Analysis of Ind As 10 – Events after Reporting Period

Analysis of Ind As 10 – Events after Reporting Period

Ind AS 10 (Indian Accounting Standard 10) deals with Events after the Reporting Period. It provides guidelines on how to account for and disclose events that occur between the end of the reporting period (balance sheet date) and the date when the financial statements are authorized for issue.

The standard distinguishes between two types of events after the reporting period:

1. Adjusting Events (those that provide evidence of conditions that existed at the end of the reporting period)

2. Non-adjusting Events (those that are indicative of conditions that arose after the reporting period)

Key Provisions of Ind AS 10

1. Adjusting Events After the Reporting Period:

These are events that provide additional evidence about conditions that existed at the end of the reporting period and require adjustments in the financial statements. Examples include:

• The settlement of a court case which confirms that the company had a present obligation at the reporting date.
• The discovery of fraud or errors that show that the financial statements were misstated.

Accounting Treatment: If an event after the reporting period is an adjusting event, the financial statements must be adjusted to reflect the effect of the event.

2. Non-Adjusting Events After the Reporting Period:

These are events that are indicative of conditions that arose after the reporting period and do not require adjustment of the financial statements. Examples include:

• A significant decline in the market value of investments after the reporting date.
• Major acquisitions or disposals of assets.
• The announcement of a plan to discontinue an operation or close a segment.

Accounting Treatment: Non-adjusting events are not reflected in the financial statements, but if they are material, they should be disclosed in the notes to the financial statements, especially if failing to disclose the event could influence the economic decisions of users.

3. Date of Authorization of Financial Statements:

• The financial statements are authorized for issue when the Board of Directors or equivalent authority approves them.
• Events occurring after the reporting period but before the date of authorization should be considered, and appropriate disclosures or adjustments should be made.

4. Disclosure Requirements:

For non-adjusting events, the standard requires the disclosure of:

• The nature of the event.
• An estimate of its financial effect, or a statement that such an estimate cannot be made.

5. Dividends Declared After the Reporting Period:

If dividends are declared after the reporting period, this is a non-adjusting event. The standard requires disclosure of the amount of the proposed dividend, but it is not accrued in the financial statements.

Summary Table:

Few practical examples to illustrate the Application of Ind AS 10: Events after the Reporting Period:

1. Adjusting Events (Events that provide evidence of conditions that existed at the end of the reporting period)

Example 1: Settlement of a Lawsuit

• Scenario: A company is involved in a lawsuit, and the outcome is uncertain at the end of the reporting period (e.g., December 31, 2023). After the reporting period, the court issues a judgment, which is in favor of the plaintiff (i.e., the company is liable to pay damages).
• Accounting Treatment: The lawsuit’s outcome is an adjusting event because it provides evidence of a present obligation that existed at the reporting date (i.e., December 31, 2023). The company must record the liability for damages in its financial statements for the year ended December 31, 2023.
• Disclosure: The company must disclose the nature of the lawsuit and the estimated financial effect of the judgment.

Example 2: Discovery of Fraud or Errors

• Scenario: During the first week of January 2024, after the year-end reporting period, it is discovered that there were errors in accounting for sales transactions that overstated revenue for the year ending December 31, 2023.
• Accounting Treatment: The error relates to a condition that existed at the end of the reporting period. Therefore, it is an adjusting event, and the financial statements for the year ending December 31, 2023, must be restated to correct the error.
• Disclosure: The company should disclose the nature of the error and the amount of correction made to the financial statements.

2. Non-Adjusting Events (Events that are indicative of conditions that arose after the reporting period)

Example 1: Major Acquisition

• Scenario: In January 2024, after the reporting period, a company acquires a competitor, ABC Ltd., for a substantial amount.
• Accounting Treatment: This is a non-adjusting event because the acquisition occurred after the reporting period. It does not affect the financial position of the company as of December 31, 2023. Therefore, no adjustment is made to the financial statements for the year ended December 31, 2023.
• Disclosure: If the acquisition is material, the company must disclose the nature of the event and the expected financial effect in the notes to the financial statements for the year ending December 31, 2023. For example, the company may disclose the fact that it has entered into an acquisition agreement and the estimated purchase price.

Example 2: Decline in the Value of Investments

• Scenario: After the reporting period, in early January 2024, the market value of the company’s investment portfolio significantly drops due to a global economic crisis.
• Accounting Treatment: Since the market value decline occurred after the reporting period, it is a non-adjusting event. The company does not adjust the financial statements for the year ending December 31, 2023, to reflect this decline.
• Disclosure: The company should disclose the nature of the event (a significant drop in market value) and the estimated financial effect (e.g., the reduction in market value) in the notes to the financial statements, provided it is material.

Example 3: Proposed Dividends

• Scenario: The board of directors of a company approves a dividend payout on January 15, 2024, for the year ended December 31, 2023.
• Accounting Treatment: Since the dividend was declared after the reporting period, it is a non-adjusting event. The dividend will not be accrued in the financial statements for the year ended December 31, 2023.
• Disclosure: The company should disclose the amount of the proposed dividend in the notes to the financial statements, as it is material information for users of the financial statements.

Example 4: Business Closure

• Scenario: In January 2024, the company announces plans to close one of its business segments due to financial difficulties. The closure plan was not known or disclosed at the reporting period of December 31, 2023.
• Accounting Treatment: This is a non-adjusting event because the plan to close the business segment arose after the reporting period.
• Disclosure: The company should disclose the nature of the event (closure of a business segment), the reasons for the decision, and any potential financial effects (e.g., expected impairment of assets, provisions for severance pay, etc.).

Example 5: Employee Strikes

• Scenario: After the reporting period, the company’s employees go on strike in January 2024. The strike is expected to disrupt operations and impact production for several months.
• Accounting Treatment: This is a non-adjusting event, as the strike arises after the reporting period and does not affect conditions that existed on December 31, 2023.
• Disclosure: If the strike is material, the company should disclose the nature of the strike and any potential impact it may have on future operations, but no adjustment is made to the financial statements for the year ended December 31, 2023.

Summary of Practical Examples:

Frequently Asked Questions (FAQs) related to Ind AS 10: Events after the Reporting Period:

1. What is the definition of the “reporting period” under Ind AS 10?

• Answer: The “reporting period” refers to the period covered by the financial statements, which is typically one year (e.g., January 1 to December 31 for an annual report). The “end of the reporting period” is the balance sheet date (e.g., December 31) for which financial statements are prepared.

2. What are “adjusting events” and when should they be recognized?

• Answer: Adjusting events are events that provide evidence of conditions that existed at the end of the reporting period. These events require adjustments to the financial statements. Examples include:
  • The discovery of errors or fraud.
  • The settlement of a lawsuit that confirms the company’s liability at the reporting period end.
  • A major customer declaring bankruptcy, confirming a doubtful receivable.

Adjustments are made to reflect the impact of such events in the financial statements of the reporting period.

3. What are “non-adjusting events” and when should they be disclosed?

• Answer: Non-adjusting events are those that arise after the end of the reporting period and do not relate to conditions that existed at the end of the reporting period. They do not require adjustment of the financial statements but must be disclosed if they are material and may affect the decision-making of users of the financial statements.

Examples of non-adjusting events include:

• A significant decline in the market value of investments after the reporting period.
• Announcing a major acquisition or disposal of assets.
• A proposed dividend declaration after the reporting date.

Non-adjusting events should be disclosed in the notes to the financial statements, with details about their nature and potential financial effect (if material).

4. When is the date of authorization of financial statements for issue?

• Answer: The date of authorization is the date when the Board of Directors or equivalent governing body formally approves the financial statements for issue. Events that occur after the reporting period but before this date should be evaluated to determine whether they require adjustment or disclosure.

5. How should a company treat dividends declared after the reporting period?

• Answer: Dividends declared after the reporting period are non-adjusting events. They do not get recognized as a liability in the financial statements for the year ended on the reporting date. However, the company should disclose the amount of the proposed dividend in the notes to the financial statements for that period.

Example: If the Board of Directors declares a dividend in January 2024, for the financial year ending December 31, 2023, this dividend should only be disclosed in the notes, not accrued as a liability.

6. If a company receives information after the reporting period indicating that assets are impaired, should the financial statements be adjusted?

• Answer: If the impairment is due to conditions that existed at the end of the reporting period, such as a significant decline in the asset’s value that was caused by factors known before the reporting date, then it would be an adjusting event. The company should adjust the financial statements to reflect the impairment.

However, if the impairment arises due to events after the reporting period (e.g., a market crash in January 2024 that causes asset value decline), it would be a non-adjusting event, and the company would disclose it but not adjust the financial statements for the period ending December 31, 2023.

7. What happens if an event occurs after the reporting period but before the financial statements are authorized for issue that could significantly affect the company’s financial position?

• Answer: If a non-adjusting event is considered material, the company must disclose:
  • The nature of the event.
  • The estimated financial effect of the event, or a statement that it cannot be estimated.

If the event is adjusting, the financial statements must be adjusted to reflect the effect of the event, as it provides additional evidence about conditions that existed at the reporting date.

8. How should a company disclose non-adjusting events that do not have a quantifiable financial effect?

• Answer: If the financial effect of a non-adjusting event cannot be reasonably estimated, the company should disclose the nature of the event in the notes to the financial statements. Even though the financial effect can’t be quantified, the disclosure of the event itself can still provide relevant information to users.

9. If a company is undergoing liquidation after the reporting period, how should this be treated?

• Answer: The liquidation of the company is typically an adjusting event if the liquidation process was already in motion before the reporting period ended or if the decision to liquidate was made before the reporting period end but only announced afterward.

In such a case, the company may need to adjust its financial statements to reflect:

• The impairment of assets.
• The reclassification of liabilities.
• Any other adjustments related to the liquidation process.

If the liquidation decision is made after the reporting period ends, it would be a non-adjusting event, and it should be disclosed in the notes to the financial statements.

10. How should a company handle an event like a fire or natural disaster that occurs after the reporting period but before the financial statements are authorized for issue?

• Answer: A fire or natural disaster would typically be a non-adjusting event, unless the condition that led to the event existed before the reporting period (e.g., an ongoing hazard). In most cases, if the event occurs after the reporting period and the financial impact is material, the company should disclose:
  • The nature of the event.
  • An estimate of its financial effect (if possible), or a statement that it cannot be estimated.

11. Can a company delay the release of its financial statements in light of significant events after the reporting period?

• Answer: While the company can delay the issuance of its financial statements to assess the impact of significant events, it must ensure that the financial statements reflect the correct treatment of adjusting and non-adjusting events, as per Ind AS 10. If an event significantly affects the financial statements, the company may need to adjust the figures or disclose the event in the notes before releasing the financial statements.

12. What are the implications if a company fails to disclose an event that should be disclosed according to Ind AS 10?

• Answer: Failure to disclose a material non-adjusting event can lead to misleading financial statements, which might impact the decision-making of users. It may also result in a qualified audit opinion if the event is considered material and the omission affects the fair presentation of the financial statements.