IAS 10 – Events after the Reporting Period examples and summary

Below we will summarize IAS 10 – Events after the Reporting Period with examples and practical cases.

IAS 10 refers to the accounting treatment that an entity must carry out on economic events arising after the reporting period and before the financial statements are authorized.

The accounting treatment of the transactions carried out in this period can be divided into two parts:

  • Accounting events that require an adjustment to the financial statements.
  • Accounting events that do not require an adjustment to the financial statements.
 

That is, if existing facts and circumstances lead the entity to conclude that certain operations are related to events that occurred before the end of the reporting period, the entity must adjust its financial statements.

To understand this concept, we will carry out several examples of events after the reporting period that imply adjustments to the financial statements and other events that allow us to conclude that the company should not make any adjustments.

It is essential to say that if an event arises after the financial statements are authorized, an entity will not make any adjustments regardless of whether a said economic event is related to facts and circumstances before the end of the reporting period.

A typical example of a transaction that requires an adjustment to the financial statements is when an entity has accounts receivable from a customer experiencing economic difficulties.

In this case, if the customer files for bankruptcy after the reporting period but before the financial statements are authorized, an entity must adjust the financial statements for the period that just ended.

However, suppose the client declares bankruptcy after the financial statements are authorized.

In that case, an entity may not make any adjustments regardless of whether this economic event is related to facts and circumstances before the reporting period.

Some economic events that require adjustment are the following:

  • Court litigation:
  • Impairment of inventories.
  • The bankruptcy of a customer
  • Errors
 

Before continuing to read the post, put your knowledge into practice.

IAS 10 QUESTIONS

IAS 10 – Events after the reporting period due to the resolution of Court litigation:

Example: In January of year 1, an entity is sued for environmental damage.

The entity recognizes a provision for 50,000.

On March 31 of year 2, the entity’s financial statements are authorized.

However, on February 20, the entity was sentenced to pay 55,000 for damages.

In this case, the entity must adjust its financial statements for year 1.

That is, the entity must write off the provision for 50,000, recognize 5,000 in profit and loss, and an exit from the bank for 55,000.

As you can see in this example, the entity adjusts the prior year’s financials because the present obligation recognized as a result of a lawsuit is an event related to facts and circumstances that arose before the reporting period.

If the resolution of the lawsuit had been after March of year 2, it would be an event that would not imply an adjustment.

IAS 10 – Events after the reporting period due to inventory impairment.

 
 

Example: In September of year 1, a pharmaceutical company had inventories of 30,000.

In December of year 1, the entity reduced the sale price of its products due to a drug price control issued by a state agency.

This has the consequence that the recoverable amount of inventories decrease to 25.000.

This event leads the entity to recognize an impairment loss of 5,000.

At the beginning of March of year 2, the drug price control is eliminated before the financial statements are authorized.

Therefore, the entity reverses the recognized impairment in the period it was generated, that is, in year 1.

This example is an event that implies an adjustment to the financial statements of the previous year because it is the result of events related to information related to that accounting period.

IAS 10 – Events due to a customer’s bankruptcy after the reporting period.

 

In December of year 1, an entity has accounts receivable from a customer of 200,000

This client has been experiencing economic difficulties, so to date, the entity has recognized 15,000 in impairment of accounts receivable associated with this client.

In February of year 2, before the financial statements are authorized, the client publicly announces that he is filing for bankruptcy.

This example is an adjusting event because it relates to prior period events and circumstances.

In other words, there is evidence to conclude that the client could default on paying his obligations due to the economic difficulties he had been experiencing.

In this case, the entity must write off accounts receivable for 185,000

However, if the customer’s financial condition were sound as of December 31, Year 1, the transaction would be a non-adjusting event.

IAS 10 – Events after the reporting period due to errors

 
 

In February of year 2, an entity incorrectly calculated the cost of sales of some of its products.

The entity considers that the cost of sale is overstated by 120,000.

The financial statements are authorized in March of year 2.

In this case, the entity should amend its financial statements for year 1 by adjusting the overcharged cost of sales.

If the entity had discovered the error after the financial statements were authorized, the adjustment should be against retained earnings.

Events after the reporting period that do not imply adjustment

 
 

The reduction in the market value of the investments between the end of the reporting period and the date of authorization of the financial statements.

The decline in fair value is not generally related to the condition of the investments at the end of the reporting period; it is related to facts and circumstances associated with the following period.

Distribution of dividends:

If the distribution of dividends is agreed after the reporting period, but before the financial statements are authorized for issue, the dividends will not be recognized as a liability at the end of the reporting period, because there is no obligation at that time.

These dividends will be disclosed in the notes to the financial statements.

IAS 10 QUESTIONS

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