IAS-10 Events after the Reporting Period

Q.No.1: (a) Explain the terms “adjusting events” and “non-adjusting events” and give three
examples of each.
(b) J-Mart Limited, a chain of departmental stores has distributed its operations into four
Divisions i.e. Food, Furniture, Clothing and Household Appliances.
The following information has been extracted from the records:
(i) The company allows the dissatisfied customers to return the goods within 30 days. It is
estimated that 5% of the sales made in June 2015 will be refunded in July 2015.
(ii) On June 2, 2015, three employees were seriously injured as a result of a fire at the company’s
warehouse. They have lodged claims seeking damages of Rs. 2.0 million from the company. The
company’s lawyers have advised that it is probable that the court may award compensation of
Rs. 400,000.
(iii) Under a new legislation, the company is required to fit smoke detectors at all the stores by
December 31, 2015. The company has not yet installed the smoke detectors.
(iv) On June 20, 2015, the board of directors decided to close down the Household Appliances
Division. However, the decision was made public after June 30, 2015.
(v) The company has a large warehouse in Lahore which was acquired under a three-year rent
agreement signed on April 1, 2014. The agreement is non- cancellable and the company cannot
sub-let the warehouse. However, due to operational difficulties, the company shifted the
warehouse to a new location.
(vi) A 15% cash dividend was declared on July 5, 2015.

Required
Describe how each of the above issue should be dealt with in the financial statements for the year
ended June 30, 2010. Support your point of view in the light of relevant International Accounting
Standards.

AKBER CHEMICALS LIMITED

Q.No.2: Akber Chemicals Limited is engaged in the business of manufacture and sale
of different type of chemicals. The following transactions have not yet been incorporated in the
financial statements for the year ended June 30, 2015:
(a) On June 15, 2015, one of its tankers carrying chemicals fell into a canal, thus polluting the
water. The company has never faced such a situation before.
The company has neither any legal obligation to clean the canal nor does it have any published
environmental policy. In a meeting held on July 26,
2015 the Board of Directors decided to clean the canal, which is estimated to cost Rs. 5.5
million.
(b) During the second week of July 2015, a significant decline in the demand for company’s
products was observed which also led to a decrease in net realizable value of finished goods. It
was estimated that goods costing Rs.
25 million as at June 30, 2015 would only fetch Rs. 23 million.
(c) On June 21, 2015, a customer lodged a claim of Rs. 2 million with the company as a
consignment dispatched on June 1, 2015 was not according to the agreed specifications. The
company’s inspection team found that this defect arose because of inferior quality of raw
materials supplied by the vendor. On June 28, 2015, the company lodged a claim for damages of
Rs 5.0 million, with its vendor, which include reimbursement of the cost of raw materials. The
company anticipates that it will have to pay compensation to its customer and would be able to
recover 50% of the amount claimed from the vendor.

Required
Discuss how Akber Chemicals (Pvt.) Limited would deal with the above situations in its
financial statements for the year ended June 30, 2015. Explain your point of view with reference
to the guidance contained in the International Financial Reporting Standards.

SKYLINE LIMITED
Q.No.3: The following information pertains to Skyline Limited (SL) for the financial year ended
December 31, 2015:
(i) A customer who owed Rs. 1 million was declared bankrupt after his warehouse was destroyed
by fire on February 10, 2016. It is expected that the customer would be able to recover 50% of
the loss from the insurance company.
(ii) An employee of SL forged the signatures of directors and made cash withdrawals of Rs. 7.5
million from the bank. Of these, Rs. 1.5 million were withdrawn before December 31, 2015.
Investigations revealed that an employee of the bank was also involved and therefore, under a
settlement arrangement, the bank paid 60% of the amount to SL on January 27, 2016.
(iii) SL has filed a claim against one of its vendors for supplying defective goods.
SL’s legal consultant is confident that damages of Rs. 1 million would be paid to SL. The
supplier has already reimbursed the actual cost of the defective goods.
(iv) A suit for infringement of patents, seeking damages of Rs. 2 million, was filed by a third
party. SL’s legal consultant is of the opinion that an unfavourable outcome is most likely. On the
basis of past experience he has advised that there is 60% probability that the amount of damages
would be Rs. 1 million and 40% likelihood that the amount would be Rs. 1.5 million.

Required
Advise SL about the amount of provision that should be incorporated and the disclosures that are
required to be made in the financial statements for the year ended December 31, 2015.
WALNUT LIMITED
Q.No.4: Walnut Limited (WL) is engaged in the business of import and distribution of electronic
appliances.
The following events took place subsequent to the reporting period i.e. 31 December
2015:
(i) On 15 January 2016, one of WL’s competitors announced launching of an upgraded version
of DVD players. WL’s inventories include a large stock of existing version of DVD players
which are valued at Rs. 15 million. Because of the introduction of the upgraded version, the net
realizable value of the existing version in WL’s inventory at 31 December 2015 has reduced to
Rs. 12.5 million.
(ii) On 20 December 2015, the board of directors decided to close down the division which
imports and sells mobile sets. This decision was made public on 29 December 2015. However,
the business was actually closed on 29
February 2016.
Net costs incurred in connection with the closure of this division were as follows:

Rs. m
Redundancy costs 1.50
Staff training 0.15
Operating loss from 1 July 2015 to closure of division 0.80
Less: Profit on sale of remaining mobile sets (0.50)
1.95

(iii) On 16 January 2016, LED TV sets valuing Rs. 3 million were stolen from a warehouse.
These sets were included in WL’s inventory as at 31 December 2015.
(iv) WL owns 9,000 shares of a listed company whose price as on 31 December
2015 was Rs. 22 per share. During February 2016, the share price declined significantly after the
government announced a new legislation which would adversely affect the company’s
operations. No provision in this regard has been made in the draft financial statements.
(v) On 31 January 2016, a customer announced voluntary liquidation. On 31
December 2015, this customer owed Rs. 1.5 million.
(vi) On 15 February 2016, WL announced final dividend for the year ended 31
December 2015 comprising 20% cash dividend and 10% bonus shares, for its ordinary
shareholders.

Required
Describe how each of the above transactions should be accounted for in the financial statements
of Walnut Limited for the year ended 31 December 2015.
Support your answer in the light of relevant International Financial Reporting Standards.

ATTOCK TECHNOLOGIES LIMITED

Q.No.5: Attock Technologies Limited (ATL) manufactures five hi-tech products, each on a
different plant. It is in the process of preparing its financial statements for the year ended June
30, 2015. As the CFO of the company, the following matters are under your consideration:
(i) Inventory carried at Rs. 25 million on June 30, 2015 was sold for Rs. 15 million after it had
been damaged in a flood, in July 2015.
(ii) On July 5, 2015 one of ATL’s corporate customers declared bankruptcy.
The liquidator announced on August 25, 2015 that 20% of the debt would be paid on liquidation.
(iii) A new product introduced by a competitor on August 1, 2015 had caused a significant
decline in the market demand of one of ATL’s major products. As a result, ATL is considering a
reduction in price and a cut in production.
(iv) On August 18, 2015 the government announced a retrospective increase in the tax rate
applicable to the company.
(v) The directors of ATL declared a dividend of Rs. 3 per share on August 28,
2015.

Required
State how the above events should be treated in ATL’s financial statements for the year ended
June 30, 2015. You may assume that all the above events are material to the company.

Q.No.6: In accordance with IAS 10 – Events After the Reporting Period, briefly explain the
following events:

(i) Adjusting events after the reporting period

(ii) Non-Adjusting events after the reporting period
Q.No.7: Classify the following events into adjusting and non-adjusting events after the reporting
period in accordance with IAS 10:

(i) Announcing or commencing the implementation of, a major restructuring.

(ii) Abnormally large changes after the reporting period in asset prices are foreign
exchange rate.
(iii) The determination after the reporting period of the cost of assets purchased, or the
proceeds from assets sold, before the end of the reporting period.
Q.No.8: The financial statement of Al-Jawda Limited, a pharmaceutical company, is in the
process of finalization. The profit before adjustments amounted to Rs. 1.25 billion for the
financial year ended June 30, 2019. The authorization date for issue of financial statements is
August 15, 2019. The company has identified the following problems that require necessary
adjustments as mentioned below:

 The tax rate applicable to the company has been changed from 30% to 29% on July 15,
2019.
 Major fire broke out in the factory on July 15, 2019 and destroyed the stock valuing Rs.
5,000,000. The sale value of which is now nil.
 A debtor, from who, Rs. 2,250,000 were due, went bankrupt due to a severe fire broke
out in his factory on August 02, 2019.
 Mr. Rashid, a regular customer of AJL, Lodged a claim for Rs. 2,000,000 against the
company for loss of his health as a result of taking a particular medicine marketed by the
company on July 15, 2019. The legal Advisor of AJL is of the view that there is no
chance of acceptance of claim.
  On August 08, 2019, the auditor of the company detected a fraud committed by the
accountant of the company, who resigned in July 2019. The financial impact of which is
Rs. 15,000,000. The amount defraud prior to year-end was Rs. 5,000,000.

Required:
Calculate the revised profit for Al-Jawda Limited for the financial year ended June 30, 2019,
taking into account the impact of above events after the reporting date.

Q.No.9: IAS 10 – Events after the Reporting Period identifies two types of events i.e. events that
provide evidence of conditions that existed at the end at the reporting period (adjusting events
after the reporting period) and events that are indicative of conditions that arose after the
reporting period (non-adjusting events after the reporting period). The following are the five
independent events:

Event-1:

Maira limited’s financial year ends on December 31. On December 20, 2017, Maira Limited was
involved in a court case with a customer, who sued the company for delivering products where
there was a dispute over the exact ingredients included in the products manufactured by Maira
Limited. These products were delivered to the customer in October 2017. The details of the case
were heard by December 22, 2017 but the judge decided to reserve the judgement until January
08,2018. On January 08,2018, the judge ruled in favour of the customer, awarding it damages of
Rs. 100,000.

Event-2

Moon Limited has an investment worth Rs. 1,500,000 in its financial statements at December 31,
2017. Due to the continuing recession, the investment reduced in value to Rs. 1,400,000 by
January 15, 2018

Event-3

Suddenly, on January 08, 2018, one of the accountant left Saira & Co. On further investigation,
the company realized that this employee had been paying himself money from the bank account
in relation to false rental invoices The amount of the overpayment was found to be Rs. 100,000.
With the help of the police, the accountant was tracked down and repaid all of the money on
January 20, 2018.

Event-4

On January 10, 2018, Aslam Limited sold some inventory for Rs. 100,000. The inventory had
been included in the year-end inventory count at cost of Rs. 120,000.
Event-5

Fine Limited sold a vehicle on December 31,2017 for Rs. 500,000. This vehicle had been
purchased on January 01, 2012. On December 31, 2017, a non-refundable deposit of Rs. 150.000
was paid toward a new vehicle and a cheque was posted with the balancing payment of
1,500,000. This cheque was not received and cashed by the seller until January 04, 2018.

Required:

Identify which of the above are adjusting and non-adjusting events in accordance with IAS 10
and giving reasoning with proper treatment.