Related parties and events after the reporting period - Adju...

Learning Outcomes

After studying this article, you will be able to identify and explain the treatment of events after the reporting period under IAS 10, distinguish between adjusting and non-adjusting events, and apply disclosure requirements in the context of related parties and other significant post-reporting events. You will also be able to determine when financial statements require adjustment and when only note disclosure is required.

ACCA Financial Reporting (FR) Syllabus

For ACCA Financial Reporting (FR), you are required to understand how to assess and account for events occurring after the reporting period, as well as related parties that may affect users’ understanding of the financial statements. You should be able to:

• Explain the distinction between adjusting and non-adjusting events after the reporting period as set out in IAS 10
• Determine the correct accounting treatment for events after the reporting period, including adjustments and note disclosures
• Recognise related parties and understand the importance of their disclosure
• Apply the rules on when to adjust figures and when to provide explanatory notes to meet the requirements of financial reporting standards

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following would be an adjusting event after the reporting period?
   1. A customer goes bankrupt after the year end, relating to sales made before the year end
   2. Announcement of a new business combination after the reporting period
   3. Declaration of dividends after the reporting period
   4. Changes in foreign exchange rates after the reporting period

2. If an asset is destroyed in a fire occurring after the reporting date, should the financial statements be adjusted?

3. True or false? All related party transactions must be disclosed if they are material to the users of the financial statements.

4. Briefly describe when you would make a provision in response to a legal claim that is settled after the reporting period but relates to an event before the year end.

Introduction

Events can happen between the end of an entity’s reporting period and the date when the financial statements are authorised for issue. According to IAS 10 Events after the Reporting Period, it is necessary to evaluate whether these events provide further evidence about conditions existing at the reporting date, or whether they relate to new conditions. How you account for them can affect reported profits, assets and liabilities. As an ACCA FR candidate, you are required to decide whether financial statements should be adjusted or not, and to explain disclosures relating to related parties where appropriate.

Key Term: events after the reporting period
Events—both favourable and unfavourable—that occur between the reporting date and the date when the financial statements are authorised for issue.

Events After the Reporting Period: Adjusting vs Non-Adjusting Events

IAS 10 separates events after the reporting period into two main categories:

• Adjusting events: Give evidence of conditions that existed at the reporting date.
• Non-adjusting events: Relate to conditions that arose after the reporting date.

Adjusting Events

Adjusting events require changes to amounts recognised in the financial statements. These events confirm circumstances that already existed as of the reporting date.

Common examples include:

• Settlement of a court case that determines an obligation for conditions existing at the year end.
• Receipt of information indicating that an asset was impaired or a receivable was uncollectible at the reporting date (e.g. a customer bankruptcy).
• Discovery of error or fraud affecting the financial statements.

Key Term: adjusting event
An event after the reporting period that provides additional evidence of conditions existing at the reporting date.

Non-Adjusting Events

Non-adjusting events provide evidence about conditions that arose after the reporting period. These do not require adjustment, but may require note disclosure if material.

Common examples include:

• Major acquisitions or disposals of assets or subsidiaries after the reporting date.
• Catastrophic events (such as fire or flood) after the year end.
• Announcements of plans to discontinue operations after year end.
• Changes in tax rates enacted after the reporting date.

Key Term: non-adjusting event
An event after the reporting period that relates to conditions which did not exist at the reporting date.

Worked Example 1.1

A company’s reporting date is 31 December 20X8. On 15 January 20X9, a major customer owing $50,000 at year end goes bankrupt as a result of financial difficulties the customer was facing at 31 December.

Should the receivable be written off in the 20X8 financial statements?

Answer:
Yes. The bankruptcy provides evidence of the financial condition of the customer at the reporting date. This is an adjusting event. The receivable should be written off in the 20X8 financial statements.

Worked Example 1.2

On 5 January, a factory is destroyed by fire. The fire occurred after the reporting date and did not relate to any condition existing at year end.

Answer:
This is a non-adjusting event. No adjustment is required to assets at year end, but if material, the fire and its estimated financial effect must be disclosed in a note to the accounts.

Disclosure Requirements

For non-adjusting events that are material, IAS 10 requires disclosure of:

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

Some events are so significant that failing to disclose them would affect the users’ ability to make proper evaluations. For example, the proposed merger announced after year end but before the financial statements are authorised for issue.

Dividends Proposed After the Reporting Period

Dividends declared after the year end but before the accounts are authorised must not be recognised as a liability at the reporting date, as the obligation did not exist at that time. Instead, they are disclosed in the notes.

Going Concern Assessment

If events after the reporting period indicate that the going concern assumption is no longer appropriate, the financial statements should not be prepared on a going concern basis.

Key Term: going concern
The fundamental assumption that an entity will continue in business for the foreseeable future unless management intends to liquidate or cease trading.

Related Parties and Disclosure

Related parties are individuals or entities related to the reporting entity through control, joint control, significant influence, or key management personnel.

Key Term: related party
A person or entity that is related to the reporting entity through control, joint control or significant influence, or is a key management person.

Transactions with related parties must be disclosed if material, due to the risk that they may not be at arm’s length. Examples include:

• Sales or purchases of goods or services
• Loans or guarantees
• Transfers of property

Disclosure requirements generally cover:

• The nature of the related party relationship
• The amount and terms of transactions
• Outstanding balances at year end

Key Term: arm’s length transaction
A transaction conducted as if between unrelated parties, each acting in their own best interest.

Worked Example 1.3

On 10 February 20X9, after the reporting period, a company settles a legal claim for $200,000. The court case was ongoing at 31 December 20X8.

Should the company adjust its provision for this claim at 31 December 20X8?

Answer:
Yes. The settlement provides additional evidence of the amount of the company’s obligation at the reporting date. The provision at 31 December 20X8 should be updated to $200,000.

Exam Warning

A frequent error is adjusting for events that only arose after the year end (such as plans to restructure or fire/floods occurring after the reporting period). Do not adjust assets or liabilities for such non-adjusting events—disclose them if material.

Summary

IAS 10 requires companies to assess events after the reporting period, making adjustments to the financial statements only for those that provide further evidence of conditions at the reporting date. Non-adjusting events, if material, are disclosed but not recognised. Related party transactions must be disclosed if relevant to informed decisions by readers of the accounts.

Key Point Checklist

This article has covered the following key knowledge points:

• Differentiate between adjusting and non-adjusting events after the reporting period under IAS 10
• Identify typical examples of both types of events and their accounting consequences
• Recognise when non-adjusting events require note disclosure
• Understand disclosure requirements for related party transactions
• State the rules for proposed dividends and going concern after the reporting period

Key Terms and Concepts

• events after the reporting period
• adjusting event
• non-adjusting event
• going concern
• related party
• arm’s length transaction