Question

Waxwork’s current year end is 31 March 2009. Its financial statements were authorised for issue by its directors on 6 May 2009 and the AGM (annual general meeting) will be held on 3 June 2009. The following matters have been brought to your attention: (i) On 12 April 2009 a fire completely destroyed the company’s largest warehouse and the inventory it contained. The carrying amounts of the warehouse and the inventory were $10 million and $6 million respectively. It appears that the company has not updated the value of its insurance cover and only expects to be able to recover a maximum of $9 million from its insurers. Waxwork’s trading operations have been severely disrupted since the fire and it expects large trading losses for some time to come. (ii) A single class of inventory held at another warehouse was valued at its cost of $460,000 at 31 March 2009. In April 2009 70% of this inventory was sold for $280,000 on which Waxworks’ sales staff earned a commission of 15% of the selling price. (iii) On 18 May 2009 the government announced tax changes which have the effect of increasing Waxwork’s deferred tax liability by $650,000 as at 31 March 2009. Required: Explain the required treatment of the items (i) to (iii) by Waxwork in its financial statements for the year ended 31 March 2009. Note: assume all items are material and are independent of each other

Answer 1

As per IAS 10 Adjusting events

there are 2 events

• Adjusting events – Those that provide evidence of conditions that existed at the end of the reporting period.
• Non-Adjusting events – Those that are indicative of conditions that arose after the reporting period.

Waxman Current year is March 2019. Date of approval is 6th May , 2019.

I) Fire Broke Out : A Major fire broke out on 12 April 2009 a fire completely destroyed the company’s largest warehouse and the inventory it contained. The carrying amounts of the warehouse and the inventory were $10 million and $6 million respectively. It appears that the company has not updated the value of its insurance cover and only expects to be able to recover a maximum of $9 million from its insurers. Waxwork’s trading operations have been severely disrupted since the fire and it expects large trading losses for some time to come.

Since such event is non adjusting event as no condition existed on Balance Sheet date, hence it will not be adjusted in the balance sheet. Although such event is a material event which has destroyed the operations and a much harm to the entity, hence such fire must be reported in the Director's report stating the facts that fire broke out and destroyed the warehouse and inventory and only $9 m is insured as against $ 16 m loss.

Also if the Directors think that It affects the going concern, it must be reported in the matter of emphasis paragraph in the Audit Report.

II) A single class of inventory held at another warehouse was valued at its cost of $460,000 at 31 March 2009. In April 2009 70% of this inventory was sold for $280,000 on which Waxworks’ sales staff earned a commission of 15% of the selling price.

This is also a non adjusting event as no condition existed on balance sheet date.

Also such must be reported in the Director's report as well as audit report about the loss that company has suffered and the commission that the company has given. It must quantify clearly that company has sold goods worth of () amount costing () amount and commission () amount and thus a loss occurred of () amount.

III) On 18 May 2009 the government announced tax changes which have the effect of increasing Waxwork’s deferred tax liability by $650,000 as at 31 March 2009.

This is also a non adjusting event as the company no condition has existed on the balance sheet date. Rather it will be reported as extra ordinary item in the next year financials by increasing the Waxwork's increased deferred tax liability. Although it must be reported in the Director's Report regarding the same.