ACCA F8 考試：SUBSEQUENT EVENTS (Part 1)

FINANCIAL REPORTING CONSIDERATIONS

In almost all circumstances, financial statements will not be finalised until a period of time has elapsed between the year-end date and the date on which the financial statements are (expected to be) issued. Therefore, regard has to be given to events that occur between the reporting date and the date on which the financial statements are (expected to be) authorised for issue.

IAS 10, Events After the Reporting Period stipulates the accounting and disclosure requirements concerning transactions and events that occur between the reporting date and the (expected) date of approval of the financial statements. Among other things, IAS 10 determines when an event that occurs after the reporting date will result in the financial statements being adjusted, or where such events merely require disclosure within the financial statements. Such events are referred to in IAS 10 as ‘adjusting’ or ‘non-adjusting’ events.

Students who have studied Paper F3, Financial Accounting will have come across such terminology and it is imperative that they can differentiate between an adjusting and a non-adjusting event. IAS 10 prescribes the definitions of such events as follows:

Adjusting event

An event after the reporting period that provides further evidence of conditions that existed at the end of the reporting period, including an event that indicates that the going concern assumption in relation to the whole or part of the enterprise is not appropriate. (1)

Non-adjusting event

An event after the reporting period that is indicative of a condition that arose after the end of the reporting period. (1)

Example 1

You are the trainee accountant of Gabriella Enterprises Co and are preparing the financial statements for the year-ended 30 September 2010. The financial statements are expected to be approved in the Annual General Meeting, which is to be held on Monday 29 November 2010. Today’s date is 22 November 2010. You have been made aware of the following matters:

1. On 14 October 2010, a material fraud was discovered by the bookkeeper. The payables ledger assistant had been diverting funds into a fictitious supplier bank account, set up by the employee, which had been occurring for the past six months. The employee was immediately dismissed, legal proceedings against the employee have been initiated and the employee’s final wages have been withheld as part?reimbursement back to the company.

2. On 20 September 2010, a customer initiated legal proceedings against the company in relation to a breach of contract. On 29 September 2010, the company’s legal advisers informed the directors that it was unlikely the company would be found liable; therefore no provision has been made in the financial statements, but disclosure as a contingent liability has been made. On 29 October 2010, the court found the company liable on a technicality and is now required to pay damages amounting to a material sum.

3. On 19 November 2010, a customer ceased trading due to financial difficulties owing $2,500. As the financial statements are needed for the board meeting on 22 November 2010, you have decided that because the amount is immaterial, no adjustment is required. The auditors have also confirmed that this amount is immaterial to the draft financial statements.

Required:

(a) For each of the three events above, you are required to discuss whether the financial statements require amendment.

Answer:

When presented with such scenarios, it is important to be alert to the timing of the events in relation to the reporting date and to consider whether the events existed at the year-end, or not. If the conditions did exist at the year-end, the event will become an adjusting event. If the event occurred after the year-end, it will become a non-adjusting event and may simply require disclosure within the financial statements.

1. Fraud

Clearly the fraud committed by the payables ledger clerk has been ongoing during, and beyond the financial year. Fraud, error and other irregularities that occur prior to the year-end date – but which are only discovered after the year-end – are adjusting items, and therefore the financial statements would require amendment to take account of the fraudulent activity up to the year-end.

2. Legal proceedings

At the year-end, the company had made disclosure of a contingent liability. However, subsequent to the year-end (29 October 2010), the court found the company liable for breach of contract. The legal proceedings were issued on 20 September 2010 (some 10 days before the year-end). This is, therefore, evidence of conditions that existed at the year-end. IAS 10 requires the result of a court case after the reporting date to be taken into consideration to determine whether a provision should be recognised in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets at the year-end. In this case, the financial statements will require adjusting because:

• the conditions existed at the year-end

• the recognition criteria for a provision in accordance with IAS 37 have been met.

3. Loss of customer

A customer ceasing to trade so soon after the reporting period indicates non-recoverability of a receivable at the reporting date and therefore represents an adjusting event under IAS 10, Events After the Reporting Period. Assets should not be carried in the statement of financial position at any more than their recoverable amount and, therefore, an allowance for receivables should be made.