Question

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Question:-
The following are mutually exclusive scenarios.
a) During 20X2 , a Singapore-incorporated company, JK Pte Ltd, discovered that the inventory as stated in the published 20X1 statement of Financial Position was overstated by $150,000. JK Pte Ltd uses a periodic system and the First-In-First-Out cost method. Discuss and determine the accounting treatment of this overstatement in JK Pte Ltd's book based on FRS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
b) The draft financial report of LM Pte Ltd for the year ended 31 Dec 20X1 was completed on 12 Mar 20X2. On 23 Mar 20X2, the board of directors reviews the financial report and authorises it for issue. LM Pte Ltd announces its profit and other selected financial information on 3 Apr 20X2. The shareholders approve the financial report at the annual meeting on 2 Jun 20X2 and the approved financial report is then filed with the regulatory body on 11 Jun 20X2. The objective of FRS 10. Events after the Reporting Period is to prescribe the treatment of events that occur after an entity's reporting period has ended. With reference to the above scenario, explain what are "Events after the reporting period" and how these events should b accounted for.

Answer 1

Answer:

Inventory overstated by $150000

As per FRS8 when any material errors pertaining to prior period is discovered during the current period, the errors should be rectified in the comparative financial statements presented for that subsequent period. The errors should not be given effect in the current financial statements. A prior period error shall be corrected by retrospective restatement. The correction should not affect the profit and loss of the period in which the error is identified.

In the present context error pertaining to year 20X1 is identified in the year 20X2. Hence in the comparative financial statement of year 20X2 the error would be rectified by restating the amounts. 20X1 financial statements are not affected and rectification is done by way of restating the inventory and profit values in the comparative financial statements. The inventory value would be reduced and accordingly the profit in comparative statement.

Events after the reporting period

Events after the reporting period are those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue. In some cases, an entity is required to submit its financial statements to its shareholders for approval after the financial statements have been issued. In such cases, the financial statements are authorised for issue on the date of issue, not the date when shareholders approve the financial statements. In other cases, the management of an entity is required to issue its financial statements to a supervisory board (made up solely of non-executives) for approval. In such cases, the financial statements are authorised for issue when the management authorises them for issue to the supervisory board.

Between reporting period and date when the financial statements are authorised for issue two types of events can be identified:

(a) those that provide evidence of conditions that existed at the end of the reporting period (adjusting events after the reporting period); and (b) those that are indicative of conditions that arose after the reporting period (non-adjusting events after the reporting period).

The adjusting events would affect the financial statements and non-adjusting events do not affect.

Adjusting events would give further clarity and evidence regarding a condition that already exists on the reporting date. Examples include settlement of court case with respect to litigation converting the contingent liability to liability, bankruptcy of customer would convert the accounts receivable into bad debt and impairment loss being confirmed etc.

Non-adjusting events are those events which occur after the reporting period and which will not affect the financial statements. Examples include decline in fair value of investments post reporting date and before the financial statements are authorised to issue.

In the present context reporting date is be 31DEC20X1 and the date when financial statements would be authorised for issue date is 23MAR20X2. So, events occurring between the said period need to be classified as adjusting and non-adjusting and accordingly effect need to be given to the financial statements.