The issue addressed by IAS 10 is to what extent anything that happens between the end of the entity's reporting period and the date the financial statements are authorised for issue should be reflected in those financial statements. The standard distinguishes between events that provide information about the state of the entity existing at the end of the reporting period and those that concern the next financial period. A secondary issue is the cutoff point beyond which the financial statements are considered to be finalised.
Authorisation Date
The determination of the authorisation date (i.e., the date when the financial statements could be considered legally authorised for issuance, generally by action of the board of directors of the reporting entity) is critical to the concept of events after the reporting period. It serves as the cutoff point after the reporting period, up to which the events after the reporting period are to be examined to ascertain whether such events qualify for the treatment prescribed by IAS 10. This standard explains the concept through the use of illustrations.
The general principles that need to be considered in determining the authorisation date of the financial statements are set out below:
When an entity is required to submit its financial statements to its shareholders for approval after they have already been issued, the authorisation date in this case would mean the date of original issuance and not the date when they are approved by the shareholders; and When an entity is required to issue its financial statements to a supervisory board made up wholly of non‐executives, authorisation date would mean the date on which management authorises them for issue to the supervisory board.
Consider the following examples:
1. The preparation of the financial statements of Xanadu Corp. for the reporting period ended December 31, 202X, was completed by the management on February 15, 202X+1. The draft financial statements were considered at the meeting of the board of directors held on February 18, 202X+1, on which date the Board approved them and authorised them for issuance. The annual general meeting (AGM) was held on March 28, 202X+1, after allowing for printing and the requisite notice period mandated by the corporate statute. At the AGM the shareholders approved the financial statements. The approved financial statements were filed by the corporation with the Company Law Board (the statutory body of the country that regulates corporations) on April 6, 202X+1.
Given these facts, the date of authorisation of the financial statements of Xanadu Corp. for the year ended December 31, 202X, is February 18, 202X+1, the date when the Board approved them and authorised them for issue (and not the date they were approved in the AGM by the shareholders). Thus, all post‐reporting period events between December 31, 202X, and February 18, 202X+1, need to be considered by Xanadu Corp. for the purposes of evaluating whether or not they are to be accounted or reported under IAS 10.
2. Suppose in the above cited case the management of Xanadu Corp. was required to issue the financial statements to a supervisory board (consisting solely of non‐executives, including representatives of a trade union). The management of Xanadu Corp. had issued the draft financial statements to the supervisory board on February 16, 202X+1. The supervisory board approved them on February 17, 202X+1, and the shareholders approved them in the AGM held on March 28, 202X+1. The approved financial statements were filed with the Company Law Board on April 6, 202X+1.
In this case the date of authorisation of financial statements would be February 16, 202X+1, the date the draft financial statements were issued to the supervisory board. Thus, all post‐reporting period events between December 31, 202X, and February 16, 202X+1, need to be considered by Xanadu Corp. for the purposes of evaluating whether or not they are to be accounted for or reported under IAS 10.
Adjusting and Non‐Adjusting Events (After the Reporting Period)
Two types of events after the reporting period are distinguished by the standard. These are, respectively, “adjusting events after the reporting period” and “non‐adjusting events after the reporting period.” Adjusting events are those post‐reporting period events that provide evidence of conditions that actually existed at the end of the reporting period, albeit they were not known at the time. Financial statements should be adjusted to reflect adjusting events after the reporting period.
Examples OF adjusting events, given by the standard, are the following:
1. Resolution after the reporting period of a court case that confirms a present obligation requiring either an adjustment to an existing provision or recognition of a provision instead of mere disclosure of a contingent liability;
2. Receipt of information after the reporting period indicating that an asset was impaired or that a previous impairment loss needs to be adjusted. For instance, the bankruptcy of a customer subsequent to the end of the reporting period usually confirms that the customer was credit impaired at the end of the reporting period, and the disposal of inventories after the reporting period provides evidence (not always conclusive, however) about their net realisable value at the date of the statement of financial position;
3. The determination after the reporting period of the cost of assets purchased, or the proceeds from assets disposed of, before the reporting date;
4. The determination subsequent to the end of the reporting period of the amount of profit sharing or bonus payments, where there was a present legal or constructive obligation at the reporting date to make the payments as a result of events before that date; and
5. The discovery of frauds or errors, after the reporting period, that show that the financial statements were incorrect at the reporting date before the adjustment.
Commonly encountered situations of adjusting events are illustrated below:
During the year 202X Taj Corp. was sued by a competitor for €10 million for infringement of a trademark. Based on the advice of the company's legal counsel, Taj accrued the sum of €5 million as a provision in its financial statements for the year ended December 31, 202X. Subsequent to the date of the statement of financial position, on February 15, 202X+1, the Supreme Court decided in favour of the party alleging infringement of the trademark and ordered the defendant to pay the aggrieved party a sum of €7 million. The financial
statements were prepared by the company's management on January 31, 202X+1, and approved by the Board on February 20, 202X+1.
Taj Corp. should adjust the provision by €2 million to reflect the award decreed by the Supreme Court (assumed to be the final appellate authority on the matter in this example) to be paid by Taj Corp. to its competitor. Had the judgement of the Supreme Court been delivered on February 25, 202X+1, or later, this post‐reporting period event would have occurred after the cutoff point (i.e., the date the financial statements were authorised for original issuance). If so, adjustment of financial statements would not have been required.
Penn Corp. carries its inventory at the lower of cost and net realisable value. At December 31, 202X, the cost of inventory, determined under the FIFO method, as reported in its financial statements for the year then ended, was €5 million. Due to severe recession and other negative economic trends in the market, the inventory could not be sold during the entire month of January 202X+1. On February 10, 202X+1, Penn Corp. entered into an agreement to sell the entire inventory to a competitor for €4 million. Presuming the financial statements were authorised for issuance on February 15, 202X+1, the company should recognise a write‐down of €1 million in the financial statements for the year ended December 31, 202X, provided that this was determined to be an indicator of the value at year‐end.
In contrast with the foregoing, non‐adjusting events are those post‐reporting period events that are indicative of conditions that arose after the reporting period. Financial statements should not be adjusted to reflect non‐adjusting events after the end of the reporting period. An example of a non‐adjusting event is a decline in the market value of investments between the date of the statement of financial position and the date when the financial statements are authorised for issue. Since the fall in the market value of investments after the reporting period is not indicative of their market value at the date of the statement of financial position (instead it reflects circumstances that arose subsequent to the end of the reporting period) the fall in market value need not, and should not, be recognised in the financial statements at the date of the statement of financial position.
Not all non‐adjusting events are significant enough to require disclosure, however. The revised standard gives examples of non‐adjusting events that would impair the ability of the users of financial statements to make proper evaluations or decisions if not disclosed. Where non‐adjusting events after the reporting period are of such significance, disclosure should be made for each such significant category of non‐adjusting event, of the nature of the event and an estimate of its financial effect or a statement that such an estimate cannot be made. Examples given by the standard of such significant non‐adjusting post‐reporting period events are the following:
1. A major business combination or disposing of a major subsidiary;
2. Announcing a plan to discontinue an operation;
3. Major purchases and disposals of assets or expropriation of major assets by government;
4. The destruction of a major production plant by fire;
5. Announcing or commencing the implementation of a major restructuring;
6. Abnormally large changes in asset prices or foreign exchange rates;
7. Significant changes in tax rates and enacted tax laws;
8. Entering into significant commitments or contingent liabilities; and 9. Major litigation arising from events occurring after the reporting period.
Dividends Proposed or Declared After the Reporting Period
Dividends on equity instruments proposed or declared after the reporting period should not be recognised as a liability at the end of the reporting period. In other words, such declaration is a non‐adjusting subsequent event. While at one‐time IFRS did permit accrual of post‐balance sheet dividend declarations, this has not been permissible for quite some time. Furthermore, the revisions made to IAS 10 as part of the IASB's Improvements Project in late 2003 (which became effective 2005) also eliminated the display of post‐reporting period dividends as a separate component of equity, as was formerly permitted. Footnote disclosure is, on the other hand, required unless immaterial.
A further clarification has been added by the 2008 Improvements, a collection of major and minor changes made in 2008. It states that, if dividends are declared (i.e., the dividends are appropriately authorised and no longer at the discretion of the entity) 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, for the very simple reason that no obligation existed at that time. This rudimentary expansion of the language of IAS 10 was deemed necessary because it had been asserted that a constructive obligation could exist under certain circumstances, making formal accrual of a dividend liability warranted. The Improvements language makes it clear that this is never the case.
Going Concern Considerations
Deterioration in an entity's financial position after the end of the reporting period could cast substantial doubts about an entity's ability to continue as a going concern. IAS 10 requires that an entity should not prepare its financial statements on a going concern basis if management
determines after the end of the reporting period that it either intends to liquidate the entity or cease trading, or that it has no realistic alternative but to do so. IAS 10 notes that disclosures prescribed by IAS 1 under such circumstances should also be complied with.
Disclosure Requirements
The following disclosures are mandated by IAS 10:
1. The date when the financial statements were authorised for issue and who gave that authorisation. If the entity's owners have the power to amend the financial statements after issuance, this fact should be disclosed;
2. If information is received after the reporting period about conditions that existed at the date of the statement of financial position, disclosures that relate to those conditions should be updated in the light of the new information; and
3. Where non‐adjusting events after the reporting period are of such significance that non‐disclosure would affect the ability of the users of financial statements to make proper evaluations and decisions, disclosure should be made for each such significant category of non‐ adjusting event, of the nature of the event and an estimate of its financial effect or a statement that such an estimate cannot be made.
EXAMPLES OF FINANCIAL STATEMENT DISCLOSURES
Exemplum Reporting PLC Financial Statements
For the Year Ended December 31, 202X 35.1 Flood damage
A widget manufacturing factory was severely damaged in a flash flood on January 17, 202X. The value of the factory and its contents were insured in full and claims put forward to the insurers are being processed. The group was, however, not insured for the loss of business due to factory downtime. The loss of business is estimated to result in financial losses of €X.
35.2 Acquisition of a subsidiary
After the reporting period but before the financial statements were authorised for issue the group acquired 100% of the share capital of Subsidiary D Ltd. The fair value of assets acquired and liabilities assumed on the acquisition date of February 1, 202X+1 were as follows:
€
Cash X
Inventories X
Trade receivables X
Property, plant and equipment X
Trade payables X
Long‐term debt X
Total net assets X
Goodwill X
Total fair value of consideration paid X
Less: Fair value of shares issued X
Cash X
Less: Cash of Subsidiary D Ltd X
Cash flow on acquisition net of cash acquired X
Goodwill represents the value of the synergies arising from the vertical integration of the group's operations. These synergistic benefits were the primary reason for entering into the business combination. The total amount of goodwill that is expected to be deductible for tax purposes is €X.
US GAAP COMPARISON
There are substantial differences between US GAAP and IFRS, the first of which is US GAAP does not use the term “provisions”; the term
“accrual” is used instead.
Under US GAAP, constructive obligations are only recognised for environmental obligations, decommissioning obligations, post‐retirement benefits and legal disputes. Discount rates used to measure provisions at present value are a risk‐adjusted risk‐free rate that reflects the entity's credit standing.
To recognise a contingency under US GAAP, a loss must be “probable,” meaning “likely to occur” and no percentage is assigned. Under IFRS,
“probable” is interpreted as more likely than not, which refers to a probability of greater than 50%. In this scenario IFRS is more likely to have recorded the liability sooner in IFRS than under US GAAP.
When a range of estimates is available for a provision, the minimum amount is accrued under US GAAP when other estimates are equally probable, including zero. IFRS uses the single most likely estimate to measure a provision.
Under US GAAP, joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date are recognised as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co‐obligors and any additional amount the reporting entity expects to pay on behalf of its co‐obligors. However, this measurement attribute does not apply if the obligations are addressed within existing US GAAP.
Onerous contracts are not recognised as provisions. The effects are recognised upon settlement of the obligation. Exit costs are provided for only when a detailed plan is in place and recipients of severance have agreed to the terms. Costs for which employees are required to work are recognised as the work is performed. There are no provisions that allow for accrual of general costs to wind down a business under US GAAP.
Asset retirement obligations (AROs) are largely the same, but the difference in the discount rate used to measure the obligations creates an inherent difference in the carrying value. To discount the obligation, US GAAP uses a risk‐free rate adjusted for the entity's credit risk. IFRS uses the time value of money rate adjusted for specific risks of the liability. Also, period‐to‐period changes in the discount rate do not affect an accrual that has not changed. The discount rate applied to each increment of an accrual, termed “layers” in US GAAP, remains within that layer. Also, AROs are not recognised under US GAAP unless there is a present legal obligation and the fair value of the obligation can be reasonably estimated.
Under US GAAP, provisions may be discounted when the liability's amount and timing are fixed or reliably determinable or when the obligation is at fair value. The discount rate depends on the nature of the accrual.
Regarding restructuring costs, under US GAAP, once management has committed to a restructuring plan, each type of cost is examined to determine when it should be recognised. Involuntary employee terminations costs under a one‐time benefit arrangement are expensed over the future service period. If no future service is required, the costs are expensed immediately. Other exit costs are expensed when incurred.
Current updates are concurrent with the new leasing standards which pull the lease liability obligations as part of the liabilities which are similar to IFRS.
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