Classification

IAS 1 requires that the reporting entity must present current and non-current assets, and current and non-current liabilities, as separate classifications on the face of its statement of financial position, except when a liquidity presentation provides more relevant and reliable information. In those exceptional instances, all assets and liabilities are to be presented broadly in order of liquidity. Whether classified or employing the order of liquidity approach, for any asset or liability reported as a discrete line item that combines amounts expected to be realised or settled within no more than 12 months after the reporting period and more than 12 months after the reporting period, the reporting entity must disclose the amount expected to be recovered or settled after more than 12 months.

IAS 1 also makes explicit reference to the requirements imposed by IAS 32 concerning financial assets and financial liabilities. Since such common items in the statement of financial position as trade and other receivables and payables are within the definition of financial instruments, information about maturity dates is already required under IFRS. While most trade payables and accrued liabilities will be due within 30 to 90 days, and thus are understood by all financial statement readers to be current, this requirement would necessitate additional disclosure, either in the statement of financial position or in the footnotes thereto, when this assumption is not warranted.

The other purpose of presenting a classified statement of financial position is to highlight those assets and obligations that are “continuously circulating” in the phraseology of IAS 1. That is, the goal is to identify specifically resources and commitments that are consumed or settled in the normal course of the operating cycle. In some types of businesses, such as certain construction entities, the normal operating cycle may exceed one year. Thus, some assets or liabilities might fail to be incorporated into a definition based on the first goal of reporting, providing insight into liquidity, but be included in one that meets the second goal.

As a compromise, if a classified statement of financial position is indeed being presented, the convention for financial reporting purposes is to consider assets and liabilities current if they will be realised and settled within one year or one operating cycle, whichever is longer. Since this may vary in practice from one reporting entity to another, however, it is important for users to read the accounting policies set out in the notes to the financial statements. The classification criterion should be set out there, particularly if it is other than the “one-year threshold” rule most commonly employed.

Nature of current liabilities

Current liabilities are generally perceived to be those that are payable within 12 months of the reporting date. The convention has long been to use one year after the reporting period as the threshold for categorisation as current, subject to the operating cycle issue for liabilities linked to operations. Examples of liabilities which are not expected to be settled in the normal course of the operating cycle but which, if due within 12 months would be deemed current, are current portions of long-term debt and bank overdrafts, dividends declared and payable, and various non-trade payables.

Current liabilities would almost always include not only obligations that are due on demand (typically including bank lines of credit, other demand notes payable and certain overdue obligations for which forbearance has been granted on a day-to-day basis), but also the currently scheduled payments on longer-term obligations, such as instalment agreements. Also included in this group would be trade credit and accrued expenses, and deferred revenues and advances from customers for which services are to be provided or products delivered within one year. If certain conditions are met (described below), short-term obligations that are intended to be refinanced may be excluded from current liabilities. An amendment to IAS 1, effective January 1, 2009, clarified that terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification. For example, if a liability to be settled in full in cash after five years also allows the lender to demand settlement in shares of the borrower at any point prior to the settlement date, that liability will be classified as non-current.

Like all liabilities, current liabilities may be known with certainty as to amount, due date and payee, as is most commonly the case. However, one or more of these elements may be unknown or subject to estimation. Consistent with basic principles of accrual accounting, however, the lack of specific information on, say, the amount owed will not serve to justify a failure to record and report on such obligations. The former commonly used term “estimated liabilities” has been superseded in IAS 37 by the term “provisions.” Provisions and contingent liabilities are discussed in detail later in this chapter.

Offsetting current assets against related current liabilities

IAS 1 states that current liabilities are not to be reduced by the deduction of a current asset (or vice versa) unless required or permitted by another IFRS. In practice, there are few circumstances that would meet this requirement; certain financial instruments (to the extent permitted by IAS 32) are the most commonly encountered exceptions. As an almost universal rule, therefore, assets and liabilities must be shown “gross,” even where the same counterparties are present (e.g., amounts due from and amounts owed to another entity).

Types of liabilities

Current obligations can be divided into those where:

1. Both the amount and the payee are known;
2. The payee is known but the amount may have to be estimated;
3. The payee is unknown and the amount may have to be estimated; and
4. The liability has been incurred due to a loss contingency.

These types of liabilities are discussed in the following sections.

Short-term obligations expected to be refinanced

Long-term financial liabilities within 12 months of maturity are current liabilities in a classified statement of financial position. In some cases, the reporting entity has plans or intentions to refinance the debt (to “roll it over”) and thus does not expect its maturity to cause it to deploy its working capital. Under provisions of IAS 1, this debt must be shown as current when due to be settled within 12 months of the end of the reporting period, notwithstanding that its original term was for a period of more than 12 months; and that an agreement to refinance, or to reschedule payments, on a long-term basis is completed after the reporting period and before the financial statements are authorised for issuance.

However, if the reporting entity has the ability, unilaterally, to refinance or “roll over” the debt for at least 12 months after the end of the reporting period, under the terms of an existing loan facility, it is classified as non-current, even if it is otherwise due to be repaid within 12 months of the end of the reporting period, if a “rollover” is the entity's intent. This differs from the situation in which refinancing or “rolling over” the obligation is not at the discretion of the entity (as when there is no agreement to refinance), in which case the potential to refinance (which is no more than the borrowers hope in such instance) is not considered and the obligation is classified as current.

• Enter into a 30-year fixed-rate mortgage for €3,400,000 at 7% interest, leaving Marrakech with a €100,000 obligation to fulfil from short-term funds. Under this scenario, Marrakech reports as current debt the €100,000, as well as the €50,000 portion of the mortgage due within one year, with the remainder of the mortgage itemised as long-term debt. The presentation follows:

• Pay off the bridge loan with Marrakech's existing variable rate line of credit (LOC), which expires in two years. The maximum amount of the LOC is 80% of Marrakech's accounts receivable. Over the two-year remaining term of the LOC, the lowest level of qualifying accounts receivable is expected to be €2,700,000. Thus, only €2,700,000 of the debt can be classified as long-term, while €800,000 is classified as a short-term obligation. The presentation follows:

• Obtain a loan bearing interest at 10% from Marrakech's owner, with a balloon payment due in five years. Under the terms of this arrangement, the owner can withdraw up to €1,500,000 of funding at any time, even though €3,500,000 is currently available to Marrakech. Under this approach, €1,500,000 is callable, and therefore must be classified as a short-term obligation. The remainder is classified as long-term debt. The presentation follows:

Long-term debt subject to demand for repayment

A lender may have the right to demand immediate or significantly accelerated repayment, or such acceleration rights vest with the lender upon the occurrence of certain events. For example, long-term (and even many short-term) debt agreements typically contain covenants, which effectively are negative or affirmative restrictions on the borrower as to undertaking further borrowings, paying dividends, maintaining specified levels of working capital and so forth. If a covenant is breached by the borrower, the lender will typically have the right to call the debt immediately, or to otherwise accelerate repayment.

In other cases, the lender will have certain rights under a “subjective acceleration clause” inserted into the loan agreement, giving it the right to demand repayment if it perceives that its risk position has deteriorated as a result of changes in the borrower's business operations, liquidity or other sometimes vaguely defined factors. Obviously, this gives the lender great power and subjects the borrower to the real possibility that the nominally long-term debt will, in fact, be short-term.

IAS 1 addresses the matter of breach of loan covenants but does not address the less common phenomenon of subjective acceleration clauses in loan agreements. As to the former, it provides that continued classification of the debt as non-current, when one or more of the stipulated default circumstances has occurred, is contingent upon meeting two conditions. First, the lender has agreed, prior to approval of the financial statements, not to demand payment as a consequence of the breach (giving what is known as a debt compliance waiver); and secondly, that it is considered not probable that further breaches will occur within 12 months of the end of the reporting period. If one or both of these cannot be met, the debt must be reclassified to current status if a classified statement of financial position is, as is generally required under IAS 1, to be presented.

Logic suggests that the existence of subjective acceleration clauses convert nominally long-term debt into currently payable debt as the entity does not have an unconditional right to defer payment for 12 months from year-end. Such debt should be shown as current, with sufficient disclosure to inform the reader that the debt could effectively be “rolled over” until the nominal maturity date, at the sole discretion of the lender.

Provisions

Under IAS 37, Provisions, Contingent Liabilities and Contingent Assets, those liabilities for which amount, or timing of expenditure is uncertain are deemed to be provisions.

First and foremost, with the issuance of IFRS 15 applicable to entities from January 1, 2018, there are key impacts on IAS 37 as detailed hereunder:

1. Type of provision, contingent liability and contingent asset arising from IFRS 15, Revenue from Contracts with Customers, shall be dealt with as detailed therein and not under IAS 37;
2. However, as IFRS 15 does not deal specifically with contracts with customers that are, or have become, onerous, the same will continue to be dealt with under IAS 37.

Another significant change has been brought about with the issuance of IFRS 16 applicable to entities from January 1, 2019. The key implication is detailed here:

1. Where IFRS 16, Leases, deals with any types of provisions these provisions are then excluded from the scope of IAS 37. This is unless the lease becomes onerous before the commencement date of the lease in terms of IFRS 16, in which case any provision or contingent liability is then included back into the scope of IAS 37.
2. IAS 37 requirements will apply to short-term leases and leases for which the underlying asset is of a low value accounted for in accordance with IFRS 16.

IAS 37 provides a comprehensive definition of the term “provision.” It mandates, in a clear-cut manner, that a provision should be recognised only if:

1. The entity has a present obligation (legal or constructive) as a result of a past event;
2. It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
3. A reliable estimate can be made of the amount of the obligation.

Thus, a whole range of vaguely defined reserves found in financial statements in days past are clearly not permitted under IFRS. This includes the oft-manipulated restructuring reserves commonly created during the business combination process. Now, unless there is a present obligation as of the purchase combination date, such reserves cannot be established—in most instances, any future restructuring costs will be recognised after the merger event and charged against the successor entity's earnings.

Many other previously employed reserves are likewise barred by the strict conditions set out in IAS 37. However, the mere need to estimate the amount to be reflected in the provision is not evidence of a failure to qualify for recognition. If an actual obligation exists, despite one or more factors making the amount less than precisely known, recognition is required.

IAS 37 offers in-depth guidance on the topic of provisions. Each of the key words in the definition of the term “provision” is explained in detail by the standard. Explanations and clarifications offered by the standard are summarised below:

1. Present obligation. The standard states that in almost all cases it will be clear when a present obligation exists. The notion of an obligation in the standard includes not only a legal obligation (e.g., deriving from a contract or legislation) but also a constructive obligation. It explains that a constructive obligation exists when the entity from an established pattern of past practice or stated policy has created a valid expectation that it will accept certain responsibilities.
2. Past event. There must be some past event which has triggered the present obligation—for example, an accidental oil spillage. An accounting provision cannot be created in anticipation of a future event. The entity must also have no realistic alternative to settling the obligation caused by the event. In other words, if the entity can avoid the expenditure through its own actions, a provision cannot be recognised (e.g., planned future maintenance on a plant).
3. Probable outflow of resources embodying economic benefits. For a provision to qualify for recognition it is essential that it is not only a present obligation of the reporting entity, but also it should be probable that an outflow of resources embodying benefits used to settle the obligation will in fact result. For the purposes of this standard, probable is defined as “more likely than not.” A footnote to the standard states that this interpretation of the term “probable” does not necessarily apply to other IFRS. The use of terms such as probable, significant or impracticable creates problems of interpretation, both within a given set of standards (e.g., IFRS) and across different sets.
4. Reliable estimate of the obligation. The standard recognises that using estimates is common in the preparation of financial statements and suggests that by using a range of possible outcomes, an entity will usually be able to make an estimate of the obligation that is sufficiently reliable to use in recognising a provision. Where no reliable estimate can be made, though, no liability is recognised.

Other salient features of provisions explained by the standard include the following:

1. Best estimate. For all estimated liabilities that are included within the definition of provisions, the amount to be recorded and presented in the statement of financial position should be the best estimate, at the end of the reporting period, of the amount of expenditure that will be required to settle the obligation. This is often referred to as the “expected value” of the obligation, which may be operationally defined as the amount the entity would pay, currently, to either settle the actual obligation or provide consideration to a third party to assume it (e.g., as a single occurrence insurance premium). For estimated liabilities comprised of large numbers of relatively small, similar items, weighting by probability of occurrence can be used to compute the aggregate expected value; this is often used to compute accrued warranty reserves, for example. For those estimated liabilities consisting of only a few (or a single) discrete obligations, the most likely outcome may be used to measure the liability when there is a range of outcomes having roughly similar probabilities; but if possible outcomes include amounts much greater (and lesser) than the most likely, it may be necessary to accrue a larger or lesser amount if there is a significant chance that the larger or lower obligation will have to be settled, even if that is not the most likely outcome as such.

   The concept of “expected value” can be best explained through an example:

   Good Samaritan Inc. provides warranty for the machines sold by it, where customers are entitled to refunds if they return defective machines with valid proof of purchase. Good Samaritan Inc. estimates that if all machines sold and still in warranty had major defects, total replacement costs would equal €1,000,000; if all those machines suffered from minor defects, the total repair costs would be €500,000. Good Samaritan's past experience, however, suggests that only 10% of the machines sold will have major defects, and that another 30% will have minor defects. Based on this information, the expected value of the product warranty costs to be accrued at year-end would be computed as follows:

   Expected value of the cost of refunds
   Resulting from major defects	€1,000,000 × 0.10	=	€100,000
   Resulting from minor defects	€500,000 × 0.30	=	150,000
   No defects	€0 × 0.60	=	0
   	Total	=	€250,000

2. Risks and uncertainties. The “risks and uncertainties” surrounding events and circumstances should be taken into account in arriving at the best estimate of a provision. However, as pointedly noted by the standard, uncertainty should not be used to justify the creation of excessive provisions or a deliberate overstatement of liabilities.
3. Discounting. The standard also addresses the use of present values or discounting (i.e., recording the estimated liability at present value, after taking into account the time value of money). While the entire subject of present value measurement in accounting has been widely debated, in practice there is a notable lack of consistency (with some standards requiring it, others prohibiting it and many others remaining silent on the issue). IAS 37 has stood firm on the subject of present value measurement and requires the use of discounting when the effect would be material, but it can be ignored if immaterial in effect. Thus, provisions estimated to be due farther into the future will have more need to be discounted than those due currently. As a practical matter, all but trivial provisions should be discounted unless the timing is unknown (which makes discounting a computational impossibility).

   IAS 37 clarifies that the discount rate applied should be consistent with the estimation of cash flows (i.e., if cash flows are projected in nominal terms). That is, if the estimated amount expected to be paid out reflects whatever price inflation is anticipated to occur between the end of the reporting period and the date of ultimate settlement of the estimated obligation, then a nominal discount rate should be used. If future cash outflows are projected in real terms, net of any price inflation, then a real interest rate should be applied. In either case, past experience must be used to ascertain likely timing of future cash flows, since discounting cannot otherwise be performed.

4. Future events. Future events that may affect the amount required to settle an obligation should be reflected in the provision amount where there is sufficient objective evidence that such future events will in fact occur. For example, if an entity believes that the cost of cleaning up a plant site at the end of its useful life will be reduced by future changes in technology, the amount recognised as a provision for cleanup costs should reflect a reasonable estimate of cost reduction resulting from any anticipated technological changes. However, in many instances making such estimates will not be possible.
5. Decommissioning provisions. IFRIC 1 mandates that changes in decommissioning provisions should be recognised prospectively (i.e., by amending future depreciation charges). More clarity is provided elsewhere in this chapter under the relevant paragraph.
6. Disposal proceeds. Gains from expected disposals of assets should not be taken into account in arriving at the amount of the provision (even if the expected disposal is closely linked to the event giving rise to the provision).
7. Reimbursements. Reimbursements by other parties should be taken into account when computing the provision, only if it is virtually certain that the reimbursement will be received. The reimbursement should be treated as a separate asset on the statement of financial position, and not netted against the estimated liability. However, in the statement of comprehensive income the provision may be presented net of the amount recognised as a reimbursement. In the authors' observation, recognition of such assets would be very rare in practice due to the long time horizons and concerns about the viability of the parties promising to make reimbursement payments over the long term.
8. Changes in provisions. Changes in provisions should be considered at the end of each reporting period, and provisions should be adjusted to reflect the current best estimate. If upon review it appears that it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, then the provision should be reversed through current period profit or loss as a change in estimate.
9. Use of provisions recognised. Use of a provision is to be restricted to the purpose for which it was recognised originally. A reserve for plant dismantling, for example, cannot be used to absorb environmental pollution claims or warranty payments. If an expenditure is set against a provision that was originally recognised for another purpose, that would camouflage the impact of the two different events, distorting income performance and possibly constituting financial reporting fraud.
10. Future operating losses. Provisions for future operating losses cannot be recognised. This is explicitly proscribed by the standard, since future operating losses do not meet the definition of a liability at the end of the reporting period (as defined in the standard) and the general recognition criteria set out in the standard.
11. Onerous contracts. Present obligations under onerous contracts should be recognised and measured as a provision. In respect of leases, with the introduction of IFRS 16, only lease contracts which have become onerous before the commencement date of the lease shall be covered by the scope of IAS 37. The standard introduces the concept of onerous contracts, which it defines as contracts under which the unavoidable costs of satisfying the obligations exceed the economic benefits expected. Executory contracts that are not onerous do not fall within the scope of this standard. In other words, the expected negative implications of such contracts (executory contracts which are not onerous) cannot be recognised as a provision.

    The standard mandates that unavoidable costs under a contract represent the “least net costs of exiting from the contract.” Such unavoidable costs should be measured at the lower of:

    1. The cost of fulfilling the contract; or
    2. Any compensation or penalties arising from failure to fulfil the contract.

    The amendment to IAS 37 applicable for the periods from 1 January 2022, provides clarity on what constitutes “cost of fulfilling a contract.” It is stated to be the costs directly related to the contract consisting of both:

    1. The incremental costs of fulfilling that contract—for example, direct labour and materials; and
    2. An allocation of other costs that relate directly to fulfilling contracts—for example, an allocation of the depreciation charge for an item of property, plant and equipment used in fulfilling that contract, among others.

    The amendment has also brought out the requirement that before the provision for onerous contract is established, the entity shall recognise any impairment to the assets used in fulfilling the contract.

    It also provides that in the year of initial application, the effect of these changes to the carrying values could be adjusted to the opening reserves without having to restate the comparative information.

12. Restructuring provisions. Provisions for restructuring costs are recognised only when the general recognition criteria for provisions are met. A constructive obligation to restructure arises only when an entity has a detailed formal plan for the restructuring, which identifies at least the following:
    1. The business or the part of the business concerned;
    2. Principal locations affected;
    3. Approximate number of employees that would need to be compensated for termination resulting from the restructuring (along with their function and location);
    4. Expenditure that would be required to carry out the restructuring; and
    5. Information as to when the plan is to be implemented.

Furthermore, the recognition criteria also require that the entity should have raised a valid expectation among those affected by the restructuring that it will, in fact, carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it. Thus, until all the conditions mentioned above are satisfied, a restructuring provision cannot be made based upon the concept of constructive obligation. In practice, given the strict criteria of IAS 37, restructuring costs are more likely to become recognisable when actually incurred in a subsequent period.

Only direct expenditures arising from restructuring should be provided for. Such direct expenditures should be both necessarily incurred for the restructuring and not associated with the ongoing activities of the entity. Thus, a provision for restructuring would not include costs like: cost of retraining or relocating the entity's current staff members or costs of marketing or investments in new systems and distribution networks (such expenditures are in fact categorically disallowed by the standard, as they are considered to be expenses relating to the future conduct of the business of the entity, and thus are not liabilities relating to the restructuring programme). Also, identifiable future operating losses up to the date of an actual restructuring are not to be included in the provision for a restructuring (unless they relate to an onerous contract). Furthermore, in keeping with the general measurement principles relating to provisions outlined in the standard, the specific guidance in IAS 37 relating to restructuring prohibits taking into account any gains on expected disposal of assets in measuring a restructuring provision, even if the sale of the assets is envisaged as part of the restructuring.

A management decision or a board resolution to restructure taken before the end of the reporting period does not automatically give rise to a constructive obligation at the end of the reporting period unless the entity has, before the end of the reporting period: either started to implement the restructuring plan, or announced the main features of the restructuring plan to those affected by it in a sufficiently specific manner that a valid expectation is raised in them (i.e., that the entity will in fact carry out the restructuring and that benefits will be paid to them).

Examples of events that may fall within the definition of restructuring are:

1. A fundamental reorganisation of an entity that has a material effect on the nature and focus of the entity's operations;
2. Drastic changes in the management structure—for example, making all functional units autonomous;
3. Removing the business to a more strategic location or place by relocating the headquarters from one country or region to another; and
4. The sale or termination of a line of business (if certain other conditions are satisfied, such that a restructuring could be considered a discontinued operation under IFRS 5).

Assessing the likelihood of contingent events

It is tempting to express quantitatively the likelihood of the occurrence of contingent events (e.g., an 80% probability), but this exaggerates the degree of precision possible in the estimation process. For this reason, accounting standards have not been written to require quantification of the likelihood of contingent outcomes. Rather, qualitative descriptions, ranging along the continuum from remote to probable, have historically been prescribed.

IAS 37 sets the threshold for accrual at “more likely than not,” which most experts have defined as being a probability of very slightly over a 50% likelihood. Thus, if there is even a hint that the obligation is more likely to exist than not to exist, it will need to be formally recognised if an amount can be reasonably estimated for it. The impact will be both to make it much less ambiguous when a contingency should be recorded and to force recognition of far more of these obligations at earlier dates than are being given recognition at present.

When a loss is probable, and no estimate is possible, these facts should be disclosed in the current period. The accrual of the loss should be made in the period in which the amount of the loss can be estimated. This accrual of a loss in future periods is a change in estimate. It is not to be presented as a prior period adjustment.

Remote contingent losses

With the exception of certain remote contingencies for which disclosures have traditionally been given, contingent losses that are deemed remote in terms of likelihood of occurrence are not accrued or disclosed in the financial statements. For example, every business risks loss by fire, explosion, government expropriation or guarantees made in the ordinary course of business. These are all contingencies (though not necessarily contingent liabilities) because of the uncertainty surrounding whether the future event confirming the loss will or will not take place. The risk of asset expropriation exists, but this has become less common an occurrence in recent decades and, in any event, would be limited to less developed or politically unstable nations. Unless there is specific information about the expectation of such occurrences, which would thus raise the item to the possible category in any event, thereby making it subject to disclosure, these are not normally discussed in the financial statements.

Litigation

The most difficult area of contingencies accounting involves litigation. In some nations, there is a great deal of commercial and other litigation, some of which exposes reporting entities to risks of incurring very material losses. Accountants must generally rely on attorneys' assessments concerning the likelihood of such events. Unless the attorney indicates that the risk of loss is remote or slight, or that the impact of any loss that does occur would be immaterial to the company, the accountant will require that the entity add explanatory material to the financial statements regarding the contingency. In cases where judgements have been entered against the entity, or where the attorney gives a range of expected losses or other amounts, certain accruals of loss contingencies for at least the minimum point of the range must be made. Similarly, if the reporting entity has made an offer in settlement of unresolved litigation, that offer would normally be deemed the lower end of the range of possible loss and, thus, subject for accrual. In most cases, however, an estimate of the contingency is unknown, and the contingency is reflected only in footnotes.

Authorisation Date

The determination of the authorisation date (i.e., the date when the financial statements could be considered legally authorised for issuance, generally by action of the board of directors of the reporting entity) is critical to the concept of events after the reporting period. It serves as the cutoff point after the reporting period, up to which the events after the reporting period are to be examined to ascertain whether such events qualify for the treatment prescribed by IAS 10. This standard explains the concept through the use of illustrations.

The general principles that need to be considered in determining the authorisation date of the financial statements are set out below:

1. When an entity is required to submit its financial statements to its shareholders for approval after they have already been issued, the authorisation date in this case would mean the date of original issuance and not the date when they are approved by the shareholders; and
2. When an entity is required to issue its financial statements to a supervisory board made up wholly of non-executives, authorisation date would mean the date on which management authorises them for issue to the supervisory board.

Consider the following examples:

1. The preparation of the financial statements of Xanadu Corp. for the reporting period ended December 31, 202X, was completed by the management on February 15, 202X+1. The draft financial statements were considered at the meeting of the board of directors held on February 18, 202X+1, on which date the Board approved them and authorised them for issuance. The annual general meeting (AGM) was held on March 28, 202X+1, after allowing for printing and the requisite notice period mandated by the corporate statute. At the AGM the shareholders approved the financial statements. The approved financial statements were filed by the corporation with the Company Law Board (the statutory body of the country that regulates corporations) on April 6, 202X+1.

   Given these facts, the date of authorisation of the financial statements of Xanadu Corp. for the year ended December 31, 202X, is February 18, 202X+1, the date when the Board approved them and authorised them for issue (and not the date they were approved in the AGM by the shareholders). Thus, all post-reporting period events between December 31, 202X, and February 18, 202X+1, need to be considered by Xanadu Corp. for the purposes of evaluating whether or not they are to be accounted or reported under IAS 10.

2. Suppose in the above cited case the management of Xanadu Corp. was required to issue the financial statements to a supervisory board (consisting solely of non-executives, including representatives of a trade union). The management of Xanadu Corp. had issued the draft financial statements to the supervisory board on February 16, 202X+1. The supervisory board approved them on February 17, 202X+1, and the shareholders approved them in the AGM held on March 28, 202X+1. The approved financial statements were filed with the Company Law Board on April 6, 202X+1.

   In this case the date of authorisation of financial statements would be February 16, 202X+1, the date the draft financial statements were issued to the supervisory board. Thus, all post-reporting period events between December 31, 202X, and February 16, 202X+1, need to be considered by Xanadu Corp. for the purposes of evaluating whether or not they are to be accounted for or reported under IAS 10.

Adjusting and Non-Adjusting Events (After the Reporting Period)

Two types of events after the reporting period are distinguished by the standard. These are, respectively, “adjusting events after the reporting period” and “non-adjusting events after the reporting period.” Adjusting events are those post-reporting period events that provide evidence of conditions that actually existed at the end of the reporting period, albeit they were not known at the time. Financial statements should be adjusted to reflect adjusting events after the reporting period.

Examples of adjusting events, given by the standard, are the following:

1. Resolution after the reporting period of a court case that confirms a present obligation requiring either an adjustment to an existing provision or recognition of a provision instead of mere disclosure of a contingent liability;
2. Receipt of information after the reporting period indicating that an asset was impaired or that a previous impairment loss needs to be adjusted. For instance, the bankruptcy of a customer subsequent to the end of the reporting period usually confirms that the customer was credit impaired at the end of the reporting period, and the disposal of inventories after the reporting period provides evidence (not always conclusive, however) about their net realisable value at the date of the statement of financial position;
3. The determination after the reporting period of the cost of assets purchased, or the proceeds from assets disposed of, before the reporting date;
4. The determination subsequent to the end of the reporting period of the amount of profit sharing or bonus payments, where there was a present legal or constructive obligation at the reporting date to make the payments as a result of events before that date; and
5. The discovery of frauds or errors, after the reporting period, that show that the financial statements were incorrect at the reporting date before the adjustment.

Commonly encountered situations of adjusting events are illustrated below:

• During the year 202X Taj Corp. was sued by a competitor for €10 million for infringement of a trademark. Based on the advice of the company's legal counsel, Taj accrued the sum of €5 million as a provision in its financial statements for the year ended December 31, 202X. Subsequent to the date of the statement of financial position, on February 15, 202X+1, the Supreme Court decided in favour of the party alleging infringement of the trademark and ordered the defendant to pay the aggrieved party a sum of €7 million. The financial statements were prepared by the company's management on January 31, 202X+1, and approved by the Board on February 20, 202X+1. Taj Corp. should adjust the provision by €2 million to reflect the award decreed by the Supreme Court (assumed to be the final appellate authority on the matter in this example) to be paid by Taj Corp. to its competitor. Had the judgement of the Supreme Court been delivered on February 25, 202X+1, or later, this post-reporting period event would have occurred after the cutoff point (i.e., the date the financial statements were authorised for original issuance). If so, adjustment of financial statements would not have been required.
• Penn Corp. carries its inventory at the lower of cost and net realisable value. At December 31, 202X, the cost of inventory, determined under the FIFO method, as reported in its financial statements for the year then ended, was €5 million. Due to severe recession and other negative economic trends in the market, the inventory could not be sold during the entire month of January 202X+1. On February 10, 202X+1, Penn Corp. entered into an agreement to sell the entire inventory to a competitor for €4 million. Presuming the financial statements were authorised for issuance on February 15, 202X+1, the company should recognise a write-down of €1 million in the financial statements for the year ended December 31, 202X, provided that this was determined to be an indicator of the value at year-end.

In contrast with the foregoing, non-adjusting events are those post-reporting period events that are indicative of conditions that arose after the reporting period. Financial statements should not be adjusted to reflect non-adjusting events after the end of the reporting period. An example of a non-adjusting event is a decline in the market value of investments between the date of the statement of financial position and the date when the financial statements are authorised for issue. Since the fall in the market value of investments after the reporting period is not indicative of their market value at the date of the statement of financial position (instead it reflects circumstances that arose subsequent to the end of the reporting period) the fall in market value need not, and should not, be recognised in the financial statements at the date of the statement of financial position.

Not all non-adjusting events are significant enough to require disclosure, however. The revised standard gives examples of non-adjusting events that would impair the ability of the users of financial statements to make proper evaluations or decisions if not disclosed. Where non-adjusting events after the reporting period are of such significance, disclosure should be made for each such significant category of non-adjusting event, of the nature of the event and an estimate of its financial effect or a statement that such an estimate cannot be made. Examples given by the standard of such significant non-adjusting post-reporting period events are the following:

1. A major business combination or disposing of a major subsidiary;
2. Announcing a plan to discontinue an operation;
3. Major purchases and disposals of assets or expropriation of major assets by government;
4. The destruction of a major production plant by fire;
5. Announcing or commencing the implementation of a major restructuring;
6. Abnormally large changes in asset prices or foreign exchange rates;
7. Significant changes in tax rates and enacted tax laws;
8. Entering into significant commitments or contingent liabilities; and
9. Major litigation arising from events occurring after the reporting period.

Dividends Proposed or Declared After the Reporting Period

Dividends on equity instruments proposed or declared after the reporting period should not be recognised as a liability at the end of the reporting period. In other words, such declaration is a non-adjusting subsequent event. While at one-time IFRS did permit accrual of post-balance sheet dividend declarations, this has not been permissible for quite some time. Furthermore, the revisions made to IAS 10 as part of the IASB's Improvements Project in late 2003 (which became effective 2005) also eliminated the display of post-reporting period dividends as a separate component of equity, as was formerly permitted. Footnote disclosure is, on the other hand, required unless immaterial.

A further clarification has been added by the 2008 Improvements, a collection of major and minor changes made in 2008. It states that, if dividends are declared (i.e., the dividends are appropriately authorised and no longer at the discretion of the entity) after the reporting period but before the financial statements are authorised for issue, the dividends are not recognised as a liability at the end of the reporting period, for the very simple reason that no obligation existed at that time. This rudimentary expansion of the language of IAS 10 was deemed necessary because it had been asserted that a constructive obligation could exist under certain circumstances, making formal accrual of a dividend liability warranted. The Improvements language makes it clear that this is never the case.

Going Concern Considerations

Deterioration in an entity's financial position after the end of the reporting period could cast substantial doubts about an entity's ability to continue as a going concern. IAS 10 requires that an entity should not prepare its financial statements on a going concern basis if management determines after the end of the reporting period that it either intends to liquidate the entity or cease trading, or that it has no realistic alternative but to do so. IAS 10 notes that disclosures prescribed by IAS 1 under such circumstances should also be complied with.

Disclosure Requirements

The following disclosures are mandated by IAS 10:

1. The date when the financial statements were authorised for issue and who gave that authorisation. If the entity's owners have the power to amend the financial statements after issuance, this fact should be disclosed;
2. If information is received after the reporting period about conditions that existed at the date of the statement of financial position, disclosures that relate to those conditions should be updated in the light of the new information; and
3. Where non-adjusting events after the reporting period are of such significance that non-disclosure would affect the ability of the users of financial statements to make proper evaluations and decisions, disclosure should be made for each such significant category of non-adjusting event, of the nature of the event and an estimate of its financial effect or a statement that such an estimate cannot be made.