Chapter 29
Events after the end of the reporting period

List of examples

Chapter 29
Events after the end of the reporting period

1 INTRODUCTION

Section 32 – Events after the End of the Reporting Period – defines events after the end of the reporting period and sets out principles for recognising, measuring and disclosing those events that occur between the end of the reporting period and the date when the financial statements are authorised for issue. [FRS 102.32.1, 2]. The definition 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 end of the reporting period to reflect in the financial statements as adjustments or by providing additional disclosure.

2 COMPARISON BETWEEN SECTION 32 AND IFRS

There are no key differences between Section 32 and the comparable IFRS standard, IAS 10 – Events after the Reporting Period.

3 REQUIREMENTS OF SECTION 32 FOR EVENTS AFTER THE END OF THE REPORTING PERIOD

The following key terms in Section 32 are defined in the Glossary: [FRS 102 Appendix I]

Reporting date is the end of the latest period covered by financial statements or by an interim financial report.

Reporting period is the period covered by financial statements or by an interim financial report.

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. Section 32 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. [FRS 102.32.4]. 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, Section 32 requires certain disclosures about them. [FRS 102.32.10].

Section 32 deals with the accounting for and the disclosure of events after the reporting period, which are defined 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’. [FRS 102.32.2]. The definition includes all events that provide evidence of conditions that existed at the end of the reporting period (adjusting events) and those events that are indicative of conditions that arose after the end of the reporting period (non-adjusting events).

Events after the end of the reporting period include all events that occur up to the date the financial statements are authorised for issue, even if those events occur after the public announcement of profit or loss or other financial information. [FRS 102.32.3].

One exception to the general rule of Section 32 for non-adjusting events is when the going concern basis becomes inappropriate after the reporting period. This is treated as an adjusting event (see 3.3 below). [FRS 102.32.7A].

The requirements of Section 32 and practical issues resulting from these requirements are dealt with below.

3.1 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. Section 32 states that events after the end of the reporting period include all events up to the date that the financial statements are authorised for issue, even if those events occur after the public announcement of profit or loss or other selected financial information. [FRS 102.32.3].

The example below illustrates a situation when an entity releases preliminary information, but not complete financial statements, before the date of the authorisation for issue.

Example 29.1 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. Accordingly, the information in the financial statements might differ from the equivalent information in a preliminary announcement.

3.1.1 Re-issuing financial statements

Section 32 does 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 regulations. There are a number of reasons why financial statements may be re-issued after they have been authorised for issue, such a reason could be that the original financial statements were defective or the entity is re-issuing financial statement for a listing.

If an entity reissues financial statements to correct an error, the UK Companies (Revision of Defective Accounts and Reports) Regulation 2008 (SI 2008/373) should be followed in correcting the defective financial statements. The regulations permit the defective financial statements to be either replaced or revised by a supplementary note. If the financial statements are replaced or revised by a supplementary note, they should appropriately reflect all adjusting events, by updating the amounts recognised in the financial statements, and non-adjusting events, to the date when the original financial statements were approved. This means that the financial statements do not reflect events that occurred between the date when the original financial statements were authorised for issue and the date the revised financial statements were authorised for re-issue.

3.2 Recognition and measurement of events occurring after the end of the reporting period

3.2.1 Adjusting events

Adjusting events are ‘those that provide evidence of conditions that existed at the end of the reporting period.’ [FRS 102.32.2(a)]. An entity shall adjust the amounts recognised in its financial statements, including any related disclosures, to reflect adjusting events. [FRS 102.32.4].

The following are examples of adjusting events after the end of the reporting period that require amounts in the financial statements to be adjusted or to recognise items that were not previously recognised: [FRS 102.32.5(a)-(e)]

  • The settlement after the end of a 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 under Section 21 – Provisions and Contingencies – 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 Section 21 (see Chapter 19).
  • The receipt of information after the end of 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:
    • the bankruptcy of a customer that occurs after the end of the reporting period usually confirms that a loss existed at the end of the reporting period on a trade receivable and that the entity needs to adjust the carrying amount of the trade receivable (see 4.3 below); and
    • the sale of inventories after the end of the reporting period may give evidence about their selling price at the end of the reporting period for the purpose of assessing impairment at that date (see 4.1 below).
  • The determination after the end of the reporting period of the cost of assets purchased, or the proceeds from assets sold, before the end of the reporting period.
  • The determination after the end of the reporting period of the amount of profit-sharing or bonus payments, if the entity had a legal or constructive obligation at the end of the reporting period to make such payments as a result of events before that date.
  • The discovery of fraud or errors that show that the financial statements are incorrect (see 4.5 below).

In addition, those entities that apply IAS 33 – Earnings per Share – as permitted by Section 1 – Scope – are required to make adjustments to earnings per share for certain share transactions after the reporting period (such as bonus issues, share splits or share consolidations), even though the transactions themselves are non-adjusting events (see 3.2.2 below).

3.2.2 Non-adjusting events

Non-adjusting events are ‘those that are indicative of conditions that arose after the end of the reporting period’. [FRS 102.32.2(b)]. An entity shall not adjust the amounts recognised in its financial statements to reflect non-adjusting events. [FRS 102.32.6].

Examples of non-adjusting events are as follows: [FRS 102.32.7]

  • A decline in market value of investments between the end of the reporting period and the date when the financial statements are authorised for issue. The decline in market value does not normally relate to the condition of the investments at the end of the reporting period but reflects circumstances that have arisen subsequent to the end of the reporting period.
  • An amount that becomes receivable as a result of a favourable judgement or settlement of a court case after the reporting date but before the financial statements are authorised for issue. This would be a contingent asset at the reporting date (see Section 21 and Chapter 19) and disclosure may be required. However, if an agreement is reached before the financial statements are authorised for issue, on the amount of damages for a judgement that was reached before the reporting date, but that was not previously recognised on the basis it could not be measured reliably, this may constitute an adjusting event. [FRS 102.32.7(b)].

The following are further examples of non-adjusting events after the end of the reporting period that would generally result in disclosure. The disclosures will reflect information that becomes known after the end of the reporting period but before the financial statements are authorised for issue: [FRS 102.32.11]

  • a major business combination or disposal of a major subsidiary (Section 19 – Business Combinations and Goodwill – does not require any specific disclosures in respect of business combinations occurring after the reporting date);
  • announcing a plan to discontinue an operation;
  • major purchases of assets, disposal or plans to dispose of assets, or expropriation of major assets by governments;
  • the destruction of a major production plant by a fire;
  • announcing, or commencing the implementation of a major restructuring;
  • the issue or repurchase of an entity's debt or equity instruments;
  • abnormally large changes in asset prices or foreign exchange rates;
  • changes in tax rates or tax laws enacted or announced that have a significant effect on current and deferred tax assets and liabilities;
  • entering into significant commitments or contingent liabilities, for example, by issuing significant guarantees; and
  • commencing major litigation arising solely out of events that occurred after the end of the reporting period.

3.3 Going concern

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. [FRS 102.32.7A].

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, Section 32 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. [FRS 102.32.7B].

Section 3 – Financial Statement Presentation – contains guidance and specific disclosure requirements when the financial statements are not prepared on a going concern basis or when there are uncertainties that cast significant doubt upon an entity's ability to continue as a going concern – see Chapter 6.

3.4 Dividends

Dividends declared by an entity to holders of its equity instruments after the end of the reporting period are not adjusting events as no obligation exists at the end of the reporting period. However, although dividends declared after the reporting date are not liabilities, entities may present the amount of dividends declared after the end of the reporting period, as a segregated component of retained earnings. [FRS 102.32.8]. This allows entities to show the amount of retained earnings that are set aside for future dividends, as at the date the financial statements are authorised for issue.

The accounting for dividends in FRS 102 reflects the legal status of dividends under the Companies Act 2006. ICAEW/ICAS Technical Release 02/17BL – Guidance on Realised and Distributable Profits under the Companies Act 2006 (TECH 02/17BL) states that a distribution is made when it becomes a legally binding liability of the company, regardless of the date on which it is to be settled. In the case of a final dividend, this is when it is declared by the company in a general meeting or, for private companies, by the members passing a general resolution. In the case of interim dividends authorised under common articles of association, normally no legally binding liability is established prior to payment being made. In such cases, dividends are normally recognised when they are paid although TECH 02/17BL also provides guidance in determining whether an interim dividend is a legally binding liability at a date earlier than when payment is made. [TECH 02/17BL.2.10].

The examples of non-adjusting events discussed at 3.2.2 above do not include declared dividends. However, the Companies Act requires disclosure of any dividends proposed before the date of approval of the financial statements (see 3.5.4 below).

3.5 Disclosures

Section 32 does not require any disclosures in respect of adjusting events as disclosures of such transactions follow the applicable sections in FRS 102 since the financial statements reflect such transactions.

3.5.1 Date when financial statements are authorised for issue

An entity shall disclose the date when the financial statements were authorised for issue and who authorised the financial statements for issue. [FRS 102.32.9].

3.5.2 Non-adjusting events

An entity shall disclose the following for each category of non-adjusting events after the end of the reporting period: [FRS 102.32.10]

  • the nature of the event; and
  • an estimate of its financial effect, or a statement that such an estimate cannot be made.

Examples of non-adjusting events after the end of the reporting period that would generally result in disclosures are provided at 3.2.2 above. It is important to note that the list of examples of non-adjusting events in Section 32, and summarised at 3.2.2 above, is not an exhaustive one; Section 32 requires disclosure of any material non-adjusting event.

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

The rectification of the breach or default of a loan payable, or the renegotiation of the terms of the loan, subsequent to the reporting date 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.

When a breach or default of a loan payable exists at the reporting date, an entity shall disclose, whether the breach or default was remedied, or the terms of the loan payable was renegotiated, before the financial statements were authorised for issue. [FRS 102.11.47(c)]. These disclosures are not required for qualifying entities that are non-financial institutions.

3.5.4 Additional Companies Act 2006 disclosure requirements in respect of reserves and dividends

The following disclosures in respect of reserves and dividends intended to be distributed after the reporting period are required for large and medium sized companies, as defined by The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 as amended (the Regulations):

  • any amount set aside or proposed to be set aside to, or withdrawn, or proposed to be withdrawn from, reserves; and
  • the aggregate amount of dividends that are proposed before the date of approval of the financial statements. [1 Sch 43, 2 Sch 56, 3 Sch 64].

4. PRACTICAL ISSUES

Section 32 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 (see 3.2.2 above). At the same time, Section 32 asserts that the bankruptcy of a customer that occurs after the reporting period usually confirms that a loss on a trade receivable existed at the end of the reporting period (see 3.2.1 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.

4.1 Valuation of inventory

The sale of inventories after the reporting period is normally a good indicator of their selling price at that date. Section 32 states that such sales ‘may give evidence about their selling price at the end of the reporting period’ [FRS 102.32.5(b)(ii)] (see 3.2.1 above). However, in some cases, selling prices decrease because of conditions that did not exist at the end of the reporting period.

Therefore, the problem is determining why selling price 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 these changes.

Some examples of changing conditions are as follows:

  • 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 selling price.

  • 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.

  • 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 more appropriate to adjust the valuation of inventories to their selling price after that introduction because the entity's failure to maintain its competitive position in relation to product improvements that existed at the end of the reporting period.

Competitive pressures that cause a decrease in selling price 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 selling price of the inventories if the impact is material (see 3.2.2 above).

4.2 Percentage of completion estimates

Events after the reporting period frequently give evidence about the profitability of construction contracts (or other contracts for which revenue is recognised using a percentage of completion method) that are in progress at the end of the reporting period.

Section 23 – Revenue – requires an assessment to be made as of the end of the reporting period, of the outcome of a construction contract to recognise revenue and expenses under the percentage of completion method (see Chapter 20). [FRS 102.23.17]. 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 percentage of completion calculation.

4.3 Insolvency of a debtor

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. Section 32 states that the ‘bankruptcy of a customer that occurs after the end of the reporting period usually confirms that a loss existed at the end of the reporting period’ [FRS 102.32.5(b)(i)] (see 3.2.1 above). 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 impact of the debtor's default.

4.4 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 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 valuation at the end of the reporting period.

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 amounts due from the tenant at the end of the reporting period.

Section 32 states that ‘a decline in market value of investments between the end of the reporting period and the date when 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 3.2.2 above). This decline in fair value, however, may be required to be disclosed if material.

4.5 Discovery of fraud after the end of 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 of estimate requiring prospective adjustment. Application of the definitions of a prior period error and a change in accounting policy included in Section 10 – Accounting Policies, Estimates and Errors – requires judgement in the case of a fraud (see Chapter 9). The facts and circumstances should be evaluated to determine if the discovery of fraud resulted from 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 application of Section 32 is required to determine whether financial information is required to be adjusted, or whether disclosure is sufficient. The facts and circumstances are evaluated to determine if the fraud provides evidence of circumstances that existed at the end of the reporting period or circumstances that arose after that date. Determining this is a complex task and requires judgement and careful consideration of the specifics to each case.

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