AC4301 Corporate Accounting II

HKAS10 Events after the Reporting Period

Question 1

What are events after the reporting period? How should they be classified?

Question 2

Precision Ltd, an engineering company, makes up its financial statements to 31 March in

(a) The financial statements of Accurate Ltd for the year ended 28 February 2009 were
received which indicated a significant deterioration in the company's financial position.
Precision Ltd bought shares in Accurate Ltd some years ago and this purchase was
included in unlisted investments at its cost of $1 million. The financial statements
received indicated that this investment was now worth only $500,000.

(b) There was a fire at the company’s warehouse on 30 April 2009 when all of the
company's inventories to the value of $5 million was destroyed. The inventories in
the warehouse were under-insured by 50 per cent.

(c) On 31 March 2009 a provision was made of $600,000 in respect of any remedial work
required on plant supplied and installed at a customer's premises on 26 March 2009.
No remedial work had been carried out. On 1 May 2009 the customer confirmed
acceptance of the plant, accordingly no further liability would be involved.

(d) It was announced on 1 June 2009 that the company's design for tank cleaning
equipment had been approved by the major oil companies and this could result in an
increase in the annual revenue of some $10 million with a relative effect on profit.

Required:

State, giving your reasons, how these events should be dealt with in the company's
financial statements for the year ended 31 March 2009 in order to comply with the
requirements of HKAS 10 "Events after the Reporting Period".

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Question 3

The directors of a company are considering the company’s draft financial statements for the
year ended 30 September of Year 1. The following material points are unresolved:

(a) One of the company’s buildings was destroyed in a flood in October of Year 1. The
estimated value of the building was $4 million, but it was insured for only $3m. The
company’s going concern status is not jeopardized. The directors are unsure what
adjustment or disclosure, if any, should be made.

(b) The company gives warranties on its products at the time of sale, undertaking to repair
or replace any defective item free of charge. Some directors believe that an
allowance should be made for estimated warranty liabilities at 30 September of Year 1
based on sales to that date, and other directors argue that the expense of warranty work
should be borne in the period in which it is incurred.

(c) Some goods which had cost $120,000, and which were included in closing inventory
at 30 September of Year 1 at that figure, were subsequently sold for $80,000 after they
were found to have deteriorated while held in inventory. The directors are unsure
whether to adjust the inventory figure downwards by $40,000 or allow the loss to fall
in the period when the deterioration was discovered.

(d) The company had supplied $100,000 worth of goods to a customer on a sale or return
basis in September of Year 1. The transaction was included as a credit sale in the
accounting records, and as a result a profit of $20,000 was taken. In October of Year
1 the customer returned all of the items in good condition.

Required:

Advise the board of directors as to the correct treatment of each of these items, quoting
the authority for your advice in each case and stating the effect, if any, on the income
statement and balance sheet.

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Question 4

In the preparation of the financial statements for the year ended 31 March 2012 of Star
Workshop Inc. (SW), the financial controller identified the following transactions/ events
which happened after the end of the reporting period but before the date when the financial
statements are authorised for issue:

(a) A customer informed SW on 3 April 2012 that all the goods delivered to the
customer's warehouse on 25 March 2012 were not produced in accordance with the
agreed specification. SW reproduced the order and shipped the replacement goods to
the customer on 10 April 2012. The invoice of $8 million issued on 25 March 2012
has not been cancelled and the customer had settled when it confirmed the acceptance
of the replacement goods.

(b) The production of a plant has been suspended since 15 April 2012 due to the sudden
shortage of electricity supply. Sales orders of $15 million received in February 2012
with a planned production and delivery in May 2012 could not be fulfilled.
According to the terms of the sale contracts, SW agreed to compensate the
counterparty by 20% of the contract price for breach of contract.

(c) An official letter issued on 8 April 2012 by the local government regarding the
approval of a subsidy of $5 million has been received. The subsidy was given to SW
because of the employment of more than 1,000 local workers during the six months
ended 31 December 2011. According to the published government notice,
enterprises are encouraged to employ local workers and, subject to approval, a
discretionary subsidy will be granted. SW applied for the subsidy on 8 March 2012.

Required:

Discuss how the above transactions/ events should be dealt with in the financial
statements of SW for the year ended 31 March 2012.

(HKICPA Module A, June 2012 Session)

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Question 5

Geranium Manufacturing Limited (GML) manufactures garden furniture. The company’s

(i) In September 2011, the internal auditors discovered a fraud involving inventories.
The warehouse manager had been deliberately overstating the value of inventories to
conceal thefts. It is estimated that inventory was overstated by $5.25 million at
31 August 2011.

(ii) On 4 October 2011, a court case involving GML reached a conclusion. GML were
ordered to pay damages of $10 million to an employee who was seriously injured in an
accident at GML’s factory which happened in May 2011.

(iii) On 1 October 2011, GML began to implement a restructuring plan which will involve
the closure of a major manufacturing facility. The plan was announced to the public
on 15 September 2011, and it is now estimated that costs of closing the facility will be
$3.5 million, of which $2.5 million relate to redundancy costs, and $1 million relate to
retraining of employees.

GML’s draft financial statements for the year ended 31 August 2011 report profit of $35
million, and total assets of $180 million. The financial statements are due to be authorised
for issue on 31 October 2011, and do not currently reflect any of the events described above.

Required:

Discuss the implications of the matters discussed at the meeting for the financial
statements of GML for the year ended 31 August 2011. Prepare any journals and
necessary disclosures. Ignore tax.

(HKICPA QP Module A Workshop, December 2011)