Question

Consider each of the following independent material events. In each case the:balance date is June 30 2019.financial report audit was signed on 12 August 2019.financial report and the audit report was mailed to members on 20 August 2019.Event 1: On 10 August you discover that a debtor of your client, LMD Ltd, went into liquidation on 7 August. The debtor was reported as owing $475,000 at balance date. A specific provision was raised of $300,000 in April 2019. The preliminary information indicates that the likely payment to unsecured creditors is likely to be zero.Event 2: A cyclone has damaged to the warehouse of your client FNQ Ltd on July 4 2019. Inventory worth $2.4 million was destroyed. The directors believe that only around one third of the value will be recovered from insurers.Event 3: The same facts as in 2, but the insurance company decides to replace all the inventory. The new stock arrives on 31 July 2019.Required: For each of the above three (3) ‘Events’ identify your accounting treatment AND justify your response.

Answer 1

Event after the reporting period: An event, which could be favourable or unfavourable, that occurs between the end of the reporting period and the date that the financial statements are authorised for issue.

Adjusting event: An event after the reporting period that provides further evidence of conditions that existed at the end of the reporting period, including an event that indicates that the going concern assumption in relation to the whole or part of the enterprise is not appropriate.

Adjusting events reflect new information about the assets and liabilities that were recognised at the end of the reporting period or about the income, expenses or cash flows that were recognised during the reporting period. Adjusting the financial statements to reflect the new information improves the relevance, reliability and completeness of the financial statements and therefore makes them more useful.

Adjust financial statements for adjusting events - events after the balance sheet date that provide further evidence of conditions that existed at the end of the reporting period, including events that indicate that the going concern assumption in relation to the whole or part of the enterprise is not appropriate.

Non-adjusting event: An event after the reporting period that is indicative of a condition that arose after the end of the reporting period

Do not adjust for non-adjusting events - events or conditions that arose after the end of the reporting period

Ans 1 ) The debtor for which a provision is already made as on June 30 is an adjusting event. An additional provision will be made for $175,000 as below

Bad Debts A/c Dr 175,000

To Provision for Bad Debts A/c 175,000

Ans 2 )

A cyclone damaging the warehouse is a non-adjusting event after the end of the reporting period. It is a condition that arose after the end of the reporting period The entity does not adjust the amounts recognised in its financial statements. However, it must give additional disclosure

Disclosure

On 4th July 2019  one of the entity’s warehouse was hit by cyclone, resulting in inventory with a carrying amount of $2.4M at 30 June 2019 being impaired to $0.0M. It is expected to receive insurance worth $0.8M for the above calamity.

Ans 3)

A cyclone damaging the warehouse is a non-adjusting event after the end of the reporting period. It is a condition that arose after the end of the reporting period The entity does not adjust the amounts recognised in its financial statements. In the given scenario, since the inventory is replaced before signing the Report, there is no impact to the entity. Hence no Disclosure required.