive obligation at the balance sheet

date to make such payments as a result of events before that date (see FRS 1192004

Employee Benefits).

(e)the discovery of fraud or errors that show that the financial statements are incorrect.

Non-adjusting Events after the Balance Sheet Date


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10.An entity shall not adjust the amounts recognised in its financial statements to reflect

non-adjusting events after the balance sheet date.

11.An example of a non-adjusting event after the balance sheet date is a decline in market value of

investments between the balance sheet date and the date when the financial statements areauthorised for issue. The decline in market value does not normally relate to the condition of the

investments at the balance sheet date, but reflects circumstances that have arisen

subsequently. Therefore, an entity does not adjust the amounts recognised in its financial

statements for the investments. Similarly, the entity does not update the amounts disclosed for

the investments as at the balance sheet date, although it may need to give additional disclosure

under paragraph 21.

Dividends

12.If an entity declares dividends to holders of equity instruments (as defined in FRS 132

Financial Instruments: Disclosure and Presentation) after the balance sheet date, the

entity shall not recognise those dividends as a liability at the balance sheet date.

13.If dividends are declared (ie the dividends are appropriately authorised and no longer at the

discretion of the entity) after the balance sheet date but before the financial statements are

authorised for issue, the dividends are not recognised as a liability at the balance sheet date

because they do not meet the criteria of a present obligation in FRS 1372004. Such dividends are

disclosed in the notes in accordance with FRS 101 Presentation of Financial Statements.

The balance sheet date is the pivotal date at which the financial position of an entity is

determined and reported. Thus, events that occur up to that date are critical in arriving

at an entitys financial results and the financial position. However, sometimes eventsoccurring after the balance sheet date may provide additional information about events

that occurred before and up to the balance sheet date. This information may have an impacton the financial results and the financial position of the entity. It is imperative that those postbalance sheet events up to a certain cutoff date be taken into account in preparing thefinancial statements for the year ended and as at the balance sheet.

Additionally, certain events that occur after the balance sheet date might not affect thefigures reported in the financial statements but may warrant disclosure in footnotes to the

financial statements. Informing users of financial statements about such postbalance sheetdate events through footnote disclosures helps them make informed decisions with respect tothe entity, keeping in mind the impact these postbalance sheet events may have on thefinancial position of the entity as at the balance sheet date.
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IAS 10, Events After the Balance Sheet Date, provides guidance on accounting and

disclosure of postbalance sheet events. For the purposes of this standard, postbalance sheetevents are categorized into adjusting and non-adjusting events.

The issue addressed by the Standard, IAS 10, is to what extent anything that happens

during the period when the financial statements are being prepared should be reflected inthose financial statements. The Standard distinguishes between events that provideinformation about the state of the entity at balance sheet date and those that concern the nextfinancial period. A secondary issue is the cutoff point beyond which the financial statementsare considered to be finalized.

Authorization Date

The authorization date is the date when the financial statements could be considered

legally authorized for issuance. The determination of the authorization date is critical to theconcept of events after the balance sheet date. The authorization date serves as the cutoff pointafter the balance sheet date up to which the postbalance sheet events are to be examined inorder to ascertain whether such events qualify for the treatment prescribed by IAS 10.

The general principles that need to be considered in determining the authorization dateof the financial statements are set out as follows:

When an entity is required to submit its financial statements to its shareholders forapproval after they have already been issued, the authorization date in this case would

mean the date of original issuance and not the date when these are approved by theshareholders; and When an entity is required to issue its financial statements to a supervisory board made

up wholly of non-executives, authorization date would mean the date on whichmanagement authorizes them for issue to the supervisory board.

The following two case studies well illustrate the situation:

Case Study-1: The preparation of the financial statements of LieDharmaPutra Inc. for the

accounting period ended December 31, 2008, was completed by the management on March 15,2009. The draft financial statements were considered at the meeting of the board of directorsheld on March 20, 2009, on which date the board approved them and authorized them forissuance. The annual general meeting (AGM) was held on April 10, 2009, after allowing for

printing and the requisite notice period mandated by the corporate statute. At the AGM theshareholders approved the financial statements. The approved financial statements were filed

by the corporation with the Company Law Board (the statutory body of the country thatregulates corporations) on April 20, 2009.

Given these situations, what is the authorization date in terms of IAS 10?

The date of authorization of the financial statements of LieDharmaPutra Inc. for the year endedDecember 31, 2008, is March 20, 2009, the date when the board approved them and authorized


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For better understanding about the concept, here is couple of case studies:

Case Study (i): During the year 2008, LieDharmaPutra Inc. was sued by a competitor for $15million for infringement of a trademark. Based on the advice of the companys legal counsel,LieDharmaPutra Inc. accrued the sum of $10 million as a provision in its financial statements

for the year ended December 31, 2008. Subsequent to the balance sheet date, on February 15,2009, the Supreme Court decided in favor of the party alleging infringement of the trademarkand ordered the defendant to pay the aggrieved party a sum of $14 million. The financialstatements were prepared by the companys management on January 31, 2009, and approved

by the board on February 20, 2009.

Should LieDharmaPutra Inc. adjust its financial statements for the year ended December

31, 2008?

LieDharmaPutra Inc. should adjust the provision upward by $4 million to reflect the awarddecreed by the Supreme Court (assumed to be the final appellate authority on the matter in this

example) to be paid by LieDharmaPutra Inc. to its competitor.

Had the judgment of the Supreme Court been delivered on February 25, 2008, or later, thispostbalance sheet event would have occurred after the cutoff point (i.e., the date the financialstatements were authorized for original issuance). If so, adjustment of financial statementswould not have been required.

Case Study (ii): ABC Inc. carries its inventory at the lower of cost and net realizable value. At

December 31, 2008, the cost of inventory, determined under the first-in, first-out (FIFO)method, as reported in its financial statements for the year then ended, was $10 million. Due tosevere recession and other negative economic trends in the market, the inventory could not besold during the entire month of January 2009. On February 10, 2009, ABC Inc. entered into anagreement to sell the entire inventory to a competitor for $6 million.

Presuming the financial statements were authorized for issuance on February 15, 2009, shouldABC Inc. recognize a write-down of $4 million in the financial statements for the year

ended December 31, 2008?

Yes, ABC Inc. should recognize a write-down of $4 million in the financial statements for

the year ended December 31, 2008.

Examples of non-adjusting events include:

Declaration of an equity dividend Decline in the market value of an investment after the balance sheet date Entering into major purchase commitments in the form of issuing guarantees after the

balance sheet date Classification of assets as held for sale under IFRS 5 and the purchase, disposal, or

expropriation of assets after the balance sheet date Commencing a lawsuit relating to events that occurred after the balance sheet date


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Lets have a look for another case study:

Case Study: The statutory audit of ABC Inc. for year ended June 30, 2008, was completed on

August 30, 2008. The financial statements were signed by the managing director on September8, 2008, and approved by the shareholders on October 10, 2008.

The next events have occurred:

(1) On July 15, 2008, a customer owing $900,000 to ABC Inc. filed for bankruptcy. Thefinancial statements include an allowance for doubtful debts pertaining to this customer only of$50,000.

(2) ABC Inc.s issued capital comprised 100,000 equity shares. The company announced abonus issue of 25,000 shares on August 1, 2008.

(3) Specialized equipment costing $545,000 purchased on March 1, 2008, was destroyed byfire on June 13, 2008. On June 30, 2005, ABC Inc. has booked a receivable of $400,000 fromthe insurance company pertaining to this claim. After the insurance company completed itsinvestigation, it was discovered that the fire took place due to negligence of the machineoperator. As a result, the insurers liability was zero on this claim by ABC Inc.

How should ABC Inc. account for these three postbalance sheet events?

Here how ABC Inc shoukd account the three events:

(1) ABC Inc. should increase its allowance for doubtful debts to $900,000 because thecustomers bankruptcy is indicative of a financial condition that existed at the balance sheetdate. This is an adjusting event.

(2) IAS 33, Earnings Per Share, requires a disclosure of transactions as stock splits or rightsissue, which are of significant importance at the balance sheet. This is a non-adjusting event,and only disclosure is needed.

(3) This is an adjusting event because it relates to an asset that was recognized at the balancesheet date. However, as the insurance companys liability is zero, ABC Inc. must adjust its

receivable on the claim to zero.

Dividends Proposed Or Declared After The Balance Sheet Date

Dividends on equity shares proposed or declared after the balance sheet date should not

be recognized as a liability at the balance sheet date. Such declaration is a non-adjustingsubsequent event and footnote disclosure is required, unless immaterial.

Disclosure Requirements
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IAS 10 requires these three disclosures:

1. The date when the financial statements were authorized for issue and who gave thatauthorization. If the entitys owners have the power to amend the financial statementsafter issuance, this fact should be disclosed.

2. If information is received after the balance sheet date about conditions that existed atthe balance sheet date, disclosures that relate to those conditions should be updated inthe light of the new information.

3. Where non-adjusting events after the balance sheet date are of such significance thatnondisclosure would affect the ability of the users of financial statements to make

proper evaluations and decisions, disclosure should be made for each such significantcategory of non-adjusting event regarding the nature of the event and an estimate of itsfinancial effect or a statement that such an estimate cannot be made.

what-are-the-accounting-treatment-and-give-examples-of-non-adjusting-events-

after-the-balance-sheet-date

For non-adjusting events, no adjustments are made to the amounts recognized in the financial

statements. However the following disclosure should be provided namely (i) nature of the event and (ii)

estimate of the financial effect , or a statement that such an estimate cannot be made. Note that non-

disclosure could affect the ability of the users to make proper evaluations and decisions taken on the

basis of the financial statements.

(b) Some examples of Non Adjusting Events After The Balance Sheet Date are:


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Announcing a plan to discontinue an operation.

Announcing or commencing the implementation of, a major restructing

Major purchase and disposals of assets

Expropriation of major assets by government.

Commencing major litigation arising solely out of events that occurred after the balance sheet

date

Entering into significant commitments or contingent liabilities, like issuing significant guarantees

Destruction of a major production plant by a fire after the balance date

Major ordinary share transactions and potential ordinary share transactions after the balance

sheet date

Abnormally large changes after the balance sheet date in asset prices or foreign exchange rates

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.

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