IAS 10 addresses the extent to which anything that happens during the postyear-end 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 company at statement of financial position date and those that concern the next financial period. A secondary issue is the point when the financial statements are considered to be finalized.
This post provides guidelines on how to report postyear-end events. Its adapted from the IAS 10. Enjoy!
Determination of The Authorization Date
The determination of the authorization date (i.e., the date when the financial statements could be considered legally authorized for issuance, generally by action of the board of directors of the reporting entity), is critical to the application of proper accounting for events after the statement of financial position date. It serves as the cutoff point after the statement of financial position date, until the post–statement of financial position 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 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 nonexecutives, authorization date would mean the date on which management authorizes them for issue to the supervisory board.
Case Examples of Determining the Authorization Date
- The preparation of the financial statements of LieDharma Corp. for the accounting period ended December 31, 2010, was completed by the management on February 15, 2011.
- The draft financial statements were considered at the meeting of the board of directors held on February 18, 2011, the date the board approved them and authorized them for issuance.
- The annual general meeting (AGM) was held on March 28, 2011, 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 6, 2011.
Given these facts, the date of authorization of the financial statements of LieDharma Corp. for the year ended December 31, 2010, is February 18, 2011, the date when the board approved them and authorized them for issue. Thus, all post–statement of financial position events between December 31, 2010, and February 18, 2011, need to be considered by LieDharma Corp. for the purposes of evaluating whether they are to be accounted or reported under IAS 10.
- Suppose in the last case the management of LieDharma Corp. was required to issue the financial statements to a supervisory board (consisting solely of nonexecutives, including representatives of a trade union).
- The management of LieDharma Corp. had issued the financial statement drafts to the supervisory board on February 16, 2011.
- The supervisory board approved them on February 17, 2011, and the shareholders approved them in the AGM held on March 28, 2011.
- The approved financial statements were filed with the Company Law Board on April 6, 2011.
In this case, the date of the authorization of the financial statements would be February 16, 2011—the date the draft financial statements were issued to the supervisory board. Thus, all post–statement of financial position events between December 31, 2010, and February 16, 2011, need to be considered by LieDharma Corp. for the purposes of evaluating whether they are to be accounted or reported under IAS 10.
Adjusting and Nonadjusting Events PostYear-End
IAS 10 distinguishes two kinds of events after the statement of financial position date. These are, respectively:
- Adjusting events after the reporting period; and
- Nonadjusting events after the reporting period
Adjusting Events After The Reporting Period – Adjusting events are those post–reporting period events that provide evidence of conditions that actually existed at the statement of financial position date, albeit they were not known at the time. Financial statements should be adjusted to reflect adjusting events after the statement of financial position date.
The Standard gives these five examples of adjusting events:
- Resolution after the statement of financial position date of a court case that confirms a present obligation requiring either an adjustment to an existing provision or the recognition of a provision instead of mere disclosure of a contingent liability;
- Receipt of information after the statement of financial position date indicating that an asset was impaired or that a previous impairment loss needs to be adjusted. For instance, the bankruptcy of a customer subsequent to the statement of financial position date usually confirms the existence of loss at the statement of financial position date, and the disposal of inventories after the statement of financial position date provides evidence (not always conclusive, however) about their net realizable value at the statement of financial position date.
- The determination after the statement of financial position date of the cost of assets purchased, or the proceeds from assets disposed of, before the statement of financial position date.
- The determination subsequent to the statement of financial position date of the amount of profit sharing or bonus payments, where there was a present legal or constructive obligation at the statement of financial position date to make the payments as a result of events before that date.
- The discovery of frauds or errors, after the statement of financial position date, that show that the financial statements were incorrect at year-end before the adjustment.
Case Examples Of Commonly Encountered Situations Of Adjusting Events
Case-1: During the year 2011, Putra Corp. was sued by a competitor for $10 million for infringement of a trademark. Based on the advice of the company’s legal counsel, Putra accrued the sum of $5 million as a provision in its financial statements for the year ended December 31, 2010. Subsequent to the statement of financial position date, on February 15, 2011, 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 $7 million. The financial statements were prepared by the company’s management on January 31, 2011, and approved by the board on February 20, 2011. Putra Corp. should adjust the provision by $2 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 Putra Corp. to its competitor. Had the judgment of the Supreme Court been delivered on February 25, 2011, or later, this post–statement of financial position 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-2: Dharma Corp. carries its inventory at the lower of cost and net realizable value. At December 31, 2010, 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 $5 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 2011. On February 10, 2011, Dharma Corp. entered into an agreement to sell the entire inventory to a competitor for $4 million. Presuming the financial statements were authorized for issuance on February 15, 2011, the company should recognize a write-down of $1 million in the financial statements for the year ended December 31, 2010.
Nonadjusting Events After The Reporting Period – In contrast with the foregoing, nonadjusting events are those post–statement of financial position events that are indicative of conditions that arose after the statement of financial position date. Financial statements should not be adjusted to reflect nonadjusting events after the reporting period.
An example of a nonadjusting event is a decline in the market value of investments between the statement of financial position date and the date when the financial statements are authorized for issue. Since the fall in the market value of investments after the statement of financial position date is not indicative of their market value at the statement of financial position date (instead it reflects circumstances that arose subsequent to the reporting period), the fall in market value need not, and should not, be recognized in the financial statements at the statement of financial position date.
Not all nonadjusting events are significant enough to require disclosure, however. The revised Standard gives examples of nonadjusting events that would impair the ability of the users of financial statements to make proper evaluations or decisions if not disclosed. Where nonadjusting events after the reporting period are of such significance, disclosure should be made for each such significant category of nonadjusting event,of the nature of the event and an estimate of its financial effect or a statement that such an estimate cannot be made.
The Standard gives nine examples of such significant nonadjusting post–statement of financial position events:
- A major business combination or disposing of a major subsidiary
- Announcing a plan to discontinue an operation
- Major purchases and disposals of assets or expropriation of major assets by government
- The destruction of a major production plant by fire
- Announcing or commencing the implementation of a major restructuring
- Abnormally large changes in asset prices or foreign exchange rates
- Significant changes in tax rates and enacted tax laws
- Entering into significant commitments or contingent liabilities
- Major litigation arising from events occurring after the reporting period
Dividends (on equity shares) proposed or declared PostYear-end
Dividends (on equity shares) proposed or declared after the statement of financial position date should not be recognized as a liability at the statement of financial position date. Such declaration is a nonadjusting subsequent event, in other words. While at one time IFRS did permit accrual of post–statement of financial position date dividend declarations, this has not been permissible for some time. Furthermore, the revisions made to IAS 10 as part of the IASB’s Improvements Project in late 2003 eliminated the formerly permitted display of post–statement of financial position date dividends as a separate component of equity. Footnote disclosure is, however, required unless immaterial.
Deterioration in a company’s financial position after the reporting period could cast substantial doubts about a company’s ability to continue as a going concern.
IAS 10 requires that an entity should not prepare its financial statements on a goingconcern basis if management determines after the reporting period either that it intends to liquidate the entity or cease trading, or that it has no realistic alternative but to do so. IAS 10 notes that disclosures prescribed by IAS 1 under such circumstances should also be complied with.
IAS 39 – Subsequent to Initial Recognition
IAS 39 established new requirements for accounting for financial liabilities that are held for trading and those that are derivatives; these have to be accounted for at fair value. Meanwhile, other financial liabilities continue to be reported at amortized historical cost. IAS 39 stipulates that all financial liabilities are to be measured initially at cost, which (assuming they are each incurred in an arm’s-length transaction) is also fair value. Any related transaction costs are included in this initial measurement.
In rare instances when the fair value of the consideration received is not reliably determinable, resort is to be made to a computation of the present value of all future cash flows related to the liability. In such a case, the discount rate to apply would be the prevailing rate on similar instruments issued by a party having a similar credit rating.
IAS 39 provides that, subsequent to initial recognition, an enterprise should measure all financial liabilities, other than liabilities held for trading purposes and derivative contracts that are liabilities, at amortized cost. Where the initial recorded amount is not the contractual maturity value of the liability (e.g., as when transaction costs are added to the issuance price, or when there was a premium or discount upon) periodic amortization should be recorded, using the constant effective yield method. In its 2003 revisions, the IASB introduced what is known as the fair value option, which allowed entities to designate any liability as being held at fair value, with changes in fair value flowing through the income statement.