Question

The board of Purple Plc have taken the decision to restructure the business and close one of Purple Plc’s factories. The impact of this will be material for Purple Plc. A detailed plan is being prepared and will be implemented in the following year. No detailed announcements of the plan have been made by the end of the financial year. Purple Plc must train its staff in changes to health and safety regulation which occurred at the end of the financial year.

Required:

(i) What are events after the balance sheet date and how should they be accounted for?

(ii) How would the decision to restructure be accounted for by Purple Plc?

(iii) Would the company need to make a provision for the future training costs?

Answer 1

A) Events after the balance sheet date and how should they be accounted for

Events occuring after the balance sheet dated are those significant events both favorable such as company won courts case and unfavorable company lost the court case.

Events occur between the balance sheet date and the date of which financial statements are approved by the board of director or by corresponding approving body in the case of any other entity this will apply for corporate company. In partnership firm partner are approving member of the firm.

Events occuring after the balance sheet date 31st Dec'2019 and date of approval by board of director 31st Mar'2020. This events took place in between this two dates.

Two types of events can be identified

1) Which provide further evidence of conditions that existed at balance sheet date

2) Which are indicative of conditions that arose subsequent to the balance sheet date

They should be accounted for

Adjusting Event

Information relating to a condition that existed at the reporting date

- Settlement of outstanding court case (Should be accounted in balance sheet if court case won then contingency profit or loss then contingency loss )

- Bankruptcy of a customer (Accounted in Allowance doubtful debt )

- Sale of inventory at below cost (Should be accounted in provision)

- Determination of purchase/sale price of property plant and equipment (Should be accounted in provision)

Non Adjustment Event

Doesn't reflect conditions that existed at the reporting date

-Fall in value of investments (Should be accounted in provision)

-Major purchase of assets (Should be accounted in fixed asset and capital expenditure)

-Announcing a discontinued operations (Should be accounted in other comprehensive income of discontinued profit or loss)

-Announing a restructing (Should be accounted in provision)

Disclose nature and financial effect

B) The decision to restructure be accounted for by Purple Plc

Company take decision to resturcture mostly because of financial pressure in the company. Its occurs due to shortage of cashflow to operate the business. Company want to reduce the cashflow shortage problem so they take debt to improve cashflow and run the operating activity smoothly. Increase of debt comes with the cost of interest payment. Higher the interest payment higher the risk involve for the company. Firm unable to pay interest payment can make company bankrupt or to liquidate the asset.

The decision to restructure the business and close one of Purple Plc’s factories. The impact of this will be material for Purple Plc. Close down one of purple plc's factories will impact the material. In accounting term it will impact on company inventory. If material is no longer in use for other remain purple plc's factories then need to find market price of that material to sell in the market. If no buyer more than 1 year then its will go in obsolete inventory should be accounted in provision.

IAS 37 defines a restructing as a program that materially changes the scope of a business or the manner in which it is conducted. US GAAP uses the term "exit activities" which may be broader than a restructing under IFRS. Understanding the scale of the restructing is therefore important because not all programs may qualify for cost recognition under IFRS

3) The company need not to make a provision for the future training costs. Provision are made when events occured during the year and will be paid in next financial year. Future training costs will be cover in the next year budget not in provision.

Purple Plc must train its staff in changes to health and safety regulation which occurred at the end of the financial year. No provision required.

Training is conducted during the year and it will pay next upcoming month or year then company will make provision. So no provision for future training cost.