Question

Question 1
IAS 10: Events after the Reporting Period addresses two issues: adjusting events, namely, those events that provide evidence of conditions that existed at the end of the reporting period and non-adjusting events: which are those events that are indicative of conditions that arose after the reporting period that need to be reflected in the financial statements. Amounts recognized in the financial statements are adjusted to reflect adjusting events, but only disclosures are required for material non-adjusting events. Management’s judgment is required in determining whether events that took place after the end of the reporting period are adjusting or non-adjusting events. This will be highly dependent on the reporting date and the specific facts and circumstances of each company’s operations. Coronavirus has overwhelmed the world in various ways and at various times. China was the first to announce spread of the virus in November, 2019. UK announced its first case of coronavirus in February, 2020 and Ghana announced its first case in March, 2020. While company A resides in China, company B resides in the UK and C resides in Ghana. Company A’s financial reporting period ends on 31st October each year; company B’s financial reporting period ends on 31st December, each year and company C’s financial reporting period ends on the 31st of March each year. Management of these companies may need to continually review and update the assessments up to the date the financial statements are issued given the fluid nature of the crisis and the uncertainties involved.
You are required to discuss in respect of each of the companies, the potential management conclusions of the impact of the coronavirus on end of year reporting, mindful of IAS 10.
Total Marks: 20marks

Answer 1

COVID-19 will be a factor in an entity’s analysis of estimates made in the preparation of the financial statements, including those related to the expected credit loss on receivables, inventory obsolescence, impairment analyses, variable and contingent consideration estimates, and other factors. Whilst the events stemming from COVID-19 are extremely volatile, entities will nevertheless be required to consider conditions as they existed at the reporting date when evaluating subsequent events.

Given the economic environment and the likelihood that events may occur rapidly or unexpectedly, entities should carefully evaluate information that becomes available after the end of the reporting period but before the date of authorisation of the financial statements. The amounts in the financial statements must be adjusted to reflect events after the end of the reporting period that provide evidence of conditions that existed at the end of the reporting period. Events that are indicative of conditions that arose after the reporting period are non-adjusting events. They are not reflected in the recognition or measurement of items in the financial statements, but require disclosure when material.

China- Reporting Date: 31- Oct

Spread Reported in Nov 19

In the case of Company A in China, the spread reported in Nov 19 which is after the reporting date. Since the events that are indicative of the conditions arose after the end of the reporting period, these are to be treated as non-adjusting events. So it is appropriate to consider that the effects on the company are the result of events that arose after the reporting date that may require disclosure in the financial statements but would not affect the amounts recognised.

If non‑adjusting events are material, an entity is required to disclose the nature of the event and an estimate of its financial effect. The estimate does not need to be precise. It is preferable to provide a range of estimated effects as an indication of impact to not providing any quantitative information at all. However, where quantitative effect cannot be reasonably estimated, qualitative description should be provided, along with a statement that it is not possible to estimate the effect.

UK- Reporting Date: 31-Dec

Spread Reported in Feb 2020

In the case of Company B in UK also, the spread reported after the reporting date. Since the events that are indicative of the conditions arose after the end of the reporting period, any material events are to be treated as non-adjusting events, which may require disclosure in the financial statements but would not affect the amounts recognised.

If non‑adjusting events are material, an entity is required to disclose the nature of the event and an estimate of its financial effect. The estimate does not need to be precise. It is preferable to provide a range of estimated effects as an indication of impact to not providing any quantitative information at all. However, where quantitative effect cannot be reasonably estimated, qualitative description should be provided, along with a statement that it is not possible to estimate the effect.

However if the company has business in China and regarding to this if there are any events that has a material impact on the business these should be treated as adjusting events and necessary adjustments in the financial statements should be madeto reflect the events to give a fair presentation.

Ghana- Reporting Date: 31-Mar

Spread Reported in Mar 2020

In the case of the Company C in Ghana, the spread reported before the reporting date. Since the events that are indicative of the conditions arose before the end of the reporting period, any material events are to be treated as adjusting events. The amounts in the financial statements must be adjusted to reflect events after the end of the reporting period.

However, there is no universal ‘flip’ point at which entities should view all COVID‑19 related impacts to be adjusting events. Instead, each event should be assessed to determine whether it provides evidence of conditions that existed at the end of the reporting period or whether it reflects a change in conditions after the reporting date.