Question

i am doing financial report but not sure for 2 items.

the balance sheet date 30/06/2018. there are 2 items are review on 10/07/2018. should i adjust them to which statement? or disclose them on notes?

the current balance at 30/06/2018: allowance for DD: 2,350,000

A review by the chief accountant on 10 July 2018 revealed the following:

On 5 July 2018 the company received $94,000 from New Ltd . This was for commissions from sales made by New Ltd up to 30 June 2018. No balance date adjustment has been made in relation to this. ?

The company estimates the allowance for doubtful debts based on the ageing method. However the chief accountant has noticed that the allowance for doubtful debts in the trial balance seemed high. This had been calculated by the assistant accountant who advised that they had incorrectly based this allowance on a percentage of credit sales. The chief accountant determined that the balance of this allowance at 30 June 2018 should be $652,000.

Answer 1

IAS 10 Events After The Reporting Period contains requirements for when events after the end of the reporting period should be adjusted in the financial statements. Adjusting events are those providing evidence of conditions existing at the end of the reporting period, whereas non-adjusting events are indicative of conditions arising after the reporting period (the latter being disclosed where material). So, we should figure out the requirements for adjusting the amounts as per IAS 10. Here is the brief analysis on the basis of the same:

1. Adjustment for Cash received from New Ltd. on 5th July 2018

As per the accounting principles, the receipt of cash at a date later than the reporting date should be recorded in the books only on the date of receipt. The receipt of cash is normally in the normal course of business and hence, also not calling for any special disclosure as well.

2. Adjustment for Provision for Doubtful Debts

Provision for doubtful debts is an estimate of management, which should ideally be based upon the recoverability of the debts so recorded. Sometimes to make things simpler, management decides to make a provision based upon the amount of credit sales on the basis of earlier trends. However, it should be on the basis of actual debtors' balance as every debtor has a different credit risk associated with it. As such, it does not make a difference if the estimate was made after the reporting date i.e. 5th July 2018. The change in estimate is based upon the conditions existing as on the reporting date and hence, this should be treated as an adjusting event. As such, the provision for DD should be adjusted to the new estimate of $ 652000.