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

Learning Outcomes

After reading this article, you will be able to recognise and explain the requirements for disclosure of related parties and events after the reporting period under IAS 1. You will understand the principles governing going concern, identify necessary disclosures for areas requiring significant management judgement, and apply these in preparing, analysing, or auditing financial statements for ACCA exam purposes.

ACCA Financial Reporting (FR) Syllabus

For ACCA Financial Reporting (FR), you are required to understand both the accounting treatment and disclosures related to events after the reporting period, related parties, and areas involving management judgement under IAS 1. Key syllabus points covered in this article include:

• The definition, recognition, and disclosure of related party transactions and balances
• Identification and distinction between adjusting and non-adjusting events after the reporting period (IAS 10)
• Understanding the going concern assumption and required disclosures under IAS 1
• Disclosure of significant accounting judgements and estimates made by management (IAS 1)
• The effects of post-reporting period events on financial statement preparation and users’ decisions

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 indicates an adjusting event after the reporting period under IAS 10?
   1. An entity declares a final dividend after year-end
   2. An irrecoverable customer debt is confirmed after year-end for a sale made before the reporting date
   3. The issue of new shares after reporting date
   4. Announcement to close a division after year-end
2. Under IAS 1, disclosure of significant judgements is required when:
   1. Judgements have no material impact on the accounts
   2. Only when estimates are made
   3. Management makes decisions that significantly affect the amounts in the financial statements
   4. At management’s discretion only
3. What primary evidence suggests that an entity is not a going concern?
   1. High profit but low cash reserve
   2. Loss of major customer with no replacement and impending loan repayments the entity cannot meet
   3. Increase in net assets compared to last year
   4. Entry into a new overseas market

4. True or false? Disclosure of transactions with related parties is required even when these have occurred at market (arm’s length) values.

Introduction

Entities operate in a complex environment where relationships, decisions, and external events can materially affect their financial statements. IAS 1 Presentation of Financial Statements requires transparency about the fundamental assumptions used, especially regarding going concern and significant areas of judgement. In addition, both related party transactions (IAS 24) and events occurring after the reporting period (IAS 10) have a direct impact on users’ understanding of financial statements and, therefore, are frequently examined in ACCA FR.

This article focuses on:

• Identifying and disclosing related parties
• Classifying and accounting for events after the reporting period
• Understanding the importance of the going concern assumption
• Presenting significant management judgements and estimates

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

Key Term: going concern
The assumption that an entity will continue its operations for the foreseeable future and does not intend, nor need, to liquidate or materially reduce its scale.

Key Term: adjusting event after the reporting period
An event after the reporting date providing evidence about conditions that existed at the end of the reporting period, requiring an adjustment in the financial statements.

Key Term: non-adjusting event after the reporting period
An event after the reporting date that is indicative of conditions that arose after the reporting period, which may require disclosure but not adjustment.

Key Term: significant judgement
A decision by management in applying accounting policies that has a major effect on the amounts recognised in the financial statements.

Related Parties and Required Disclosures

Entities must disclose relationships and material transactions with related parties, as these often occur under terms different from those with third parties and may influence reported profit/loss or financial position.

Related parties include:

• Parent entities, subsidiaries, and fellow subsidiaries
• Associates, joint ventures, and individuals with control/joint control/significant influence
• Key management personnel of the entity or its parent
  Disclosures must include the nature of the relationship, amounts of transactions, balances outstanding, and any provisions for doubtful debts. Even arm’s length transactions are disclosed to provide full transparency.

Exam Warning Omitting disclosure of routine transactions with related parties, such as director loans or intra-group sales at cost, is a common error and a frequent cause of audit qualification.

Events After the Reporting Period

IAS 10 splits post-reporting period events into two types:

• Adjusting events provide further evidence of conditions existing at the balance sheet date. Examples include the bankruptcy of a customer where the original sale was before year-end, or the settlement of court cases confirming liabilities at the reporting date. Financial statements are adjusted for these.
• Non-adjusting events arise from events after the date (e.g., fire destroying a factory after year-end, announcement of restructuring with no commitment at year-end). These do not result in adjustments but may require disclosure if material.

Worked Example 1.1

At 31 December 20X8, QWERTY Ltd's receivables include a $15,000 debt from RST Ltd. On 22 January 20X9, RST Ltd is declared bankrupt. The reporting date is 31 December 20X8 and the accounts are approved 15 March 20X9.

Should an adjustment or disclosure be made in QWERTY Ltd's accounts for the year ended 31 December 20X8?

Answer:
Yes. The bankruptcy confirms that the $15,000 debt was irrecoverable at 31 December 20X8, so this is an adjusting event. QWERTY Ltd must write off the balance in the 20X8 accounts, reducing receivables and recognising an expense.

Going Concern and Disclosures

IAS 1 requires that management assesses an entity’s ability to continue as a going concern for at least 12 months from the reporting date. Where material uncertainty exists, this must be disclosed with sufficient detail for users to understand its nature and impact.

Indicators that going concern may not apply include:

• Trading losses, negative net assets, or cash flow issues
• Legal proceedings or changes in market environment
• Loan defaults or inability to refinance

If the financial statements are not prepared on a going concern basis, this fact, the alternative basis used, and the reason must be clearly disclosed.

Worked Example 1.2

ACME Plc has suffered consecutive losses, is unable to pay debts as they fall due, and major customers have left. Management plans to sell assets and restructure but is uncertain about success.

What disclosures are required under IAS 1?

Answer:
Management should assess whether the going concern basis is still appropriate. If material uncertainty exists, they must disclose the facts, the nature of uncertainties, and management’s mitigation plans. If not a going concern, the FS must be prepared on a break-up basis, with reasons and impacts disclosed.

Significant Judgements and Major Sources of Estimation Uncertainty

IAS 1 requires entities to disclose information about the most significant judgements (except those relating to estimating amounts) made in applying accounting policies that have the greatest effect on the amounts recognised in the financial statements. Sources of estimation uncertainty that present a significant risk of material adjustment (within next financial year) must also be disclosed.

Typical areas requiring disclosure:

• Determining whether control or significant influence exists (e.g., for consolidation)
• Assessing whether a contract contains a lease
• Valuing unquoted investments, impairment of assets, or inventory net realisable values

Entities should describe the nature of the assumption or judgement and give detail of its potential effect on the financial statements.

Worked Example 1.3

Bluechip Ltd applies a percentage-of-completion method for long-term contracts, but significant uncertainty exists regarding total costs to complete.

What disclosure is needed?

Answer:
The directors must disclose the key assumptions regarding contract costs, explain the estimation method used, and state the sensitivity of the recognised amounts to changes in estimates.

Implications for ACCA FR Exam

The examiner expects you to:

• Identify and distinguish related parties and appropriately advise on necessary disclosures
• Correctly classify and account for adjusting and non-adjusting events post-reporting period
• Evaluate going concern using presented information and recommend the necessary disclosures or change of basis
• State and explain significant judgements when preparing or reviewing financial statements, giving examples

Summary

Clear disclosure of related party transactions, classification of subsequent events, and transparent going concern assessment are essential for presenting a fair view to users. ACCA FR questions regularly integrate these areas, often within scenario-based questions requiring application and concise written explanations.

Key Point Checklist

This article has covered the following key knowledge points:

• State the definition and disclosure requirements for related parties under IAS 24 and IAS 1
• Distinguish between adjusting and non-adjusting events after the reporting period (IAS 10) and identify their impact
• Explain the going concern assumption, indicators of risk, and required disclosures if a material uncertainty exists
• Recognise the requirement to disclose significant management judgements and estimation uncertainties, including examples
• Apply these principles in exam scenarios, including when to adjust, disclose, or change accounting bases

Key Terms and Concepts

• related party
• going concern
• adjusting event after the reporting period
• non-adjusting event after the reporting period
• significant judgement