Finance & Accounting

What does IAS 10 say about Events after the Reporting Period?

There may be a period of time between the balance sheet date (or the reporting date) and the day the financial statements are approved. Some events will occur during this time period. Such occurrences are referred to as events after the reporting period. For example, suppose a corporation compiles its balance statement on March 31, 2021, but it is approved by the Board of Directors on June 30, 2021. Any event that occurs between the 31st of March, 2021, and the 30th of June, 2021 is referred to as an event after the reporting period. The main question here is whether such events should be adjusted in the financial accounts. International Accounting Standard 10 (IAS 10) provides detailed guidelines for these events. The standard has been made effective for fiscal years beginning on or after January 1, 2005.

Why is IAS 10 needed?

Financial statements are full of estimations, which will, of course, alter when new information and situations evolve and become available. This standard (IAS 10) lays out the guidelines for dealing with events that occur after the financial reporting date (that is year-end reporting date), as well as how we should amend or not adjust the financial statements in light of these events and facts.

It is critical to have a uniform strategy to allow for comparison across industries and over time, without neglecting the basic qualitative features of relevance and faithful depiction, which are critical to making the information in financial statements^[1] meaningful.

The standard will walk you through how to handle both adjusting and non-adjusting events. The decision point that the IAS 10 principles will assist you in trying to explain is whether an event occurring after year-end will lead you in a position to adjust the figures of the financial statements (and thus an adjusting event) or whether you would not need to adjust the financial statements and will most likely only disclose the information in a note to the financial statements.

Objective

The overall aim of this Accounting Standard is to prescribe:

• when an entity’s financial statements should be adjusted to reflect events that occurred after the reporting period, and
• the disclosures that an organization must make about the date the financial statements were approved for release and events that occurred after the reporting period.

The Standard further states that an entity shall not produce its financial statements on a going concern basis if the circumstances that occur after the reporting period suggest that the going concern assumption is not perfectly appropriate.

Basic principles of IAS 10

IAS 10 covers the accounting treatment in relation to events that occur after the reporting period. Some important terms used in the Standard are explained as follows:

An event after reporting period: These are those events, both positive and negative, which typically occur between the reporting date and the day when the financial statements are authorized for release.

Adjusting events: Adjusting events are those that show evidence of an event existing at the time of reporting. This is regardless of whether or not the fact/information was actually known at the time of reporting.

Non-adjusting events: These are those events that are indicative of circumstances that occurred after the reporting date.

A company must present and disclose information that allows users of financial statements to assess the effects of events that occurred after the reporting period. An entity must indicate the date on which the financial statements were authorized for release, as well as who granted such authorization. If the business’s owners or others have the authority to change the financial statements after they have been issued, the entity must disclose this fact.

Whether to adjust the financial statements or not?

In the instance of an adjusting event, the Standard requires that the recognized amounts in the financial statements be adjusted. This entails changing the statistics in the statement of financial position, statement of profit or loss, & other comprehensive income, among other things, as well as the accompanying notes.

In the case of a non-adjusting event, the Standard specifies that one should not adjust the recognized amounts in the financial statements; however, if the consequences are considerable and material, they will be properly disclosed in the notes to the financial statements. Moreover, if the occurrence has an impact on the going concern assumption, this situation will be different.

If non-adjusting events that occur beyond the reporting period of an entity are material, non-disclosure may have an impact on economic decisions made by users based on the financial statements. As a result, after the reporting period, an organization must disclose in its notes to accounts, the following for each material type of non-adjusting event:

• the nature of such event,
• an estimate showing its probable financial effect, or a statement as to the fact that such an estimate can’t be made.

As a result, the process is to analyze any events that happened after the reporting date to validate that the event occurred between the date of year-end reporting and the day when the financial statements are approved. Then, based on the aforementioned definitions and principles, one must define each occurrence as either adjusting or non-adjusting, and if adjusting, you must amend the financial statements; if non-adjusting, you must disclose the consequences only in notes, if they are material.

Some instances of adjusting events are as follows:

• A court lawsuit is settled after the reporting date, confirming the entities’ current obligations at the reporting date.
• Detection of fraud or inaccuracies that existed at the time of reporting
• Evaluation of profit shares/bonus payable after the reporting date if the entity was required to make such payments at the reporting date
• Information surfacing (perhaps through a press release or other means) that a significant customer declared his bankruptcy after your fiscal year-end, but that they were actually insolvent and therefore unable to pay their creditors before your fiscal year-end date.

Some instances of non-adjusting events are as follows:

• Reduction in the market value of investments between the end of the reporting period and the date of approval of financial statements
• After the reporting date, a subsidiary or a business combination may be acquired or sold.
• After the reporting period, fixed assets are liquidated or discarded.
• A major reorganization is being announced/begins to be implemented.
• Litigation arising from events that happened after the reporting period

Other important points concerning IAS 10

IAS 10 takes into account the effects of events that occur after the reporting period and have an influence on the entity’s capacity to continue as a going concern.

Financial statements should not be produced on a going concern basis if the assumption becomes unsuitable after the reporting date. As a result, if an event or transaction occurs after the reporting period that impacts the companies’ capacity to continue as a going concern, it is always an adjusting event, and you must publish the financial statements on the correct basis (i.e., not on the going concern assumption).

In other words, an entity must not compile its financial statements on a going concern assumption if the administration establishes, after the reporting date, that it plans to liquidate the entity or discontinue its trade, or that it has no other practical alternative but to do so.

There are also certain guidelines for dealing with declared dividends. The guidelines apply to dividends announced after the reporting date but before the financial statements are approved.

This dividend declared after the reporting date does not generate a present obligation at the reporting date, hence no liability is acknowledged in the statement of financial position in the financial statements for such reporting period. Nevertheless, there should still be disclosure in the notes for a non-adjusting event after the reporting date of the dividend amount, disclosure per-share amount, and if there is any non-cash dividend, there are certain additional disclosure requirements.

Conclusion

Events after the reporting date are those circumstances that occur, both positively & negatively, between the end of the reporting period and the day when the financial statements are authorized for release. There are two types of events that may be identified. One is those occurrences that offer proof of conditions existing at the close of the reporting period (called adjusting events), and the other are those that are representative of circumstances that occurred after the reporting period (called non-adjusting events). After the reporting period, an organization must adjust/modify the amounts recognized in its financial statements to reflect the adjusting events.

Read our Article:Comprehensive Understanding of Ind AS (Indian Accounting Standards)