List of examples
IAS 10 – Events after the Reporting Period – deals with accounting for, and disclosure of: ‘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’. [IAS 10.2, 3]. This definition, therefore, includes all events occurring between those dates – irrespective of whether they relate to conditions that existed at the end of the reporting period. The principal issue is determining which events after the reporting period are required to be reflected in the financial statements as adjustments, which are material enough to require additional disclosure and which require neither adjustment nor disclosure.
The following timeline illustrates events after the end of the reporting period that are within the scope of IAS 10 for an entity with a 31 December year-end:
The financial statements of an entity present, among other things, its financial position at the end of the reporting period. Therefore, it is appropriate to adjust the financial statements for all events that offer greater clarity concerning the conditions that existed at the end of the reporting period, that occur prior to the date the financial statements are authorised for issue. The standard requires entities to adjust the amounts recognised in the financial statements for ‘adjusting events’ that provide evidence of conditions that existed at the end of the reporting period. [IAS 10.3(a), 8]. An entity does not recognise in the financial statements those events that relate to conditions that arose after the reporting period (‘non-adjusting events’). However, if non-adjusting events are material (that is, non-disclosure of the event could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements),1 the standard requires certain disclosures about them. [IAS 10.3(b), 10, 21].
One exception to the general rule of the standard for non-adjusting events is when the going concern basis becomes inappropriate. This is treated as an adjusting event. [IAS 10.1, 14].
The requirements of IAS 10 and some practical issues resulting from these requirements are dealt with, respectively, at 2 and 3 below.
The objective of IAS 10 is to prescribe:
The standard does not permit an entity to prepare its financial statements on a going concern basis if events after the reporting period indicate that the going concern assumption is not appropriate. [IAS 10.1]. This requirement is discussed further at 2.2.2 below. The going concern basis is discussed in Chapter 3 at 4.1.2.
IAS 10 defines events after the reporting period as ‘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’. [IAS 10.3]. This definition therefore includes events that provide additional evidence about conditions that existed at the end of the reporting period, as well as those that do not. The former are adjusting events, the latter are non-adjusting events. [IAS 10.3]. Adjusting and non-adjusting events are discussed further at 2.1.2 and 2.1.3 below, respectively.
Given the definition above, the meaning of ‘the date when the financial statements are authorised for issue’ is clearly important. The standard observes that the process for authorising financial statements for issue varies depending upon the management structure, statutory requirements and procedures followed in preparing and finalising the financial statements. [IAS 10.4].
The standard identifies two particular instances of the different meaning of ‘authorised for issue’ as follows:
These two meanings are illustrated by the following two examples, which are based on the illustrative examples contained in IAS 10. [IAS 10.5‑6].
An uncommon, but possible, situation that may occur is that the financial statements are changed after they are authorised for issue to the supervisory board. The following example illustrates such a situation.
As governance structures vary by jurisdiction, entities may be allowed to organise their procedures differently and adjust the financial reporting process accordingly.
An example of a company which is required to submit its financial statements to its shareholders for approval is LafargeHolcim Ltd, as illustrated in the following extract:
As discussed above, an entity may be required to issue its financial statements to a supervisory board (made up solely of non-executives) for approval. For such instances, the phrase ‘made up solely of non-executives’ is not defined by the standard, although it contemplates that a supervisory board may include representatives of employees and other outside interests. However, it seems to draw a distinction between those responsible for the executive management of an entity (and the preparation of its financial statements) and those in a position of high-level oversight (including reviewing and approving the financial statements). This situation seems to describe the typical two-tier board system seen in some jurisdictions. An example of a company with this structure is Bayer AG, as illustrated in the following extract.
The example below illustrates when the entity releases preliminary information, but not complete financial statements, before the date of the authorisation for issue.
Example 38.4 illustrates that events after the reporting period include all events up to the date when the financial statements are authorised for issue, even if those events occur after the public announcement of profit or of other selected financial information. [IAS 10.7]. Accordingly, the information in the financial statements might differ from the equivalent information in a preliminary announcement.
IFRSs do not address whether and how an entity may amend its financial statements after they have been authorised for issue. Generally, such matters are dealt with in local laws or regulations.
If an entity re-issues financial statements (whether to correct an error or to include events that occurred after the financial statements were originally authorised for issue), there is a new date of authorisation for issue. The financial statements should then appropriately reflect all adjusting events, by updating the amounts recognised in the financial statements, and non-adjusting events, through additional disclosure, up to the new date of authorisation for issue.
However, in certain circumstances, the re-issuing of previously issued financial statements is required by local regulators particularly for inclusion in public offering and similar documents. Consequently, in November 2012, the Interpretations Committee was asked to clarify the accounting implications of applying IAS 10 when previously issued financial statements are re-issued in connection with an offering document.2
In May 2013, the Interpretations Committee responded that:
The Interpretations Committee decided not to add this issue to its agenda on the basis of the above and because the issue arises in multiple jurisdictions, each with particular securities laws and regulations which may dictate the form for re-presentations of financial statements.3
Adjusting events are ‘those that provide evidence of conditions that existed at the end of the reporting period.’ [IAS 10.3(a)].
Examples of adjusting events are as follows:
In addition, IFRIC 23 – Uncertainty over Income Tax Treatments – requires entities to apply IAS 10 to determine whether changes in facts and circumstances or new information after the reporting period gives rise to an adjusting or non-adjusting event for reassessing a judgement or estimate of an uncertain tax position. [IFRIC 23.14]. An event would be considered adjusting if the change in facts and circumstances or new information after the reporting period provided evidence of conditions that existed at the end of the reporting period (see 3.6 below).
IAS 33 – Earnings per Share – is another standard that requires an adjustment for certain transactions after the reporting period. IAS 33 requires an adjustment to earnings per share for certain share transactions after the reporting period (such as bonus issues, share splits or share consolidations as discussed in Chapter 37 at 4.3 and 4.5) even though the transactions themselves are non-adjusting events (see 2.1.3 below). [IAS 10.22].
The standard states that non-adjusting events are ‘those that are indicative of conditions that arose after the reporting period’. [IAS 10.3(b)].
Examples of non-adjusting events after the reporting period are as follows:
The reference in (a) and (c) above to asset disposals as examples of non-adjusting events is not quite the whole story as these may indicate an impairment of assets, which may be an adjusting event. In addition, (b) and (e) above regarding announcements of plans to discontinue an operation or to restructure a business, respectively, may also lead to an impairment charge (see Chapter 20 at 5.1).
IFRS 5 makes it clear that the held for sale criteria must be met at the reporting date for a non-current asset (or disposal group) to be classified as held for sale in those financial statements. However, if those criteria are met after the reporting date but before the authorisation of the financial statements for issue, IFRS 5 requires certain additional disclosures (see Chapter 4 at 2.1.2 and 5.1). [IFRS 5.12].
Information provided under (i) above, will be in addition to the disclosure of commitments that exist at the reporting date which other standards require. For example, IAS 16 – Property, Plant and Equipment – and IAS 38 – Intangible Assets – require commitments for the acquisition of property, plant and equipment and intangible assets to be disclosed (see Chapter 18 at 8.1 and Chapter 17 at 10.1). IFRS 16 – Leases – requires a lessee to disclose the amount of its lease commitments for short-term leases if the portfolio of short-term leases to which it is committed at the end of the reporting period is dissimilar to the portfolio of short-term leases for which current period short-term lease expense disclosure was provided (see Chapter 23 at 5.8.2).
For declines in fair value of investments, as in (k) above, the standard notes that the decline in fair value does not normally relate to the condition of the investments at the end of the reporting period, but reflects circumstances that arose subsequently. Therefore, in those circumstances the amounts recognised in financial statements for the investments are not adjusted. Similarly, the standard states that an entity does not update the amounts disclosed for the investments as at the end of the reporting period, although it may need to give additional disclosure, if material, as discussed at 2.3 below. [IAS 10.11].
However, the assertion that a decline in fair value of investments does not normally relate to conditions at the end of the reporting period is similar wording to that used for bankruptcy and the sale of inventories (see 2.1.2(b) above). Therefore, it requires an assessment of the circumstances in order to determine which conditions actually existed at the end of the reporting period – although this can be difficult in practice, particularly when fraud is involved (see 3.5 below).
In addition to the examples of non-adjusting events the standard provides, IFRIC 23 requires entities to apply IAS 10 to determine whether changes in facts and circumstances or new information after the reporting period gives rise to an adjusting or non-adjusting event when reassessing a judgement or estimate of an uncertain tax position. [IFRIC 23.14]. An event would only be considered non-adjusting if the change in facts and circumstances or new information after the reporting period was indicative of conditions that arose after the reporting period (see 3.6 below).
The subsequent rectification of a breach in a long debt term covenant is not an adjusting event and therefore does not change the classification of the liability in the statement of financial position from current to non-current (see 2.3.2 below). [IAS 1.76].
Another example of a non-adjusting event not mentioned by IAS 10 is where a contingent asset becomes virtually certain after the end of the reporting period. If the inflow of economic benefits from a contingent asset has become virtually certain, IAS 37 indicates that the asset and the related income should be recognised in the period in which the change occurs. The requirement to recognise the effect of changing circumstances in the period in which the change occurs extends to the analysis of information available after the end of the reporting period but before the date when the financial statements are authorised for issue. In contrast to contingent liabilities, no adjustment should be made to reflect the subsequent settlement of a legal claim in favour of the entity since the period in which the change occurs is after the end of the reporting period. An asset could only be recognised if, at the end of the reporting period, the entity could show that it was virtually certain that its claim would succeed (see Chapter 26 at 3.2.2). [IAS 37.35].
In respect of dividend declarations, as in (l) above, dividends are only recognised as a liability if declared on or by the end of the reporting period. If an entity declares dividends to holders of equity instruments (as defined in IAS 32) after the reporting period, the entity shall not recognise those dividends as a liability at the end of the reporting period. [IAS 10.13]. While an entity may have a past practice of paying dividends, such dividends are not declared and, therefore, not recognised as an obligation. [IAS 10.BC4].
As a consequential amendment to IAS 10, the definition of ‘declared’ in this context was moved to IFRIC 17 – Distributions of Non-cash Assets to Owners. IFRIC 17 did not change the principle regarding the appropriate timing for the recognition of dividends payable. [IFRIC 17.BC18‑20]. It states that an entity recognises a liability to pay a dividend when the dividend is appropriately authorised and is no longer at the discretion of the entity, which is the date:
In many jurisdictions, the directors may keep discretion to cancel an interim dividend until such time as it is paid. In this case, the interim dividend is not declared (within the meaning described above), and is, therefore, not recognised until paid. Final dividends proposed by directors, in many jurisdictions, are only binding when approved by shareholders in general meeting or by the members passing a written resolution. Therefore, such a final dividend is only recognised as a liability when declared, i.e. approved by the shareholders at the annual general meeting or through the passing of a resolution by the members of an entity.
IAS 10 contains a reminder that an entity discloses dividends, both proposed and declared after the reporting period but before the financial statements are authorised for issue, in the notes to the financial statements in accordance with IAS 1 – Presentation of Financial Statements (see Chapter 3 at 5.5). [IAS 1.137, IAS 10.13].
Similar issues arise regarding the declaration of dividends by subsidiaries, associates and other equity investments. Although IAS 10 does not specifically address such items, IFRS 9 – Financial Instruments – requires a shareholder to recognise dividends when the shareholder's right to receive payment is established, it is probable that the economic benefits associated with the dividend will flow to the shareholder and the dividend can be measured reliably (see Chapter 50 at 2.5). [IFRS 9.5.7.1A]. Similarly, IAS 27 – Separate Financial Statements – also contains this general principle in recognising in an entity's separate financial statements those dividends received from subsidiaries, joint ventures or associates when its right to receive the dividend is established (see Chapter 8 at 2.4.1). [IAS 27.12]. Accordingly, a shareholder does not recognise such dividend income until the period in which the dividend is declared.
IAS 10 requires that the amounts recognised in the financial statements be adjusted to take account of an adjusting event. [IAS 10.8].
The standard also notes that an entity may receive information after the reporting period about conditions existing at the end of the reporting period relating to disclosures made in the financial statements but not affecting the amounts recognised in them. [IAS 10.20]. In such cases, the standard requires the entity to update the disclosures that relate to those conditions for the new information. [IAS 10.19].
For example, evidence may become available after the reporting period about a contingent liability that existed at the end of the reporting period. In addition to considering whether to recognise or change a provision under IAS 37, IAS 10 requires an entity to update its disclosures about the contingent liability for that evidence. [IAS 10.20].
If management determines after the reporting period (but before the financial statements are authorised for issue) either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so, the financial statements should not be prepared on the going concern basis. [IAS 10.14].
Deterioration in operating results and financial position after the reporting period may indicate a need to consider whether the going concern assumption is still appropriate. If the going concern assumption is no longer appropriate, the standard states that the effect is so pervasive that it results in a fundamental change in the basis of accounting, rather than an adjustment to the amounts recognised within the original basis of accounting. [IAS 10.15]. As discussed in Chapter 3 at 4.1.2, IFRS contains no guidance on this ‘fundamental change in the basis of accounting’. Accordingly, entities will need to consider carefully their individual circumstances to arrive at an appropriate basis.
The standard also contains a reminder of the specific disclosure requirements under IAS 1:
While IFRSs are generally written from the perspective that an entity is a going concern, they are also applicable when another basis of accounting is used to prepare financial statements. Various IFRSs acknowledge that financial statements may be prepared on either a going concern basis or an alternative basis of accounting. [IAS 1.25, IAS 10.14, CF(2010) 4.1, CF 3.9]. Such IFRSs do not specifically exclude the application of IFRS when an alternative basis of accounting is used. As a result, financial statements prepared on a ‘non-going concern’ basis of accounting may be described as complying with IFRS as long as that other basis of preparation is sufficiently described in accordance with paragraph 25 of IAS 1. This is further discussed in Chapter 3 at 4.1.2.
Regarding the requirement in (b) above, the events or conditions requiring disclosure may arise after the reporting period. [IAS 10.16(b)].
IAS 10 prohibits the adjustment of amounts recognised in financial statements to reflect non-adjusting events. [IAS 10.10]. It indicates that if non-adjusting events are material, non-disclosure could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements. Accordingly, an entity should disclose the following for each material category of non-adjusting event:
To illustrate how these requirements have been applied in practice, two examples of disclosure for certain types of non-adjusting events are given below.
Possibly the non-adjusting events that appear most regularly in financial statements are the acquisition/disposal of a non-current asset, such as an investment in a subsidiary or a business, subsequent to the end of the reporting period.
Extract 38.3 contains an example of the disclosures required for 2.1.3(a) above related to a business combination:
Extract 38.4 contains an example of the disclosure of major ordinary share transactions after the reporting period as described at 2.1.3(f) above:
It is important to note that the list of examples of non-adjusting events in IAS 10, and summarised at 2.1.3 above, is not an exhaustive one; IAS 10 requires disclosure of any material non-adjusting event.
When an entity declares a dividend to distribute a non-cash asset to owners after the end of a reporting period but before the financial statements are authorised for issue, IFRIC 17 requires an entity to disclose:
In the case of (c) above, any quantitative disclosures are required to be presented in a tabular format, unless another format is more appropriate. [IFRS 13.99]. Fair value measurement is further discussed in Chapter 14.
When an entity breaches a provision of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand, it classifies the liability as current in its statement of financial position (see Chapter 3 at 3.1.4). [IAS 1.74]. This may also give rise to going concern uncertainties (see 2.2.2 above).
It is not uncommon that such covenant breaches are subsequently rectified; however, a subsequent rectification is not an adjusting event and therefore does not change the classification of the liability in the statement of financial position from current to non-current.
IAS 1 requires disclosure of the following remedial arrangements if such events occur between the end of the reporting period and the date the financial statements are authorised for issue:
The disclosures required in respect of non-adjusting events are discussed at 2.3 above. As IAS 10 only requires consideration to be given to events that occur up to the date when the financial statements are authorised for issue, it is important for users to know that date, since the financial statements do not reflect events after that date. [IAS 10.18]. Accordingly, IAS 10 requires disclosure of the date the financial statements were authorised for issue. Furthermore, it requires: disclosure of who authorised the financial statements for issue and, if the owners of the entity or others have the power to amend them after issue, disclosure of that fact. [IAS 10.17]. In practice, this information can be presented in a number of ways:
Strictly speaking, this information is required to be presented within the financial statements. So, if (c) above were chosen, either the whole report would need to be part of the financial statements or the information could be incorporated into them by way of a cross-reference.
In addition to the IAS 10 disclosure requirements, other standards may require disclosures to be provided about future events, for example, IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors – requires disclosure of the expected impact of new standards that are issued but are not yet effective at the reporting date (see Chapter 3 at 5.1.2.C). [IAS 8.30].
The standard alludes to practical issues such as those discussed below. It states that a decline in fair value of investments after the reporting period does not normally relate to conditions at the end of the reporting period and therefore would be a non-adjusting event (see 2.1.3 above). At the same time, the standard asserts that the bankruptcy of a customer that occurs after the reporting period would usually be an adjusting event (see 2.1.2 above). Judgement of the facts and circumstances is required to determine whether an event that occurs after the reporting period provides evidence about a condition that existed at the end of the reporting period, or whether the condition arose subsequent to the reporting period.
The sale of inventories after the reporting period is normally a good indicator of their net realisable value (NRV) at that date. IAS 10 states that such sales ‘may give evidence about their net realisable value at the end of the reporting period’. [IAS 10.9(b)(ii)]. However, in some cases, NRV decreases because of conditions that did not exist at the end of the reporting period.
Therefore, the problem is determining why NRV decreased. Did it decrease because of circumstances that existed at the end of the reporting period, which subsequently became known, or did it decrease because of circumstances that arose subsequently? A decrease in price is merely a response to changing conditions so it is important to assess the reasons for, and timing of, these changes.
Some examples of changing conditions are as follows:
Whilst it is arguable that the ‘dumping’ of cheap imports after the reporting period is a condition that arises subsequent to that date, it is more likely that this is a reaction to a condition that already existed such as overproduction in other parts of the world. Thus, it might be more appropriate in such a situation to adjust the value of inventories based on its subsequent NRV.
The reasons for price reductions and increased competition do not generally arise overnight but normally occur over a period. For example, a competitor may have built up a competitive advantage by investing in machinery that is more efficient. In these circumstances, it is appropriate for an entity to adjust the valuation of its inventories because its own investment in production machinery is inferior to its competitor's and this situation existed at the end of the reporting period.
It is unlikely that a competitor developed and introduced an improved product overnight. Therefore, it is correct to adjust the valuation of inventories held at the end of the reporting period to their NRV after that introduction because the entity's failure to maintain its competitive position in relation to product improvements existed at the end of the reporting period.
Competitive pressures that caused a decrease in NRV after the reporting period are generally additional evidence of conditions that developed over a period and existed at the end of the reporting period. Consequently, their effects normally require adjustment in the financial statements.
However, for certain types of inventory, there is clear evidence of a price at the end of the reporting period and it is inappropriate to adjust the price of that inventory to reflect a subsequent decline. An example is inventories for which there is a price on an appropriate commodities market. In addition, inventory may be physically damaged or destroyed after the reporting period (e.g. by fire, flood, or other disaster). In these cases, the entity does not adjust the financial statements. However, the entity may be required to disclose the subsequent decline in NRV of the inventories if the impact is material (see 2.3 above).
Events after the reporting period frequently give evidence about the profitability of revenue from contracts with customers, where revenue is measured over time, that are in progress at the end of the reporting period.
IFRS 15 – Revenue from Contracts with Customers – requires an assessment to be made of the progress towards complete satisfaction of performance obligations satisfied over time (see Chapter 30 at 3). [IFRS 15.40]. In such an assessment, consideration should be given to events that occur after the reporting period and a determination should be made as to whether they are adjusting or non-adjusting events for which the financial effect is included in the method used to measure progress over time or the percentage of completion method.
The insolvency of a debtor or inability to pay debts usually builds up over a period. Consequently, if a debtor has an amount outstanding at the end of the reporting period and this amount is written off because of information received after the reporting period, the event is normally adjusting. IAS 10 states that the bankruptcy of a customer that occurs after the reporting period usually confirms that the customer was credit-impaired (Stage 3 under the IFRS 9 general approach – refer to Chapter 51 at 3.1) at the end of the reporting period. [IAS 10.9(b)(i)]. If, however, there is evidence to show that the insolvency of the debtor resulted solely from an event occurring after the reporting period, then the event is a non-adjusting event. If the impact is material, the entity will be required to disclose the nature and effect of the debtor's default (see 2.3 above).
In April 2015 the IFRS Transition Resource Group for Impairment of Financial Instruments (ITG) discussed whether, and if so how, to incorporate events and forecasts that occur between the reporting date and the date the financial statements are authorised for issue, when applying the impairment requirements of IFRS 9 at the reporting date. The ITG noted that if new information becomes available between the reporting date and the date of signing the financial statements, an entity needs to apply judgement, based on the specific facts and circumstances, to determine whether it is an adjusting or non-adjusting event in accordance with IAS 10. This is further discussed in Chapter 51 at 5.9.4.
The fair value of investment property reflects, among other things, the quality of tenants' covenants and the expected future rental income from the property. If a tenant ceases to be able to meet its lease obligations due to insolvency after the reporting period, an entity considers how this event is reflected in the financial statements at the end of the reporting period.
IAS 40 – Investment Property – requires the fair value of investment property, when measured in accordance with IFRS 13 – Fair Value Measurement, to reflect, among other things, rental income from current leases and other assumptions that market participants would use when pricing investment property under current market conditions. [IAS 40.40]. In addition, professional valuations generally reference the state of the market at the date of valuation without the use of hindsight. Consequently, the insolvency of a tenant is not normally an adjusting event to the fair value of the investment property because the investment property still holds value in the market. However, it would generally be indicative of an adjusting event for any rent receivable from that tenant.
This conclusion is consistent with the treatment of investment property measured using the alternative cost model. IAS 10 states that a decline in fair value of investments after the reporting period and before the date the financial statements are authorised for issue is a non-adjusting event, as the decline does not normally relate to a condition at the end of the reporting period (see 2.1.3 above). This decline in fair value, however, may be required to be disclosed if material (see 2.3 above).
When fraud is discovered after the reporting date the implications on the financial statements should be considered. In particular, it should be determined whether the fraud is indicative of a prior period error, and that financial information should be restated, or merely a change in estimate requiring prospective adjustment. Application of the IAS 8 definitions of a ‘prior period error’ and a ‘change in accounting estimate’ (see Chapter 3 at 4.5 and 4.6) in the case of a fraud requires the exercise of judgement. The facts and circumstances are evaluated to determine if the discovery of the fraud resulted from a previous failure to use, or misuse of, reliable information; or from new information. If the fraud meets the definition of a prior period error, the fraud would be an adjusting event as it relates to conditions that existed at the end of the reporting period. However, if the fraud meets the definition of a change in estimate, the facts and circumstances are evaluated to determine if the discovery of the fraud provides evidence of circumstances that existed at the end of the reporting period (i.e. an adjusting event) or circumstances that arose after that date (i.e. a non-adjusting event). Determining this is a complex task and requires judgement and careful consideration of the specifics to each case.
IFRIC 23, addresses how to reflect uncertainty in accounting for income taxes. It requires an entity to reassess any judgement or estimate relating to an uncertain tax treatment if the facts and circumstances on which the judgement or estimate was based change, or as a result of new information that affects the judgement or estimate. In cases where the change in facts and circumstances or new information occurs after the reporting period, the Interpretation requires an entity to apply IAS 10 to determine whether the change gives rise to an adjusting or non-adjusting event, as set out above at 2.1.2 and 2.1.3. [IFRIC 23.13, 14].
Examples of changes in facts and circumstances or new information that could result in the reassessment of a judgement or estimate required by IFRIC 23 include, but are not limited to, the following:
A change in rules established by a taxation authority after the reporting period constitutes a non-adjusting event. [IAS 10.22(h)]. An entity should apply IAS 10 to determine whether any other change that occurs after a reporting period is an adjusting or non-adjusting event. The requirements of IFRIC 23 are further discussed in Chapter 33 at 9.