Question

The following events occurred in independent cases, but in each instance, the event happened after the close of the fiscal year under the audit but before the financial statements were authorised for the issue, which is also the audit report date. For each case, state what impact, if any, you would expect on the financial statements (and notes). The balance sheet in each instance is December 31, 2019.

Case1. On December 31, the commodities handled by the company had been traded on the open market for $1.40 per kilogram. this price had prevailed for two weeks, following an official market report that predicted vastly enlarged supplies; however, no purchases were made $1.40. The price throughout the preceding year, and several prior years, had been about $2. On January 18, 2020, the price returned to $2, following disclosure of an error in the official calculations of the prior December- correction of which destroyed the expectation of excessive supplies. Inventory at December 31, 2019, had been valued on a LCNRN (lower of cost and net realizable value) basis, using the prevailing price known at that time, $1.40.

Case 2. On February 1, 2020, the board of directors adopted a resolution accepting an investment banker’s offer to guarantee the marketing of $100 million of preferred shares.

Case3. On January 22, 2020, one of the auditee’s three major plants burned down, a $50 million loss that was covered to $40 million by insurance.

Answer 1

These cases are dealt with as per generally accepted accounting standards.

1) The event is adjusting event as Price information after balance sheet date provide more information on event that is existing on Balance sheet date that is price of Inventory. As there is substantial change in Price of Commodity, Company should take NRV as $ 2 instead of $ 1.4 and recalculate inventory valuation - if Inventory has been written down to NRV due to less price than that will be bring back to cost.

2) This is General information ehich have no adjusting impact as every company have investment banker and merchant banker who underwrite the securities.

3) As Auditee's major plant has burned down - Although no information regarding event exist on Balance Sheet date but there is question on Going Concern as three major plant has burned. So, Auditee needs to reassess the Balance Sheet and look at Going Concern Issue and Prepare balance sheet accordingly. Although Insurance company have accepted claims of $ 40 mn but it has impacted its 3 plants which might take time to rebuilt. Hence, Same should be adjusting event and also a clear disclosure by way note should be given.

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