IAS 10- EVENT AFTER THE REPORTING PERIOD

IAS 10- EVENT AFTER THE REPORTING PERIOD

The standard was previously named ‘Event after the Balance sheet date’, but retitled to Event after the reporting period resulting from revision to IAS 1.

      IAS 10 contains the requirement for dealing with events that occurs after the reporting period. There are some terms we need to know before going in-depth into the requirements of the standard.

•      Reporting period: This refers to the period to which the financial statements of an entity relate. It usually span across a period of 12-month, e.g Jan 1 20x5  - Dec 31, 20x5. 
•     Event after the reporting period: This is an event, whether favourable or unfavourable that occurs between the end of the reporting period and the date the financial statements are authorised for issue. From this definition, it is evident that the events under the scope of this standard are not limited to unfavourable events, but also include favourable events. The definition further specifies a cut-off date in which those events should be considered up to, i.e. the event after the reporting period dealt with under this standard are those that occur strictly in between the end of the reporting period and a cut-off date (Authorisation date).

• Authorisation Date: This is the date which the financial statement has been authorised for issue by the Board of directors/Management.

Even with the aforementioned, why worry ourselves about the events that occur after a particular reporting period? Shouldn’t those events be treated as part of the reporting in which it occurred, since another reporting period commences after the end of one reporting period?

 Let’s go a little further into the contents of the standard if we can get a clue to the above questions.

The standard IAS 10 proffers two types of “event after the reporting period”, which are:

1.     Adjusting Event
2. Non-adjusting Event   

a.      Adjusting Event: This is an event after the reporting period that provides evidence of a condition that existed at the end of the reporting period. In other words, those events occurring between the end of the reporting period and the authorisation that gives evidence of condition that existed at the end of the reporting period. Examples include:

·         Bankruptcy of a customer that occurs after the reporting period. The bankruptcy (Event) provides evidence that a loss (condition) regarding the amount owed by the customer existed at the end of the reporting period.

·         Sale of inventory after the reporting period: The sale (event) may give evidence about the inventory’s net realisable value (since this is chiefly based on estimate) at the end of the reporting period.

·         The settlement after the reporting period of an existing court case. The settlement (Event) gives confirmation that the entity had a present obligation (Condition) at the end of the reporting period.

·         The discovery of fraud or errors after the reporting period. The discovery (event) gives evidence of the incorrectness (conditions) of the financial statement at the end of the reporting period.

b.      Non-adjusting Event: An event after the reporting period that is indicative (a sign) of conditions that arose after the reporting period. Examples include:

·         The destruction of a major production plant by fire after the reporting period. The loss that occurred is indicative of the condition that arose after the reporting period (occurrence of fire).

·         Decline in market value between the end of the reporting period and the date when the financial statement are authorised for issue. Although this may be similar to example number two under Adjusting event, but the decline in the market value has really not given confirmation, until an actual sale occurs. In addition, the decline relates to conditions that arose after the reporting period.

·         Announcing a plan to discontinue an operation: The potential discontinuance (event) is indicative of the announcement to discontinue it.   

STANCE: HOW DOES THE STANDARD WANTS THESE TWO TYPES OF EVENT TREATED WHEN THEY OCCUR?

ACCOUNTING TREATMENT

1.      Adjusting Event: when an event after the reporting period occurs, i.e. in between the end of the reporting period and authorisation date, the effect of the event should be incorporated (recognised) in the financial statement of the reporting period that just ended.

2.      Non-adjusting Event: An event which is non-adjusting shall not have its effect recognised in the just ended reporting period. It should be disclosed if material.

OTHERS

DIVIDENDS
Dividends for period proposed/declared after the end of the reporting period but before Financial statements are approved should not be recognised as a liability at the end of the reporting period. In addition, IAS 1 only requires the recognition of dividend paid during the reporting period.
 
GOING CONCERN
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. 
 

IAS 8

IAS 8                                                                                         IAS 8

Accounting Policies, Changes in

Accounting Estimates and Errors

International Accounting Standard 8 focuses on Accounting policies, Accounting Estimates, as well as Prior period errors.

The objective of this Standard (IAS 8) is to:

           A.      Accounting Policies

• Prescribe the criteria for Selecting Accounting policies:
• Prescribe the criteria for changing accounting policies ;
• Prescribe the criteria for Accounting for changes in accounting policies; and
• Prescribe disclosures of changes in accounting policies,

         B.       Accounting Estimates

• ·         Prescribe the criteria for Accounting for changes in accounting estimates and

         C.      Prior period errors

• ·         Prescribe the criteria for Accounting for corrections of errors. 

ACCOUNTING POLICIES AND CHANGES IN ACCOUNTING POLICIES

Let me commence with the objectives under A above, i.e Accounting policies.

Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. This therefore means, out of the various principles, bases, conventions, rules and practices, those specifically adopted by the entity are the entity’s accounting policies.

Selection and application of accounting policies

A)     WHERE A PARTICULAR STANDARD ADDRESSES THE TRANSACTION OR EVENT:

When an IFRS specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item shall be determined by applying the IFRS.

B)      WHERE NO STANDARD APPLIES TO THE TRANSACTION OR EVENT

When this happen the management shall use its judgement in developing and applying an accounting policy that results in information that is:

(i) relevant, to the economic decision-making needs of users;  and

(ii) reliable,  in that the financial statements.

In applying the above judgment the entity shall refer to, and consider the applicability of the following sources in descending order:

1.  The requirements in IFRSs dealing with similar and related issues

2. Framework

      3.The most recent pronouncements of other standard-setting bodies that use a similar conceptual framework.

Changes in accounting policies

Example of changes in accounting policy is a change from AVCO inventory cost method to FIFO inventory cost method.

WHEN SHOULD AN ENTITY CHANGE ITS ACCOUNTING  POLICY                                                                                                      

An entity shall change an accounting policy only if the change:

(a) is required by an IFRS; or

(b) results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance or cash flows.

Accounting Treatment:  RETROSPECTIVE APPLICATION unless impracticable, then apply PROSPECTIVELY from the earliest date practicable.

Retrospective application is applying a new accounting policy to transactions, other events and conditions as if that policy had always been applied. The practical impact of this is that the new policy should be effected not just in the period of change but from the period when the previous policy commenced, that is, corresponding amounts (or “comparatives”) presented in financial statements must be restated as if the new policy had always been applied.

In addition, to applying the change “retrospectively”, the new accounting policy, if it affects  transactions, other events and conditions occurring after the date as at which the policy is changed will be applied “prospectively”– Applying the new accounting policy to transactions, other events and conditions occurring after the date as at which the policy is changed.

ACCOUNTING ESTIMATE

*Accounting estimate—An approximation of a monetary amount or quantitative figure in the absence of a precise means of measurement.

Judgements are made based on the most up to date information and the use of such estimates is a necessary part of the preparation of financial statements. It does not undermine their reliability. Here are some examples of accounting estimates.

(a) A necessary irrecoverable debt allowance.

(b) Useful lives of depreciable assets.

(c) Provision for obsolescence of inventory.

d) Residual value of an Asset.

e) Changes in depreciation method.

f) Warranty obligation

g) Change in the estimate of contract revenue or costs (IAS 11)

h) Change in the outcome of a contract (IAS 11)

ACCOUNTING TREATMENT: PROSPECTIVE APPLICATION

Prospective application of recognising the effect of a change in an accounting estimate is recognising the effect of the change in the accounting estimate in the current and future periods affected by the change.

   

  PRIOR PERIOD ERRORS

Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that: 

(a) was available when financial statements for those periods were authorised for issue;  and

(b) could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.

EXAMPLES OF SUCH ERROR, Include the effect of:

 (a) Mathematical mistakes

(b) Mistakes in the application of accounting policies

(c) Misinterpretation of facts

(d) Oversights

(e) Fraud (For the purpose of this standard, this is also an example of error)

ACCOUNTING TREATMENT: RETROSPECTIVE RESTATEMENT unless impracticable, then correct prospectively.

Retrospective restatement is correcting the recognition, measurement and disclosure of amounts of elements of financial statements as if a prior period error had never occurred. i.e. Correct  retrospectively. This involves:

(a) Either restating the comparative amounts for the prior period(s) in which the error occurred,

(b) Or, when the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for that period.

Correcting prospectively here means when it is impracticable to determine the cumulative effect, at the beginning of the current period, of an error on all prior periods, the entity shall restate the comparative information to correct the error prospectively from the earliest date practicable.