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MAA716 Financial Accounting Suggested Solution Topic 2.2 Chapter 21 Events occurring after the end of the reporting period Review questions 21.1

Paragraph 3 of AASB 110 states: Events after the reporting period are 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. Two types of events can be identified: (a)

those that provide evidence of conditions that existed at the end of the reporting period (adjusting events after the reporting period); and

(b)

those that are indicative of conditions that arose after the reporting period (non-adjusting events after the reporting period).

As can be seen from the above, AASB 110 refers to ‘adjusting events’ and ‘non-adjusting events’. An adjusting event (which has also been commonly referred to as a type 1 event) is one that provides additional evidence of, or further elucidates, a condition that existed as at the end of the reporting period. It would be recognised in the financial statements either by being brought to account—if it relates to an item which would itself be brought to account— or by being included by way of a note—if it relates to an item that would usually be recognised only by way of a note, such as a contingent liability. As paragraph 8 of AASB 110 states: An entity shall adjust the amounts recognised in its financial statements to reflect adjusting events after the reporting period. A non-adjusting event (which has commonly been referred to as a type 2 event) is an event that occurred after the end of the reporting period, and therefore creates a new condition. The financial statements themselves would not be adjusted (unless the subsequent event indicates that the entity is no longer a going concern), but note disclosure could be required, depending upon the materiality of the event. As paragraph 10 of AASB 110 states: An entity shall not adjust the amounts recognised in its financial statements to reflect non-adjusting events after the reporting period. In relation to the note disclosures required by AASB 110 in relation to non-adjusting events, paragraph 21 of AASB 110 states: If non-adjusting events after the reporting period are material, nondisclosure could influence the economic decisions of users taken on the basis of the financial report. Accordingly, an entity shall disclose the following for each material category of non-adjusting event after the reporting period: 1

21.2

(a)

the nature of the event; and

(b)

an estimate of its financial effect, or a statement that such an estimate cannot be made.

Such an event would be a non-adjusting (or type 2) event. Non-adjusting events should be disclosed in the notes to the financial statements with a description of the event and, where possible, the financial effect of the event. Because non-adjusting events do not relate to any conditions existing at the end of the reporting period, it would be inappropriate to adjust the statement of financial position (which provides the financial position as at the end of the reporting period), or the statement of comprehensive income (which provides the profit or loss and total comprehensive income for a period of time at the end of the reporting period). However, it should be stressed that one exception to this rule relates to events that bring into question the going concern assumption of the entity. If something happens after the end of the reporting period that causes the entity to no longer appear to be a going concern, then paragraph 14 of AASB 110 requires that the financial statements be adjusted. Further, paragraph 15 states: 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 effect is so pervasive that this Standard requires a fundamental change in the basis of accounting, rather than an adjustment to the amounts recognised within the original basis of accounting. Even though non-adjusting events do not relate to the financial period in question, it would be inappropriate and misleading not to advise financial statement readers of material information that has come to light in the period since the end of the reporting period, but prior to the date when the financial statements are authorised for issue. Omission of such information may, if considered material, cause them to make resource allocation decisions that they may not otherwise have made. It should also be noted that Section 299 of the Corporations Act requires the directors to provide information about significant after-reporting-date events within their Directors’ Report.

21.3

(a)

To the extent that this does not impact the assumption that the entity is a going concern, then this is a non-adjusting event that should be disclosed by way of a note to the financial statements. If the event is of such magnitude that the going concern basis of valuation is no longer appropriate, then consistent with paragraph 14 of AASB 110, adjustments would be made directly to the financial statements.

(b)

To the extent that the new information provides further information about a condition that existed at the end of the reporting period (being that the debt was doubtful), then the accounts should be adjusted to reflect the fact that the debt is in doubt. That is, it is an adjusting (or type 1) event. In relation to this example, external auditors typically review receipts subsequent to the end of the reporting period, or search for information about subsequent customer failures, to determine whether closing allowances for doubtful debts appear adequate. Again, we would need to consider whether the event impacts the going concern assumption.

(c)

This is a non-adjusting (type 2) event, which should be documented in the notes to the financial statements to the extent that it is material.

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(d)

This is an adjusting event that provides information about a debt which had been incurred prior to the end of the reporting period, and adjustment to the financial statements will be required.

(e)

There can be a note to the financial statements, but the dividend declared after the end of the reporting period shall not be recognised in that current period’s financial statements. As paragraph 12 of AASB 110 states: If an entity declares dividends to holders of equity instruments (as defined in AASB 132 Financial Instruments: Presentation) after the reporting period, the entity shall not recognise those dividends as a liability at the end of the reporting period.

21.4

21.5

(a)

To the extent that this does not impact the assumption that the entity is a going concern, then this is a non-adjusting event that should be disclosed by way of a note to the financial statements. If the event is of such magnitude that the going concern basis of valuation is no longer appropriate, then consistent with paragraph 14 of AASB 110, adjustments would be made directly to the financial statements.

(b)

To the extent that the new information provides further information about a condition that existed at the end of the reporting period (being that the debt was doubtful), then the accounts should be adjusted to reflect the fact that the debt is in doubt. That is, it is an adjusting (or type 1) event. In relation to this example, external auditors typically review receipts subsequent to the end of the reporting period, or search for information about subsequent customer failures, to determine whether closing allowances for doubtful debts appear adequate. Again, we would need to consider whether the event impacts the going concern assumption.

(c)

The judgement provides information about a condition that existed at the end of the reporting period. The entity would have been aware that action had been taken against it for the faulty goods. The judgement allows the organisation to reliably attribute an amount to the claim. Therefore, it is an adjusting event and a liability and a related expense needs to be recognised in the 2019 financial statements.

(d)

This would be a non-adjusting event (it is one of the examples provided in paragraph 22 of AASB 110). Disclosure would be required in the notes to the financial statements.

(a)

This is a non-adjusting event, which should be disclosed by way of a note to the financial statements. If the event is of such magnitude that the going concern basis of valuation is no longer appropriate, then consistent with paragraph 14 of AASB 110, adjustments would be made directly to the financial statements.

(b)

To the extent that the new information provides further information about a condition that existed at the end of the reporting period (being that the debt was doubtful), then the accounts should be adjusted to reflect the fact that the debt is in doubt. That is, it is an adjusting (or type 1) event.

(c)

This would be a non-adjusting event, although the materiality of the item would require disclosure in the notes to the 2019 financial statements. However, if the event is of such magnitude that the going concern basis of valuation is no longer appropriate, then consistent with paragraph 14 of AASB 110, adjustments would be made directly to the financial statements.

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(d)

This new information provides further information about a condition that existed at the end of the reporting period in relation to a liability for negligence. The accounts should be adjusted to reflect the amount of the expense and the associated liability. That is, it is an adjusting (or type 1) event.

Challenging questions 21.6

We will consider each of the events that has been disclosed by the directors of Petrol Limited to decide whether they are adjusting or non-adjusting events. It is assumed that the information has come to light prior to the financial statements being authorised for issue. (a)

On 30 August 2018, the price of crude oil fell by $13 following a meeting of OPEC nations. The fall in price may affect the valuation of stock on hand at 30 June 2018. The valuation should be at the lower of cost and net realisable value as per AASB 102. Thus, if net realisable value is reduced as the selling price falls, then the stock valuation may need to be reduced. The reduction in value will, however, apply only to stock on hand at 30 August 2018 that was on hand as at 30 June 2018. In addition, a note disclosing the permanent diminution in sales prices may be required.

(b)

The sinking of the oil tanker on 5 July 2018 would be a non-adjusting event as it does not provide any additional evidence or reveal conditions existing at the end of the reporting period. Thus, the tanker’s carrying amount of $15 million and inventory of $2 million lost will be disclosed by way of a note. In addition, the possible litigation claim by oyster farmers for $50 million should be disclosed as a contingent liability.

(c)

The dividends will not be recognised in the 2018 financial statements but will be disclosed within the notes. As paragraph 12 of AASB 110 states: If an entity declares dividends to holders of equity instruments (as defined in AASB 132 Financial Instruments: Presentation) after the reporting period, the entity shall not recognise those dividends as a liability at the end of the reporting period. The above requirement is further explained in paragraph 13. If dividends are declared 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 because no obligation exists at that time. Such dividends are disclosed in the notes in accordance with AASB 101 Presentation of Financial Statements.

(d)

On 1 July 2018 the company received notice from the Australian Taxation Office and advice from its tax advisers that the provision for tax was inadequate. Thus, we have additional evidence of a condition that existed at the end of the reporting period and this will, therefore, be an adjusting event. The adjustment should be shown separately given its size and effect on the profit or loss of the entity.

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(e)

The managing director was terminated in May 2018. He commenced legal action in August 2018. We must decide if the condition existed at the end of the reporting period. The event that triggered the claim was the sacking in May; however, it could be argued that the event is the lodgement of the claim. The solicitors believe that the claim is likely to be settled for $2 million. Therefore, it would be appropriate to adjust the accounts and create a provision. A contingent liability would be recognised in respect of the remaining $2 million.

(f)

We need to establish whether there were conditions existing at the end of the reporting period. The initial discussions were held at board meetings and a decision had been made, subject to a feasibility study, prior to 30 June 2018. In addition, the feasibility study was dated 15 June 2018 and some property, plant and equipment had been placed on the market. The decision was not formally made until August 2018. For the conditions to exist, there must have been an intention to relocate prior to 30 June 2018. On the balance of evidence available it would appear that there were conditions existing and we would adjust for the losses on sale of property, plant and equipment and redundancy costs. However, if we decide that the condition did not exist until the August board meeting when the decision was made, then the events will need to be disclosed by way of a note.

21.7

21.8

(a)

The judgement establishes definitively a claim that was in existence at 30 June 2018, but of uncertain amount. Therefore, the amount is an adjusting event, which should be brought to account in the body of the financial statements.

(b)

This is a non-adjusting event. However, as this event will have implications for the value of any deferred tax assets or deferred tax liabilities, then note disclosure would be appropriate. Changes in tax rates are used in paragraph 22 of AASB 110 as an example of a non-adjusting event requiring note disclosure.

(c)

This fire falls into the non-adjusting category of events—that is, creating new conditions, not previously existing at the end of the reporting period. This event should be disclosed by way of a note to the extent it is material. If this fire impacts the going-concern status of the organisation, then adjustments to the financial statements might be required.

(d)

This event appears to be an adjusting event, requiring adjustment to the accounts.

(e)

This event would be classed as a non-adjusting event, requiring disclosure in the notes to the financial statements.

(a)

Prior to the release of AASB 110, dividends recommended after the end of the reporting period were included in the financial statements, even though the declaration was made after the reporting period. This is no longer the case. Paragraph 12 of AASB 110 now requires: If an entity declares dividends to holders of equity instruments (as defined in AASB 132 Financial Instruments: Presentation) after the reporting period, the entity shall not recognise those dividends as a liability at the end of the reporting period.

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Even though the financial statements would not incorporate the dividends, disclosure in the notes to the financial statements would be required. (b)

This would be considered to be an adjusting event requiring adjustments to the financial statements. At 30 June 2018 the financial statements should include a provision to cover the costs associated with the intended closure of the division. The actual costs incurred elucidate a condition that existed at the end of the reporting period.

(c)

This is a type 2 event that should be disclosed in the notes to the financial statements.

(d)

This would be considered to be an adjusting event necessitating adjustments to the financial statements. At the end of the reporting period there would have been some doubt about the ability of the Eco-Friendly Leisure Company to pay its debts. The information about the insolvency elucidates a condition that existed at the end of the reporting period. The amount of $600 000 would be treated as a bad debt expense. Another issue that warrants consideration is whether the insolvency of Eco-Friendly Leisure Company will impact the applicability of the going-concern assumption of Lombok Ltd. If the loss of this major customer is likely to affect whether or not Lombok is a going concern, then the basis of valuation of the financial statement would need to be adjusted.

(e)

This would be treated as an adjusting event, and the financial statements should be adjusted accordingly. At the end of the reporting period, Lombok Ltd had a claim against the supplier. The out-of-court settlement clarifies the value of the claim.

(b)

(see AASB 110, paragraph 9 (d)).

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