FAR-II ASSIGNMENT -1

IAS-10 BASIC CONCEPT: Event After Reporting

Example-1
The management of an entity completes draft financial statements for the year to 30 June 20X2 on
31 August 20X2. On 18 September 20X2, the board of directors reviews the financial statements
and authorises them for issue. The entity announces its profit and selected ‘other financial
information’ on 19 September 20X2. The financial statements are made available to shareholders
and others on 1 October 20X2. The shareholders approve the financial statements at their annual
meeting on 24 October 20X2 and the approved financial statements are then filed with
SECP/registrar on 20 November 20X2.
Required: What is date of authorization for issue of financial statements?
Example-2
On 30 June 20X1, G Limited is involved in a court case. It is being sued by a supplier. On 15
September 20X1, the court decided that G Limited should pay the supplier Rs.45,000 in settlement
of the dispute. The financial statements for G Limited for the year ended 30 June 20X1 were
authorised for issue on 04 October 20X1.
The settlement of the court case is an adjusting event after the reporting period:
 It is an event that occurred between the end of the reporting period and the date the financial
statements were authorised for issue.
 It provided evidence of a condition that existed at the end of the reporting period. In this case,
the court decision provides evidence that the company had an obligation to the supplier as at the
end of the reporting period.
Since it is an adjusting event after the reporting period, the financial statements for the year ended
30 June 20X1 must be adjusted to include a provision for Rs.45,000. The alteration to the financial
statements should be made before they are approved and authorised for issue
Example 03:
A decline in fair value of investments between the end of the reporting period and the date when
the financial statements are authorized for issue----(Non Adjusting Events)
Example 04:
ABC Limited is in the process of finalizing its financial statements for the year ended June 30,
20Y1. Assume today is 31st August 20Y1 and the intended date of authorization of financial
statements is September 15, 20Y1.
a) On July 7, 20Y1, ABC Limited announced to discontinue producing its Product C due to heavy
loss which represented 22% of total revenue. ---Non adjusting event
b) On July 27, 20Y1 the auditors have pointed out that certain sales invoices were omitted from
recording during March 20Y1. ---Adjusting Event
c) The board of directors announced the dividend for its ordinary shareholders of Rs. 3 per share
on July 09, 20Y1 from the profits for the year ended 30 June 20Y1. ---Non Adjusting Event
d) On July 12, 20Y1 information was received that a foreign customer had gone into liquidation
in May 20Y1. There are no chances of recovery of this debt now. ---Adjusting Event
e) On August 20, 20Y1 it was discovered that another customer, who owed Rs.100,000 at year end
was declared insolvent on 15 August 20Y1 after its premises burnt down two weeks ago. The
premises were completely destroyed and were not insured. ---Non Adjusting Event
f) On July 15, 20Y1 one of corporate customer declared bankruptcy. The liquidator announced
that only 30% of the debt would be paid on liquidation. ---Adjusting Event
g) On August 15, 20Y1 the company sold 1,000 units of Product B for only Rs. 120 per unit due
to damage caused by water spoilage on August 05, 20Y1. The cost per unit was Rs. 200. However,
this Product had been valued at its NRV of Rs. 150 per unit on June 30, 20Y1. ---Non Adjusting
Event
h) On July 15, 20Y1 the company sold 1,000 units of Product C for only Rs. 120 per unit. The cost
per unit was Rs. 200. --- Adjusting Event
Required: Identify the above events as either adjusting or non-adjusting and briefly suggest
accounting treatment.
Example 05:
You are finance manager of Tibet Limited (TL). You are finalizing the financial statements of TL
for the year ended 31 December 20Y0. The Chief Executive of TL has sent you the following
email:
20Y0 was a tough year for TL due to COVID-19. The net profit of TL is expectedly very low as
compared to previous years. However, I have identified the following matters which may improve
TL’s net profit for 20Y0:
a) On 25 January 20Y1, Government has enacted amendments in the income tax laws to reduce
the rate of income tax for companies by 10% for 3 years including 20Y0.
b) The exchange rate has risen from Rs. 150 per USD as on 31 December 20Y0 to Rs. 162 per
USD. TL has significant receivables in USD due to export sales.
c) A major local customer has settled his full balance after receiving bank loan last week. At year-
end, the customer was facing financial difficulty and therefore TL had provided 40% of his balance
as doubtful receivable.
d) In December 20Y0, Government has announced a compensation scheme for entities which have
not terminated any employee in 20Y0. Under the scheme, these entities would be reimbursed 25%
of salaries expense of 20Y0. TL would initiate the process of obtaining the reimbursement after
completion of audit. The reimbursement might take few months.
Required: Discuss how each of the above matters would affect TL’s net profit for the year ended
31 December 20Y0. Support your answer with justifications. (Discussion on disclosure
requirements is not required).---- Non Adjusting Event
Example 06:
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, 20X5. As the
CFO of the company, the following matters are under your consideration:
a) Inventory carried at Rs. 25 million on June 30, 20X5 was sold for Rs. 15 million after it had
been damaged in a flood, in July 20X5. ---Non Adjusting Event
b) On July 5, 20X5 one of ATL’s corporate customers declared bankruptcy. The liquidator
announced on August 25, 20X5 that 20% of the debt would be paid on liquidation. ---Adjusting
Event
c) A new product introduced by a competitor on August 1, 20X5 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.---Non Adjusting Event
d) On August 18, 20X5 the government announced a retrospective increase in the tax rate
applicable to the company. ---Non Adjusting Event
e) The directors of ATL declared a dividend of Rs. 3 per share on August 28, 20X5. ---Non
adjusting Event
Required: State how the above events should be treated in ATL’s financial statements for the year
ended June 30, 20X5. You may assume that all the above events are material to the company.
GOING CONCERN ASSUMPTION
Example 07:
Fit Limited (FL) is in the course of finalizing its financial statements for the year ended June 30,
20X0. Due to international recession the company has lost its major customers. The company now
intends to cease its business operations and liquidate the company.
Required: What would be impact of above issue on the financial statements?
Example 08:
Earley Inc is finalising its accounts for the year ended 31 December 20X4. The following events
have arisen since the year end and the financial director has asked you to comment on the final
accounts.
a) At 31 December 20X4 trade receivables included a figure of Rs. 250,000 in respect of Nedengy
Inc. On 8 March 20X5, when the current debt was Rs. 200,000, Nedengy Inc went into
receivership. Recent correspondence with the receiver indicates that no dividend will be paid to
unsecured creditors.
b) On 15 March 20X5 Earley Inc sold its former head office building, Whitley Wood, for Rs. 2.7
million. At the year end the building was unoccupied and carried at a value of Rs. 3.1 million.
c) Inventories at the year-end included Rs. 650,000 of a new electric tricycle, the Opasney. In
January 20X5 the European Union declared the tricycle to be unsafe and prohibited it from sale.
An alternative market, in Bongolia, is being investigated, although the current price is expected to
be cost less 30%.
d) Stingy Inc, a subsidiary in Outer Sonning, was nationalised in February 20X5. The Outer
Sonning authorities have refused to pay any compensation. The net assets of Stingy Inc have been
valued at Rs. 200,000 at the year end.
e) Freak floods caused Rs. 150,000 damage to the Southcote branch of Earley Inc in January 20X5.
The branch was fully insured.
f) On 1 April 20X5 Earley Inc announced a 1 for 1 rights issue aiming to raise Rs. 15 million.
Required:
Explain how you would respond to the matters listed above.