Introduction:
Events after the reporting date standardized by the International Accounting standard of IAS-10 called Events After the Reporting Period published requirements for that when should be events after the reporting date should be adjusted in the financial statements of the company.
Adjusting events are those that showed their conditions at the end of the reporting date and therefore they should be adjusted.
On the other hand, non-adjusting events are those whose signs were not visible at the end of the reporting period and hence are not allowed by IAS-10 to be adjusted in the financial statements of the company.
However, non-adjusting events are disclosed in notes to the financial statements when they are material.
Key terms used in the IAS-10 Events After the Reporting Period:
Events after the reporting period:
An event, either favorable or unfavorable for the company has occurred during the reporting date and when the financial statements are authorized for issue.
Events that happened during this period will be either adjusting or non-adjusting depending on its time of occurrence.
Adjusting event:
An event that provides information that the event’s signs were present at the reporting date although the event has occurred after the reporting date.
These include events that show going concern issues for either for the full or part of the enterprise. This can be explained by the example, let’s say a worker in a company got injured due to low-quality safety material put on by the worker.
This incident occurred a month ago reporting date. The worker filed a case against the company for damages before 15 days of the reporting date.
However, after the reporting date, the legal advisors of the company know that there is a 70% probability that the company will have to pay damages of one million USD to the worker and further heavy penalties payable to the government.
This event is an adjusting event as it was present at the reporting date and it is highly material. The company should, therefore, adjust this event in the financial statements the company.
Non-adjusting event:
Those material or non-material events are not indicative of if the event was visible at the end of the reporting period and because of that, these events are not adjusted in the financial statements of the company.
This can be best explained by the following example. Let’s say one of our debtors went liquidated who owed 5 million USD to our company. However, our debtor was performing healthily at the reporting date.
This event leaves no hint at the reporting date that the debtor will be liquidated after the reporting date.
This event is therefore non-adjustable however, it should be disclosed in the notes to the financial statements as it is a material amount and is of concern to users of financial statements.
Accounting for events after the reporting date:
The company has to recognize the figures and the effects of adjusting events including events that show that there are going concern issues at the reporting date either for the whole or part of the company.
The company does not have to recognize the figure and effects of non-adjusting events.
Along with, if the entity has issued dividends after the reporting date, they should not recognize any liability at the reporting date because this is a non-adjusting event.
Going concern issues for the company:
Management of an entity should not prepare the financial statements of the company on a going concern basis if they evaluate after the reporting date that they will cease the operations of the company, liquidating the entity or the company has no realistic ability to perform over the next year.
Disclosures:
Adjusting events are adjusted in the financial statements of the company and hence enough information is available to the readers of the financial statements of the company.
Non-adjusting events should be disclosed in the notes to the financial statements of the company if they are material and if not disclosing them will not provide the readers a piece of good information about the evaluations and decision-making process.
The company is required to update the disclosures with time as when the new information is available to the management and that is of high importance to the users of financial statements.
Companies are required to disclose the date of authorization of the financial statement and that who authorized them.
If the senior management or owners of the company have the power to amend the financial statements after the issuance, the company must disclose that information to users.
Auditor’s Responsibilities:
There are different responsibilities for the auditor to make sure that facts at different durations are considered and dealt with.
It is the auditor’s responsibility to make sure that material issues are identified and their effect on financial statements is measured. They have to make sure that the company is going to survive for the next 12 months.
They have to make sure that incidents that can give birth to future liabilities are properly assessed such as pending litigations against the company, issues with tax authorities, or guarantees issued by the company on others’ behalf.
If a material incident occurs after signing the audit report, the auditor is not responsible for the consequences however, it is the responsibility of the management to inform the auditors.
If the audit report is required to amend and the management agrees to amendment, the auditor has to prepare a new audit report.
If the management refuses to adjust the incident, the auditor has to transfer the liability to management in written and other consequences.
If the management refuses to adjust the material issues, the auditors have to inform users of the financial statements and proper documentation prepared by the auditor.
