IndAS 10 Event Occurring After the Reporting Period

IndAS 10 Event Occurring After the Reporting Period. The Standard requires that an entity should not prepare its financial statements on a going concern basis if events after the reporting period indicate that the going concern assumption is not appropriate.

IndAS 10 Event Occurring After the Reporting Period

Scope & Objective –

Scope – This standard shall be applied in the accounting for and disclosure of events after the reporting period.

Objective – Ind AS prescribes:

  • (a) when an entity should adjust its financial statements for events after the reporting period; and
  • (b) the disclosures that an entity should give about the date when the financial statements were approved for issue and about events after the reporting period.

Meaning

Events after the reporting period are those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are approved by the Board of Directors in case of a company, and, by the corresponding approving authority in case of any other entity for issue. Two types of events can be identified:

  • (a) those that provide evidence of conditions that existed at the end of the reporting period (adjusting events after the reporting period); and
  • (b) those that are indicative of conditions that arose after the reporting period (non-adjusting events after the reporting period).

However, there is an exception to the above principle. In case of a breach of a material provision of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand on the reporting date, the agreement by lender before the approval of the financial statements for issue, to not demand payment as a consequence of the breach, shall be considered as an adjusting event.

An entity shall adjust the amounts recognised in its financial statements to reflect adjusting events after the reporting period.

An entity shall not adjust the amounts recognised in its financial statements to reflect non-adjusting events after the reporting period.

However, if non-adjusting events after the reporting period are material and their non-disclosure could influence the economic decisions that users make on the basis of the financial statements, then it shall disclose the following for each material category of non-adjusting event after the reporting period:

  • (a) the nature of the event; and
  • (b) an estimate of its financial effect, or a statement that such an estimate cannot be made.

If an entity receives information after the reporting period about conditions that existed at the end of the reporting period, it shall update disclosures that relate to those conditions, in the light of the new information.

Appendix A of Ind AS 10 provides guidance with regard to distribution of noncash assets as dividends to owners. The Appendix prescribes that liability to pay such a dividend should be recognised when it is appropriately authorised and is no longer at the discretion of the entity. This liability should be measured at the fair value of assets to be distributed. Any difference between the carrying amount of the assets distributed and the carrying amount of the dividend payable should be recognised in profit or loss when an entity settles the dividend payable.

General points –

  • The process involved in authorizing the financial statements for issue will vary depending upon the management structure, statutory  requirements and procedures followed in preparing and finalizing the financial statements.
  • In some cases, an entity is required to submit its financial statements to its shareholders for approval after the financial statements have been issued. In such cases, the financial statements are authorized for issue on the date of issue, not the date when shareholders  approve the financial statements.
  • In some cases, the management of an entity is required to issue its financial statements to a supervisory board (made up solely of non-executives) for approval. In such cases, the financial statements are authorized for issue when the management authorizes them for issue to the supervisory board.

Adjusting events –

  • An entity should adjust its financial statements for events after the reporting date that provide further evidence of conditions that existed at the reporting date.
  • Notwithstanding anything about adjusting or non-adjusting events, where there is a breach of a material provision of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand on the reporting date, the agreement by lender before the approval of the financial statements for issue, to not demand payment as a consequence of such breach, shall be considered as an adjusting event.

Adjusting events examples-

  • Settlement of a court case that confirms that an entity has a present obligation at the end of the reporting period
  • Receipt of an information that an asset was impaired or that previous impairment requires reversal e.g.  bankruptcy and inventory valuation
  • Profit sharing or bonus, if an entity has legal or constructive obligations
  • Discovery of fraud or errors which shows that FS are incorrect
  • In certain cases, cost of assets purchased or proceeds from assets sold
  • Ind AS 33 – if an entity issue of bonus shares during subsequent period, it has to consider these shares for working EPS for current period as well as comparative period. Same treatment for share split or reverse split.

Non-Adjusting events

An enterprise should not adjust its financial statements for events after the reporting date that are indicative of conditions that arose after the reporting date.

It shall disclose the following for each material category of non-adjusting event after the reporting period:

  • the nature of the event; and
  • an estimate of its financial effect, or a statement that such an estimate can not be

Example –

  • a major business combination after the reporting period Ind AS 103, ‘Business Combination’ ;
  • announcing a plan to discontinue an operation;
  • entering into significant commitments or contingent liabilities, for example – by issuing significant guarantees;
  • major purchases of assets, classification of assets as held for sale in accordance with Ind AS 105, ‘Non Current Asset Held for Sale and Discontinued Operations’ or exploration of major assets by government;
  • the destruction of a major production plant by a fire after the reporting period;
  • announcing or commencing the implementation of, a major restructuring;
  • major ordinary share transactions and potential ordinary share transaction after the reporting period;
  • abnormally  large changes after the reporting period in asset prices or foreign exchange rates;
  • changes in tax rates or tax laws enacted or announced after the reporting period that have a significant effect on current and deferred tax assets and liabilities

Dividends –

  • If dividend to holders of equity instruments are proposed or declared after the reporting date, an entity should not recognize those dividends as liability. There is no obligation as on the reporting date.
  • The entity would disclose if any dividend is declared or proposed after the reporting date but before the date of approval of financial statements.
  • An enterprise may give the disclosure of proposed dividends either on the face of the balance sheet as an appropriation within equity or in the notes in accordance with Ind AS 1 ‘Presentation of Financial Statements’.

Going concern-

An entity should not prepare its financial statements on a going concern basis if management determines after the reporting date either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternatives but to do so.

However, there should no longer be a requirement to adjust the financial statements where an event after the reporting date indicates that going concern assumption is not appropriate. In that case there is need for fundamental change in the basis of accounting rather than adjustment.

Ind-AS 1 specifies required disclosure if:

  1. The financial statements are not prepared on a going concern basis;
  2. Management is aware of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern. The events or conditions requiring disclosure may arise after the reporting period

Disclosure –

Date of authorization for issue – An entity shall disclose the date when the financial statements were authorized for issue and who gave that authorization. If the entity’s owners or others have the power to amend the financial statements after issue, the entity shall disclose that fact.

Updating disclosure about conditions at the end of the reporting period: If an entity receives information after the reporting period about conditions that existed at the end of the reporting period, it shall update disclosures that relate to those conditions, in the light of the new information

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