International Accounting Standard IAS 10 comes into the part when an organization has to make post-reporting period modifications to the accounts it keeps; and the information that a company is required to declare about the date when the financial statements were authorized for publication, in addition to the information that pertains to events that took place after the reporting period.
Events following the reporting period include both positive and negative occurrences that take place after the end of the reporting period but before the day that the financial statements are approved for release. Events following the reporting period can include anything that takes place during this period. There are two distinct types of occurrences:
- adjusting events, which are happenings that indicate the condition of affairs at the end of the reporting period; and
- Non-adjusting events: those that provide light on developments that took place following the end of the reporting period.
Examples of adjusting events are;
- A court judgment at the end of the reporting period affirming the existing obligation may require recognition or an adjustment to the provision.
- Validation of financial records verifies their correctness via the identification of any irregularities or instances of fraud. (Exited at the time of accounting period end).
Examples of non-adjusting events;
- a significant acquisition by another company or the selling of an important subsidiary
- announcing a business decision to put a stop to a certain activity;
- major asset purchases, the declaration of assets as being held for sale, other property disposals, or the expropriation of substantial assets by the government;
- the fire that broke out and caused extensive damage to a huge manufacturing site.
The amounts that are recognized in an entity’s financial statements are modified to reflect adjusting events, but they are not altered to reflect non-adjusting events. Adjusting events are those that affect the amounts recognized in the statements. IAS 10 requires disclosures to be made of the significance of non-adjusting events that take place after the end of the reporting period.
Accounting under IAS-10
Adjusting events are occurrences that take place after the date of the balance sheet and provide additional evidence of the circumstances that existed at the end of the reporting period. Adjusting events can include occurrences that demonstrate that the going concern assumption for the entirety of the enterprise or a portion of the enterprise is incorrect. Financial statements should then be adjusted for adjusting events. [IAS 10.8] Events or circumstances that happened after the completion of the reporting period are deemed non-adjusting events and should not be adjusted for.
If the firm decides to issue dividends to its shareholders after the reporting period has ended, then the company cannot record such payouts as a liability at the end of the reporting period. Because there is no obligation at the end of the reporting period and the dividends are declared after the reporting period but before the financial statements are approved for publication, the dividends are not acknowledged as a liability. This is because there is no obligation at the end of the reporting period. IAS 1 requires that information on these payouts be included in the notes.
As an illustration, XYZ has completed the preparation of its financial statements for the year that will end on December 31, 2021. On January 30, 2022, the board of directors of XYZ announced dividends with a total value of $2 million.
This is an event that cannot be adjusted for and is a non-adjusting event. The figures that appear in XYZ’s financial statements for the year 2021 do not change; however, the disclosure on retained earnings has been given to reflect information on post-reporting period distributions.
If management determines after the reporting period that it either intends to liquidate the business or to cease operations or that it has no other reasonable choice other than to do so, the entity should not start producing its financial statements on a going concern basis. This is because the entity will no longer be able to generate reliable financial results.
This asks for an adjustment to the accounting basis rather than making changes to figures that have already been recognized. In addition, the following conditions for IAS 1 disclosure need to be met:
- financial statements are not prepared on a continuing-concern basis,
- management is aware of certain events that severely raise issues about the entity’s capacity to continue functioning as a going concern even if it might arise after the end of the reporting period.
As another illustration related to going concern, that will help to clarify the above statement. On the 31st of December in 2021, XYZ will be entitled to 50 million dollars in payment from a trade debtor. On January 21, 2022, the process of liquidating the debtor will get underway. It has been made clear to XYZ that the liquidation will not result in any compensation to the company.
Because XYZ is unable to create enough revenue to compensate for this loss, the company will surely be put out of business in the near future.
In light of the current circumstances, it is recommended that the financial statements be prepared on a liquidation basis as opposed to a going-concern basis until the end of the fiscal year 2021.
Also read, Summary of IAS-2
Disclosures requirements under IAS 10
If the non-adjusting events are of such significance that users would be prevented from making correct evaluations and judgments if they are not disclosed, then users should be encouraged to discuss them. The two items of information that are required to be given are;
- The nature of the event and the
- a forecast of the financial impact it will have or an assertion that it is impossible to anticipate the effect with a level of precision that is even somewhat acceptable.
Any new information that a company acquires about conditions that existed at the end of the reporting period must be included in disclosures that are relevant to those conditions.
Companies are expected to explain when and who approved the publication of the financial statements. The company is obligated to explain whether or not its shareholders or even other stakeholders have the right to alter the financial statements after they have been published.