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 entity’s financial results and the financial position. However, sometimes events occurring 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 impact on the financial results and the financial position of the entity. It is imperative that those post–balance sheet events up to a certain “cutoff date” be taken into account in preparing the financial statements for the year ended and as at the balance sheet.
Additionally, certain events that occur after the balance sheet date might not affect the figures reported in the financial statements but may warrant disclosure in footnotes to the financial statements. Informing users of financial statements about such post–balance sheet date events through footnote disclosures helps them make informed decisions with respect to the entity, keeping in mind the impact these post–balance sheet events may have on the financial position of the entity as at the balance sheet date.
IAS 10, Events After the Balance Sheet Date, provides guidance on accounting and disclosure of post–balance sheet events. For the purposes of this standard, post–balance sheet events 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 in those financial statements. The Standard distinguishes between events that provide information about the state of the entity at balance sheet date and those that concern the next financial period. A secondary issue is the cutoff point beyond which the financial statements are considered to be finalized.
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 the concept of events after the balance sheet date. The authorization date serves as the cutoff point after the balance sheet date up to which the post–balance sheet events are to be examined in order 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 date” of the financial statements are set out as follows:
- When an entity is required to submit its financial statements to its shareholders for approval 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 the shareholders; 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 which management 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 directors held on March 20, 2009, on which date the board approved them and authorized them for issuance. 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 the shareholders approved the financial statements. The approved financial statements were filed by the corporation with the Company Law Board (the statutory body of the country that regulates 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 ended December 31, 2008, is March 20, 2009, the date when the board approved them and authorized them for issue (and not the date they were approved in the AGM by the shareholders). Thus, all post–balance sheet events between December 31, 2008, and March 20, 2009, need to be considered by LieDharmaPutra Inc. for the purposes of evaluating whether they are to be accounted or reported under IAS 10.
Case Study-2: Suppose in the above-cited case, the management of LieDharma Inc. was required to issue the financial statements to a supervisory board (consisting solely of non-executives including representatives of a trade union). The management of LieDharmaPutra Inc. had issued the draft financial statements to the supervisory board on March 16, 2009. The supervisory board approved them on March 17, 2009, and the shareholders approved them in the AGM held on April 10, 2009. The approved financial statements were filed with the Company Law Board on April 20, 2009.
Would the new facts have any effect on the date of authorization?
In this case, the date of authorization of financial statements would be March 16, 2009, the date the draft financial statements were issued to the supervisory board. Thus, all post–balance sheet events between December 31, 2008, and March 16, 2009, need to be considered by LieDharmaPutra Inc for the purposes of evaluating whether they are to be accounted or reported under IAS 10.
Adjusting And Non-adjusting Events (after the balance sheet date)
Two kinds of events after the balance sheet date are distinguished by the IAS 10. These are, respectively: “adjusting events after the balance sheet date” and “non-adjusting events after the balance sheet date”. Adjusting events are those post–balance sheet events that provide evidence of conditions that actually existed at the balance sheet date, albeit they were not known at the time.
Financial statements should be adjusted to reflect adjusting events after the balance sheet date.
Typical examples of adjusting events are:
- The bankruptcy of a customer after the balance sheet date usually suggests a loss of trade receivable at the balance sheet date.
- The sale of inventory at a price substantially lower than its cost after the balance sheet date confirms its net realizable value at the balance sheet date.
- The sale of a property, plant, and equipment for a net selling price that is lower than the carrying amount is indicative of an impairment that took place at the balance sheet date.
- The determination of an incentive or bonus payment after the balance sheet when an entity has a constructive obligation at the balance sheet date.
- A deterioration in the financial position (recurring losses) and operating results (working capital deficiencies) of an entity that has a bearing on the entity’s continuance as a “going concern” in the foreseeable future.
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 $15 million for infringement of a trademark. Based on the advice of the company’s 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 trademark and ordered the defendant to pay the aggrieved party a sum of $14 million. The financial statements were prepared by the company’s 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 award decreed 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, this post–balance sheet event would have occurred after the cutoff point (i.e., the date the financial statements were authorized for original issuance). If so, adjustment of financial statements would 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 to severe recession and other negative economic trends in the market, the inventory could not be sold during the entire month of January 2009. On February 10, 2009, ABC Inc. entered into an agreement to sell the entire inventory to a competitor for $6 million.
Presuming the financial statements were authorized for issuance on February 15, 2009, should ABC 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
Let’s 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 September 8, 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. The financial 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 a bonus issue of 25,000 shares on August 1, 2008.
(3) Specialized equipment costing $545,000 purchased on March 1, 2008, was destroyed by fire on June 13, 2008. On June 30, 2005, ABC Inc. has booked a receivable of $400,000 from the insurance company pertaining to this claim. After the insurance company completed its investigation, it was discovered that the fire took place due to negligence of the machine operator. As a result, the insurer’s liability was zero on this claim by ABC Inc.
How should ABC Inc. account for these three post–balance 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 the customer’s bankruptcy is indicative of a financial condition that existed at the balance sheet date. This is an “adjusting event”.
(2) IAS 33, Earnings Per Share, requires a disclosure of transactions as “stock splits” or “rights issue,” 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 balance sheet date. However, as the insurance company’s 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-adjusting subsequent event and footnote disclosure is required, unless immaterial.
IAS 10 requires these three disclosures:
- The date when the financial statements were authorized for issue and who gave that authorization. If the entity’s owners have the power to amend the financial statements after issuance, this fact should be disclosed.
- If information is received after the balance sheet date about conditions that existed at the balance sheet date, disclosures that relate to those conditions should be updated in the light of the new information.
- Where non-adjusting events after the balance sheet date are of such significance that nondisclosure would affect the ability of the users of financial statements to make proper evaluations and decisions, disclosure should be made for each such significant category of non-adjusting event regarding the nature of the event and an estimate of its financial effect or a statement that such an estimate cannot be made.