AC4301 Corporate Accounting II

HKAS10 Events after the Reporting Period

In-Class Assignment - Solution

Question 1

Events after the reporting period are those events, favorable and unfavorable that
occurs between the reporting date and the date of financial statements are authorized
for issue. These events are classified as adjusting events and non-adjusting events.
Adjusting events are those that provide evidence of condition that existed at the
reporting date. Non-adjusting events are those that are indicative of conditions that
arose after the reporting date.

Question 2

a) The financial statements of Precision Ltd provide evidence for an impairment of

the investment in Accurate Ltd. As at the end of the reporting period of
Precision Ltd, the investments had suffered an impairment loss and so in
accordance with HKAS 10 "Events after the Reporting Period" this would be
treated as an adjusting event after the reporting period. The investment would
therefore be included in Precision's statement of financial position at $500,000
and the impairment loss of $500,000 recognised in profit or loss for the year
ended 31 March 2009.

b) The destruction of the warehouse does not relate to the condition of the
warehouse at the end of the reporting period but reflects the circumstances that
have arisen subsequently, i.e. the fire broke out after the reporting period. This
would be treated as a non-adjusting event after reporting period. Information
would be provided in a note, but inventories would be included in the statement
of financial position at 31 March 2009 at $5,000,000. The note would state the
nature of the event and an estimate of the financial effect. Failure to provide
this information could influence the economic decisions that users make on the
basis of the financial statements.

c) The information obtained after the reporting period indicates that the provision
previously recognised at the end of the reporting period is no longer required.
The event is thus an adjusting event after the reporting period. The relevant
items in the statement of financial position at 31 March 2009 and the profit or
loss for the year ended 31 March 2009 would be adjusted accordingly.

d) The approval of company's design does not provide evidence of conditions

existed at the end of the reporting period and is therefore a non-adjusting event
after the reporting period.

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Question 3

a) HKAS 10 "Events after the Reporting Period" classified this type of events as
non-adjusting - no change to the figure in the financial statements is required but
there should be a note to ensure that the financial statements are not misleading.
The note should state the amount of the loss and the extent of the insurance cover.

b) A provision should be made for the estimated amount of the liabilities under
warranties, as required by HKAS 37 Provisions, Contingent Liabilities and
Contingent Assets. The provision will appear as a liability in the statement of
financial position and the operating profit will be reduced by the amount of the
allowance.

c) This is an adjusting event according to HKAS 10. The closing inventory would
be reduced by $40,000 in the statement of financial position and in cost of sales,
thus reducing operating profit by this amount, unless it could be shown that the
deterioration had taken place after the reporting date.

d) This is an adjusting event according to HKAS 10. The goods have to be treated
as trading inventory at September of Year 1, applying generally accepted
accounting principles. The effect on the profit or loss and statement of financial
position will be:

(i) Sales and trade receivables both reduced by $100,000.

(ii) Closing inventory increased by $80,000.

The combined effect of the two adjustments is to reduce current assets and profit
by $20,000.

Question 4

a) This is an adjusting event under HKAS 10. SW should reverse the recognition
of the $8 million sales during the year ended 31 March 2012 and record the
inventory as the lower of cost and net realisable value after considering the
rework cost because:

- The notice from the customer on 3 April 2012 has indicated that the goods
received on 25 March 2012 were not accepted, being an event after the
reporting period that provided evidence of conditions [of goods] that existed
at the end of reporting period.

- SW accepted the complaint of the customer and has replaced the goods
shipped after the reporting period.

- The customer confirmed only the acceptance of the replaced goods, which
was after the reporting period.

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b) This is a non-adjusting event under HKAS 10. SW should recognise the
$3 million (20% of $15 million) compensation for the breach of contract in the
period subsequent to 31 March 2012 because:

- The sales orders were received and the sales contracts were signed before the
end of the reporting period.

- There was no indication that SW would fail to fulfil the sales orders at the end
of the reporting period. The failure in the production and delivery of orders
was due to the suspension of production from 15 April 2012, not a condition
that existed at 31 March 2012.

- If this event is considered to be material, SW should disclose the nature of the

event and its financial effect in the notes to the financial statements.

c) This is a non-adjusting event under HKAS 10. SW should not recognise the
$5 million subsidy as government grant in the year ended 31 March 2012 OR SW
should recognise the subsidy as government grant in the period subsequent to
31 March 2012 because:

- Although it is possible to argue that there is reasonable assurance that SW

would comply with the conditions attached (HKAS 20.7 (a)), i.e. the relevant
employment period of local workers was the six months ended 31 December
2011 and the application for the subsidy was on 8 March 2012, which is
during the year ended 31 March 2012.

- There was no reasonable assurance that the subsidy will be received

(HKAS20.7 (b)) at 31 March 2012, i.e. the subsidy is discretionary and subject
to approval by the local government which was obtained on 8 April 2012.

- If this event is considered to be material, SW should disclose the nature of the

event and its financial effect in the notes to the financial statements.

Question 5

GML’s financial statements are due to be authorised for issue on 31 October 2011,
and the three matters discussed by the board may need to be adjusted or disclosed
before the financial statements are authorised.

(i) Inventory fraud

The discovery of the fraud in September 2011 happened after the end of the reporting
period of 31 August, and is therefore an event after the end of the reporting period.
The amount of the fraud is material at 5.25/35 = 15% of draft profit for the year.

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The key issue is whether the discovery provides evidence of a condition that existed at
the end of the reporting period, i.e. whether it meets the definition of an adjusting
event according to HKAS 10.3.

The fraud and the related inventory loss both existed at the reporting date, therefore
this meets the definition of an adjusting event. The discovery of a fraud that shows
that the financial statements are incorrect is given as an example of an adjusting event
in the accounting standard.

An adjustment is necessary to the financial statements to remove the material error

caused by the fraud. The following journal should be made:

DR Cost of sales $5.25 million

CR Inventory $5.25 million

(ii) Settlement of court case

The settlement of the court case happens after the end of the reporting period, but it
relates to a situation which occurred before the end of the reporting period. The
settlement after the end of the reporting period of a court case that confirms the
reporting entity had a present obligation at the end of the reporting period should be
treated as an adjusting event.

The amount of damages is material at 10/35 = 29% of draft profit for the year.
A provision should therefore be recognised at 31 August 2011 at $10 million. The
following journal should be made:

DR Operating expenses $10 million

CR Provisions $10 million

A disclosure note should be included in the financial statements in accordance with

HKAS 37 Provisions, Contingent Liabilities and Contingent Assets to explain the
nature of the provision.

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(iii) Restructuring

The implementation of the restructuring plan commences after 31 August 2011, so

this is an event after the reporting period. As with the inventory fraud, the key issue
is whether the implementation of the plan is an adjusting event.

The plan was announced on 15 September 2011, after the end of the reporting period,
and so the implementation of the plan does not provide additional evidence of a
year-end condition. The start of implementing the restructuring plan is therefore a
non-adjusting event. Announcing, or commencing the implementation of a major
restructuring plan is given as an example of a non-adjusting event given in the
accounting standard.

Therefore, the financial statements should not be adjusted, and the reported profit and
total assets are unaffected by the restructuring plan.

However, disclosure is required of material non-adjusting events after the reporting

period where nondisclosure could influence the economic decisions made by users.

The costs of restructuring of $3.5 million amount to 10% of profit and 2% of total
assets, so are material. Disclosure should therefore be made in a note to the financial
statements to describe the restructuring plan and the amounts involved.

Recommendation/ justification

GML’s financial statements require adjustment for the adjusting events in respect of
the fraud and the court case, which will result in a reduction of $15.25 million to
profit, $5.25 million to total assets, and an increase of $10 million to total liabilities.
The redrafted profit for the year ended 31 October 2011 will be $19.75 million
($million 35 – 10 – 5.25), and the redrafted total assets will be $174.75 million
($million 180 – 5.25).

The implementation of the restructuring plan is a non-adjusting event which requires

disclosure, but not adjustment in the financial statements.