Chapter 38
Events after the reporting period

List of examples

Chapter 38
Events after the reporting period

1 INTRODUCTION

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:

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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.

2 REQUIREMENTS OF IAS 10

2.1 Objective, scope and definitions

The objective of IAS 10 is to prescribe:

  • when an entity should adjust its financial statements for events after the reporting period; and
  • the disclosures that an entity should give about the date when the financial statements were authorised for issue and about events after the reporting period. [IAS 10.1].

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.

2.1.1 Date when financial statements are authorised for issue

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:

  1. An entity may be 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 them. [IAS 10.5].
  2. The management of an entity may be required to issue its financial statements to a supervisory board (made up solely of non-executives) for approval. Such financial statements are authorised for issue when management authorises them for issue to the supervisory board. [IAS 10.6].

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.

2.1.1.A Impact of preliminary reporting

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.

2.1.1.B Re-issuing (dual dating) financial statements

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 scope of IAS 10 is the accounting for, and disclosure of, events after the reporting period and that the objective of this Standard is to prescribe:
    1. when an entity should adjust its financial statements for events after the reporting period; and
    2. the disclosures that an entity should give about the date when the financial statements were authorised for issue and about events after the reporting period;
  • financial statements prepared in accordance with IAS 10 should reflect all adjusting and non-adjusting events up to the date that the financial statements were authorised for issue; and
  • IAS 10 does not address the presentation of re-issued financial statements in an offering document when the originally issued financial statements have not been withdrawn, but the re-issued financial statements are provided either as supplementary information or a re-presentation of the original financial statements in an offering document in accordance with regulatory requirements.

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

2.1.2 Adjusting events

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:

  1. the settlement after the reporting period of a court case that confirms that the entity had a present obligation at the end of the reporting period. In this situation, an entity adjusts any previously recognised provision related to this court case in accordance with IAS 37 – Provisions, Contingent Liabilities and Contingent Assets – or recognises a new provision. Mere disclosure of a contingent liability is not sufficient because the settlement provides additional evidence of conditions that existed at the end of the reporting period that would give rise to a provision in accordance with IAS 37 (see Chapter 26 at 3.1.1 and 3.2.1);
  2. (b) the receipt of information after the reporting period indicating that an asset was impaired at the end of the reporting period, or that the amount of a previously recognised impairment loss for that asset needs to be adjusted. For example:
    1. the bankruptcy of a customer that occurs after the reporting period usually confirms that the customer was credit-impaired at the end of the reporting period (this is discussed further at 3.3 below); and
    2. the sale of inventories after the reporting period may give evidence about their net realisable value at the end of the reporting period;
  3. the determination after the reporting period of the cost of assets purchased, or the proceeds from assets sold, before the end of the reporting period;
  4. the determination after the reporting period of the amount of profit-sharing or bonus payments, if the entity had a present legal or constructive obligation at the end of the reporting period to make such payments as a result of events before that date (see Chapter 35 at 12.3); and
  5. the discovery of fraud or errors that show that the financial statements are incorrect (see 3.5 below). [IAS 10.9].

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].

2.1.3 Non-adjusting events

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:

  1. a major business combination (IFRS 3 – Business Combinations – requires specific disclosures in such cases, see Chapter 9 at 16.1.2) or disposing of a major subsidiary;
  2. announcing a plan to discontinue an operation;
  3. major purchases of assets, classification of assets as held for sale in accordance with IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations, other disposals of assets, or expropriation of major assets by government (see Chapter 4 at 5.1 for certain disclosures that are required to be made);
  4. the destruction of a major production plant by a fire;
  5. announcing, or commencing the implementation of, a major restructuring (discussed in Chapter 26 at 6.1.2);
  6. major ordinary share transactions and potential ordinary share transactions (although as noted at 2.1.2 above, some transactions in ordinary shares are adjusting events for the purposes of computing earnings per share);
  7. abnormally large changes in asset prices or foreign exchange rates;4
  8. changes in tax rates or the enactment or announcement of tax laws that significantly affect current and deferred tax assets and liabilities (discussed in Chapter 33 at 5.1.3 and 8.1.2);
  9. entry into significant commitments or contingent liabilities, for example, by issuing significant guarantees;
  10. start of major litigation arising solely out of events that occurred after the reporting period;
  11. a decline in fair value of investments;
  12. a declaration of dividends to holders of equity instruments (as defined in IAS 32 – Financial Instruments: Presentation – discussed in Chapter 47 at 8);
  13. a subsequent rectification of a breach in a long debt term covenant; and
  14. a contingent asset becoming virtually certain after the end of the reporting period. [IAS 10.11, 12, 22, IAS 1.76, IAS 37.35].

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].

2.1.3.A Dividend declaration

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:

  • when declaration of the dividend, e.g. by management or the board of directors, is approved by the relevant authority, e.g. the shareholders, if the jurisdiction requires such approval; or
  • when the dividend is declared, e.g. by management or the board of directors, if the jurisdiction does not require further approval. [IFRIC 17.10].

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.

2.2 The treatment of adjusting events

2.2.1 Events requiring adjustment to the amounts recognised, or disclosures, in the financial statements

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].

2.2.2 Events indicating that the going concern basis is not appropriate

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:

  1. when the financial statements are not prepared on a going concern basis, that fact should be disclosed, together with the basis on which the financial statements have been prepared and the reason why the entity is not regarded as a going concern; or
  2. when management is aware of material uncertainties related to events or conditions that may cast significant doubt upon the entity's ability to continue as a going concern, disclosure of those uncertainties should be made. [IAS 10.16.a, 16.b, IAS 1.25].

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)].

2.3 The treatment of non-adjusting events

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:

  1. the nature of the event; and
  2. an estimate of its financial effect, or a statement that such an estimate cannot be made. [IAS 10.21].

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.

2.3.1 Declaration to distribute non-cash assets to owners

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:

  1. the nature of the asset to be distributed;
  2. the carrying amount of the asset to be distributed as of the end of the reporting period; and
  3. the fair value of the asset to be distributed as of the end of the reporting period, if it is different from its carrying amount, and the following information about the method(s) used to measure that fair value: [IFRIC 17.17]
    1. the level of the fair value hierarchy within which the fair value measurement is categorised (Level 1, 2 or 3); [IFRS 13.93(b)]
    2. for fair value measurement categorised within Level 2 and Level 3 of the fair value hierarchy, a description of the valuation technique(s) and the inputs used in the fair value measurement. If there has been a change in valuation technique (e.g. changing from a market approach to an income approach or the use of an additional valuation technique), the entity should disclose that change and the reason(s) for making it. For fair value measurement categorised within Level 3 of the fair value hierarchy, quantitative information about the significant unobservable inputs used in the fair value measurement should be provided. An entity is not required to create quantitative information to comply with this disclosure requirement if quantitative unobservable inputs are not developed by the entity when measuring fair value (e.g. when an entity uses prices from prior transactions or third-party pricing information without adjustment). However, when providing this disclosure the quantitative unobservable inputs that are significant to the fair value measurement and are reasonably available to the entity should not be ignored; [IFRS 13.93(d)]
    3. for fair value measurement categorised within Level 3 of the fair value hierarchy, a description of the valuation processes used by the entity (including, for example, how an entity decides its valuation policies and procedures and analyses changes in fair value measurements from period to period); [IFRS 13.93(g)] and
    4. if the highest and best use of the non-financial asset differs from its current use, an entity should disclose that fact and why the non-financial asset is being used in a manner that differs from its highest and best use. [IFRS 13.93(i)].

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.

2.3.2 Breach of a long-term loan covenant and its subsequent rectification

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:

  • refinancing on a long-term basis;
  • rectification of a breach of a long-term loan arrangement; and
  • the granting by the lender of a period of grace to rectify a breach of a long-term loan arrangement ending at least twelve months after the reporting period (see Chapter 3 at 5.5). [IAS 1.76].

2.4 Other disclosure requirements

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:

  1. on the face of a primary statement (for example, entities that are required to have the statement of financial position signed could include the information at that point);
  2. in the note dealing with other IAS 10 disclosures or another note (such as the summary of significant accounting policies); or
  3. in a separate statement such as a statement of directors' responsibilities for the financial statements (that is, outside of the financial statements as permitted in certain jurisdictions).

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].

3 PRACTICAL ISSUES

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.

3.1 Valuation of inventory

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:

  1. Price reductions caused by a sudden increase in cheap imports

    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.

  2. Price reductions caused by increased competition

    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.

  3. Price reductions caused by the introduction of an improved competitive product

    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).

3.2 Percentage of completion estimates

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.

3.3 Insolvency of a debtor and IFRS 9 expected credit losses

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.

3.4 Valuation of investment property at fair value and tenant insolvency

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).

3.5 Discovery of fraud after the reporting period

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.

3.6 Changes to estimates of uncertain tax treatments

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:

  1. examinations or actions by a taxation authority. For example:
    1. agreement or disagreement by the taxation authority with the tax treatment or a similar tax treatment used by the entity;
    2. information that the taxation authority has agreed or disagreed with a similar tax treatment used by another entity; and
    3. information about the amount received or paid to settle a similar tax treatment;
  2. changes in rules established by a taxation authority; and
  3. the expiry of a taxation authority's right to examine or re-examine a tax treatment. [IFRIC 23.A2].

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.

References

  1.   1 The IASB's amendments to IAS 1 and IAS 8 ‘Definition of Material’ issued in October 2018 amended IAS 10.21, in order to align IAS 10 with the updated definition of material in IAS 8. This amendment is effective for financial periods beginning on or after 1 January 2020.
  2.   2 IFRIC Update, November 2012.
  3.   3 IFRIC Update, May 2013.
  4.   4 Abnormally large changes in exchange rates are not, in our experience, a common occurrence. An example of disclosure regarding abnormally large changes in foreign exchange rates after the reporting period can be found in the 2014 annual report of UBS AG.
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