Question

In: Accounting

Classify the events as adjusting or non-adjusting events as per IAS10. Justify your answer! a) shortly...

Classify the events as adjusting or non-adjusting events as per IAS10. Justify your answer!

a) shortly after the financial reporting date a survey of an item of property, plant and equipment revealed significant structural problems with the asset.

b) a lawsuit alleging damages suffered from an acident that occured after the financial reporting date.

c) a bankruptcy of a customer that occurs after the reporting date.

d) at the year end, management has the intention to decide upon implementing a restructuring plan. After the financial reporting date, but prior to the issuance date of the company's financial statements, management approves and announces the plan.

Solutions

Expert Solution

IAS 10 defines "Events occuring after the Reporting Date" as events (whether favourable or not), occuring after the Reporting date, but before the date when financial statements are authorised to be issued.

These Events, can further be divided into 2 categories :

1. Adjusting events

These events provide additional evidence related to the conditions which existed on the reporting date.

These events require the entity to make adjustments to record their impact before the financial statements are finalised.

2. Non-Adjusting events

These events do not provide any evidence related to the conditions which existed on the reporting date, rather such conditions arise after the reporting date. These events are not required to be adjusted by the entity.

But, certain non adjusting events, which indicate that the going concern preparation of the financial statements is not appropriate , that is, the event materially affects the going concern assumption status of the organisation, shall always be treated as an adjusting event and shall be disclosed despite of being non adjusting events. For example, issue of shares, major business combinations , destruction of major property due to fire/any natural calamity.

Answers to the questions :

a) Non Adjusting event : Since the survey of the property, plant and equipment is done after the reporting date, this states that there were no indications/evidence existing on the reporting date hence, this need not be adjusted.

b) Non Adjusting event : Since the accident as well as the lawsuit accured after the reporting date, this shows that no conditions existed at the reporting date. Therefore, the lawsuit alleging damages from an accident occuring after the reporting date is not required to be adjusted.

c) Adjusting event : The bankruptcy of a customer that occurs after the reporting date, whose balance was outstanding (was stated) at the year end, usually confirms the loss existed at the reporting date, hence it should be adjusted in the carrying amount of the receivables because the outstanding balance indicates that the conditions existed on the reporting date.

d) Adjusting event : SInce the management has the intention to decide upon the implementing a restructuring plan, this indicates existance of conditions on the reporting date, inspite of the fact that it was announced after the reporting date, hence it is an adjusting event and must be disclosed.

Also, if it would be covered by the definition of a non adjusting event (due to non existence of conditions indicating the same), still it would have been disclosed since it is a material transation.


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