UNIT 7 : EVENTS AFTER THE REPORTING PERIOD
Key unit competence: To be able to assess the events that require
the entity to adjust the amount shown in the financial statements.
Introductory activity
Imagine that the end of your reporting period is 31st December 2022,
your accountants finish the closing works on 31st January 2023, the
board of directors authorizes them for issue on 15th February 2023 and
the shareholders approve them on 28th February 2023. By definition, you
need to consider everything that happens between 31st December 2022
and 15th February 2023 as an event after the reporting period.
Ok, but what if the earthquake happens on 16th February 2023 and
destroys your building? Well, that is the event after the reporting period
for sure, but not under the definition of IAS 10, because it falls outsidethose two important dates.
1. Why do accountants adjust the accounts after the reporting period?
2. What is the impact of adjustments on the financial statements of a
company?
7.1. Objective and scope of the International Accounting
Standard 10 (IAS 10)Learning Activity 7.1
One of the accounting purposes is to report the accounting information to
various users, including internal and external. After reporting, some eventsmay occur and adjustments may be done.
1. In which range these adjustments must be done?
Events after the reporting period are the events which could be favorable or
unfavorable, that occur between the reporting period and the date that thefinancial statements are authorized for issue.
7.1.1 Objective of the International Accounting Standard 10
(IAS 10)
The financial statements are significant indicators of a company’s success
or failure. It is important therefore, that they include all the informationnecessary for an understanding of the company’s position.
7.1.2 Scope of the International Accounting Standard 10 (IAS 10)
The International Accounting Standard 10 (IAS 10) deals with the events after
the reporting period, which may affect the performance and financial position
of a company at the reporting date. It addresses the criteria that must be met in
order to adjust the financial statements and all disclosures that must be made
regarding events after the reporting period date.
Application activity 7.1
a) Why do businesses consider adjustments after reporting period?
b) Is it necessary to adjust all events that occur between the reportingperiod and that of authorization for issue? Why?
7.2. Events that require adjustments and events that do not
require adjustments.
Learning Activity 7.2
After the reporting period, a given number of events may occur and, some
of them affect the accounts included in the financial statements while others
are not, reason why accountants must consider all of these events.a) Why do accountants adjust accounts?
7.2.1 Events that require adjustments
Events that require adjustments are the events that provide further evidence
of conditions that existed at the reporting date should be adjusted for in the
financial statements.
The standard requires adjustment of assets and liabilities in certain circumstances;
an entity shall adjust the amounts recognized in its financial statements to reflect
adjusting events after the reporting period.
Examples include additional evidence which becomes available after the
reporting date is where a customer goes bankrupt, thus confirming that the
trade account receivable balance at the year-end is irrecoverable.
Other examples include:
• Evidence of a permanent diminution in property value prior to the year end,
• Sale of inventory after the end of the reporting period for less than its
carrying at the year-end;
• Insolvency of a customer with a balance owing at the year-end;
• Amounts received or paid in respect or insurance claims which were in
negotiation at the year end
• Determination after the year end of the sale or purchase price of assets
sold or purchased before the year end;
• Evidence of a permanent diminution in the value of a long-term
investment prior to the year end
• Discovery of fraud or errors that show that the financial statements are
incorrect.
The standard states that, where operating results and the financial position have
deteriorated after the reporting date, it may be necessary to reconsider whether
the going concern assumption is appropriate in the preparation of the financialstatements.
7.2.2 Events that do not require adjustments
Events which do not affect the situation at the reporting date should not be
adjusted, but should be disclosed in the financial statements. The entity shall
not adjust the amounts recognized in its financial statements to reflect non
adjusting events after the reporting period.
Example given by the standard of such an event is where the value of an
investment falls between the reporting date and the date the financial statements
are authorized for issue. The fall in value represents circumstances during the
current period, not condition existing at the previous reporting date, so it is not
appropriate to adjust the value of the investment in the financial statements.
Disclosure is an aid to users, however, indicating unusual changes in the state
of assets and liabilities after the reporting date.
Other examples include the following:
• Acquisition or disposal of subsidiary after the year end;
• Announcement of a plan to discontinue an operation;
• Major purchases and disposals of assets;
• Destruction of a production plant by fire after the end of the reporting period
• Announcement of commencing implementation of a major restructuring;
• Share transactions after the end of the reporting period;• Litigation commenced after the end of the reporting period.
Illustration
KANYANA Company Ltd faces the court case for selling contaminated foods to
KABANYANA its customers. KANYANA Company Ltd denied all claims and no
provision was made in its financial statements at 31st December 2021.
On 2nd February 2022, the court awards KABANYANA FRW 1,000,000
damages against KANYANA Company Ltd. The financial statements have not
yet authorized for issue at that date.
Therefore, this adjusting event must be reflected in the financial statement at
31st December 2021.
KANYANA Company Ltd needs to create a provision for the damages because
the present obligation existed at 31st December 2021 (they sold contaminated
food prior that date)
The adjusting entries are as under:
Dr: Legal costs in profit or loss 1,000,000Cr: provision against legal cost 1,000,000
Application activity 7.2
a) Distinguish the events that require the adjustments from the events
that do not require adjustments after the reporting period
b) Give three examples of events that require adjustments and three
ones that do not require adjustments after the reporting period
c) State whether the following events occurring after the reporting
period require an adjustment to the assets and liabilities of the
financial statements:
– Purchase of an investment
– A change in the rate of tax, applicable to the previous year
– An increase in pension benefits– Losses due to fire
– An irrecoverable debt suddenly being paid
– The receipt of proceeds of sales or other evidence concerning the
net realizable value of inventory
– A sudden decline in the value of property held as a long-term asset
d) A debtor who owed FRW 500,000 to the business by the end of the
financial year is declared bankrupt by the court before the statements
are authorized for issue.
Required:
• State if this event requires adjustment or not. Explain your position• Make journal entries for this bankruptcy
7.3. Information to be disclosed in the notes
Learning Activity 7.3
Accounting information users always need to be informed about the
performance and the financial position of their business. Sometimes, there
are events that occur after reporting period and do not require adjustments.
1. In which way are the shareholders informed how their business is
especially about the events which are not included in the financial
statements?
Notes to the financial statements disclose the detailed assumption made by
accountants when preparing a company’s income statement, balance sheet,
statement of change of financial position or statement of retained earnings. The
notes are essential to fully understanding these documents.
These notes include important factors that were used in preparing the statement,
information such as cash or accrual accounting procedures, valuation methods
for inventory, reporting of events, intangible assets and contingent liabilities.
These notes are used to disclose important information that explains how
accountants applied Generally Accepted Accounting Principles (GAAP) in theirreporting of the company.
Importance of disclosed information
Full disclosure of relevant information by businesses helps investors make
informed decisions. It decreases the sentiment of mistrust and speculation
and increases investor confidence as they feel fully prepared to make investmentdecisions with transparency in information at hand.
7.3.1 Dividends
A dividend is the distribution of a company’s earnings to its shareholders and is
determined by the company’s board of directors
Proposed dividend (which must be distributed among shareholders of the
company during a financial year which will be paid in the next financial year), or
declared dividend (dividend that has been authorized by the board of directors,
but not yet paid to investors), are not recognized as a liability in the accounts atthe reporting date, but are disclosed in the notes to the accounts.
7.3.2 Disclosures
Accounting disclosure notes are included in the footnotes to an entity’s financial
statements. These notes reveal certain important facts about an entity’s finances
that are not shown elsewhere in the financial statements. These disclosure notes
disclose facts and situations that are considered “material” and are done either
as a requirement or in good faith.
If there is a known merger or acquisition occurring in the near future, it would
be in the best interest of the shareholders to reveal this fact in a disclosure
note. Essentially, any time there is a major event or important fact related to a
company’s financial health that is not included anywhere else in the financial
statements, this item should be reported via an accounting disclosure note.
The following requirements are given for material events after the reporting
period which do not require adjustment. If disclosure of events occurring after
the reporting period is required by this standard, the following information
should be provided:
• The nature of the events
• An estimate of the financial effect, or a statement that such an estimatecannot be made.
Application activity 7.3
1. What is the importance to the shareholders to disclose information?
2. Which organ is in charge of determining the dividend to be distributedto the shareholders within the business?
Skills Lab
Students in small groups analyze events after reporting period from case
studies. Through a case study, students conduct a field visit to school
bursar office, check how the events after reporting period are treated and
their effects on the financial statements prepared just at the end of thereporting period.
End unit assessment
1. The controller of UBWIZA Ltd Company is preparing the financial
statement for the year ended 30th June 2018 and has identified the
following transactions/events which happened after the end of the
reporting period but before the date when the financial statements are
authorized for issue:
a) The production of a factory has been suspended since 15th July
2018 due to a succession of power cuts. Sales orders of FRW
60,000,000 received in May 2018 with a planned production and
delivery in August 2018 could not be fulfilled. According to the
terms of the sale contracts, UBWIZA Ltd Company agreed to
compensate the counterparty by 25% of the contract price for
breach of contract;
b) A customer informed UBWIZA Ltd Company on 3rd July 2018
that all the goods delivered to the customer’s warehouse on 25th
June 2018 were not produced in accordance with the agreed
specification. UBWIZA Ltd Company reproduced the order and
shipped the replacement goods to the customer on 10th July 2018.
The invoice of FRW 32,000,000 issued on 25th June 2018 has
not been cancelled and the customer paid it when they confirmedthe acceptance of the replacement goods.
Required:
Explain how the above transactions/events should be dealt in the financial
statements of UBWIZA Ltd Company for the year ended 30 June 2018
2. The following material events take place after reporting date of 31st
December 2021 and before the financial statements for KIRABO Ltd
are approved:
i) KARABO Company, a major customer of KIRABO Ltd, went into
liquidation. KIRABO Ltd was advised that it is highly unlikely to receive
any of the outstanding debt of FRW 150,000,000 owed by KARABO
Company at the year end
ii) A fire occurred in the warehouse of KIRABO Ltd and stock costing
FRW 75,000,000 was destroyed.Adjustments are made in the financial statements as required by IAS
Required
What is the effect on profit for the year in the financial statement at 31st
December 2021 of making the required adjustments?
a) Reduction of FRW 150,000,000
b) Reduction of FRW 75,000,000
c) Reduction of FRW 225,000,000d) No effect on profit