Menu Close

CA Final FR Ind AS 10 Events after the Reporting Period Important Solved Questions

Ind AS 10, Events After the Reporting Period, Important Questions with Solutions for CA Final FR May & Nov 2021 Exams

Question 1 –

XYZ Ltd. was formed to secure the tenders floated by a telecom company for publication of telephone directories. It bagged the tender for publishing directories for Pune circle for 5 years. It has made a profit in 2013-2014, 2014-2015, 2015-2016 and 2016-2017. It bid in tenders for publication of directories for other circles – Nagpur, Nashik, Mumbai, Hyderabad but as per the results declared on 23rd April, 2017, the company failed to bag any of these. Its only activity till date is publication of Pune directory. The contract for publication of directories for Pune will expire on 31st December 2017. The financial statements for the F.Y. 2016-17 have been approved by the Board of Directors on July 10, 2017.  Whether it is appropriate to prepare financial statements on going concern basis?

Solution –

With regard to going concern basis to be followed for preparation of financial statements, Ind AS 10 provides as follows:

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

2) Deterioration in operating results and financial position after the reporting period may indicate a need to consider whether the going concern assumption is still appropriate. If the going concern assumption is no longer appropriate, the effect is so pervasive that this Standard requires a fundamental change in the basis of accounting, rather than an adjustment to the amounts recognised within the original basis of accounting.”

In accordance with the above, an entity needs to change the basis of accounting if the effect of deterioration in operating results and financial position is so pervasive that management determines after the reporting period either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so.

In the instant case, since contract is expiring on 31st December 2017 and it is confirmed on 23rd April, 2017, i.e., after the end of the reporting period and before the approval of the financial statements, that no further contact is secured, implies that the entity’s operations are expected to come to an end. Accordingly, if entity’s operations are expected to come to an end, the entity needs to make a judgement as to whether it has any realistic possibility to continue or not. In case, the entity determines that it has no realistic alternative of continuing the business, preparation of financial statements for 2016-17 and thereafter on going concern basis may not be appropriate.


Question 2 –

What is the date of approval for issue of the financial statements prepared for the reporting period from April 1, 2011 to March 31, 2012, in a situation where following dates are available? Completion of preparation of financial statements May 28, 2012 Board reviews and approves it for issue June 19, 2012

Available to shareholders July 01, 2012
Annual General Meeting September 15, 2012
Filed with regulatory authority October 16, 2012

Will your answer differ if the entity is a partnership firm?

Solution –

As per Ind AS 10 the date of approval for issue of financial statements is the date on which 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. Accordingly, in the instant case, the date of approval is the date on which the financial statements are approved by the Board of Directors of the company, i.e., June 19, 2012.

In the case of an entity is a partnership firm, the date of approval will be the date when the relevant approving authority of such entity approves the financial statements for issue ie. the date when the partner(s) of the firm approve(s) the financial statements.


Question 3 –

ABC Ltd. received a demand notice on 15th June, 2017 for an additional amount of Rs.28,00,000 from the Excise Department on account of higher excise duty levied by the Excise Department compared to the rate at which the company was creating provision and depositing the same. The financial statements for the year 2016-17 are approved on 10th August, 2017. In July, 2017, the company has appealed against the demand of Rs.28,00,000 and the company has expected that the demand would be settled at Rs.15,00,000 only. Show how the above event will have a bearing on the financial statements for the year 2016-17. Whether these events are adjusting or non-adjusting events and explain the treatment accordingly.

Solution –

Ind AS 10 defines ‘Events after the Reporting Period’ as follows:

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)

In the instant case, the demand notice has been received on 15th June, 2017, which is between the end of the reporting period and the date of approval of financial statements. Therefore, it is an event after the reporting period. This demand for additional amount has been raised because of higher rate of excise duty levied by the Excise Department in respect of goods already manufactured during the reporting period. Accordingly, condition exists on 31st March, 2017, as the goods have been manufactured during the reporting period on which additional excise duty has been levied and this event has been confirmed by the receipt of demand notice. Therefore, it is an adjusting event.

In accordance with the principles of Ind AS 37, the company should make a provision in the financial statements for the year 2016-17, at best estimate of the expenditure to be incurred, i.e., Rs.15,00,000.


Question 4 –

ABC Ltd. is trading company in Laptops. On 31st March 20X2 company has 50 laptops which were purchased at Rs. 45,000 each. Company has considered the same price for calculation of closing inventory. On 15th April 20X2, advanced version of same series of laptops is introduced in the market. Therefore, the price of the current laptops crashes to Rs. 35,000 each. Company does not want to value the stock as Rs. 35,000 as the event of reduction took place after the 31stMarch 20X2 and the reduced prices were not applicable as on 31st March 20X2. Comment

Solution –

As per Ind AS 10, the decrease in the net realizable value of the stock after reporting period should be considered as adjusting event.


Question 5 –

Discuss with reasons whether these events are in nature of adjusting or non-adjusting and the treatment needed in light of accounting standard Ind AS 10.

(i) Moon Ltd. won an arbitration award  on 25th April, 2019 for Rs.1 crore. From the arbitration proceeding, it was evident that the Company is most likely to win the arbitration award. The directors approved the financial statements of year ending 31.03.2019 on 1st May 2019. The management did not consider the effect of the above transaction in FY-2018-19, as it was favourable to the company and the award came after the end of the financial year.

(ii) Zoom Ltd. have a trading business of Mobile telephones. The Company has purchased 1000 mobiles phones at Rs.5,000 each on 15th March, 2019. The manufacturers of phone had announced the release of the new version on 1st March, 2019 but not announced the price. Zoom Ltd, has valued inventory at cost of Rs.5,000 each at the year ending 31st March, 2019.

(iii) Due to arrival of new advance version of Mobile Phone on 8th April, 2019, the selling prices of the mobile stocks remaining with company was dropped at Rs. 4,000 each.

The financial statements of the company valued mobile phones @ Rs. 5,000 each and not at the value @ Rs. 4,000 less expenses on sales, as the price reduction in selling price was effected after 31.03.2019.

(iv) Assume that subsequence to the year end and before the financial statements are approved, Company’s management announces that it will restructure the operations of the company. Management plans to make significant redundancies and to close a few divisions of company’s business; however, there is not formal plan yet. Should management recognize a provision in the books if the company decides subsequent to end of the accounting year to restructure its operations?

Solution –

(i) Ind AS 10 defines “Events After Reporting Period” as follows :

Events After the reporting period are those events favourable and unfavourable that occur between the end of the reporting period and the date when financial statements are approved by Board of Directors in case of company and by the corresponding approving authority in case of any other entity for issue.

Two types of event can be identified :

a) those that provide evidence of conditions that existed at the end of the reporting period i.e. Adjusting events.

b) those that are indicative of conditions that arose the reporting period i.e. Non adjusting events.

In this case arbitration award i.e. adjusting event and should be reported. The management argument is wrong. Even favourable event should be reported.

(ii) As per Ind AS 10, the selling price of inventory after reporting period but before approval of financial statements is an adjusting event.

∴ Zoom Ltd. should adjust financial statement to value inventory at Rs.4,000 less expenses to sale i.e. at lower of cost or NRV.

(iii) The debtor was declared solvent and therefore no provising is needed.

(iv) Management should not recognise a provision as no formal plan is in place of restructuring.


Question 6 –

Company XYZ Ltd. was formed to secure the tenders floated by a telecom company for publication of telephone directories. It bagged the tender for publishing directories for Pune circle for 5 years. It has made a profit in 2011- 2012, 2012-2013, 2013-2014 and 2014-2015. It bid in tenders for publication of directories for other circles – Nagpur, Nashik, Mumbai, Hyderabad but as per the results declared on 23rd April, 2015, the company failed to bag any of these. Its only activity till date is publication of Pune directory. The contract for publication of directories for Pune will expire on 31st December 2015. The financial statements for the F.Y. 2014-15 have been approved by the Board of Directors on July 10, 2015. Whether it is appropriate to prepare financial statements on going concern basis?

Solution –

With regard to going concern basis to be followed for preparation of financial statements, paras 14 & 15 of Ind AS 10 states that-

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

Deterioration in operating results and financial position after the reporting period may indicate a need to consider whether the going concern assumption is still appropriate. If the going concern assumption is no longer appropriate, the effect is so pervasive that this Standard requires a fundamental change in the basis of accounting, rather than an adjustment to the amounts recognised within the original basis of accounting. In accordance with the above, an entity needs to change the basis of accounting if the effect of deterioration in operating results and financial position is so pervasive that management determines after the reporting period either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so.

In the instant case, since contract is expiring on 31st December 2015 and it is confirmed on 23rd April, 2015, i.e., after the end of the reporting period and before the approval of the financial statements, that no further contact is secured, implies that the entity’s operations are expected to come to an end. Accordingly, if entity’s operations are expected to come to an end, the entity needs to make a judgement as to whether it has any realistic possibility to continue or not. In case, the entity determines that it has no realistic alternative of continuing the business, preparation of financial statements for 2014-15 and thereafter on going concern basis may not be appropriate.


Question 7 –

A company manufacturing and supplying process control equipment is entitled to duty draw back if it exceeds its turnover above a specified limit. To claim duty drawback, the company needs to file application within 15 days of meeting the specified turnover. If application is not filed within stipulated time, the Department has discretionary power of giving duty draw back credit. For the year 20X1-20X2 the company has exceeded the specified limit of turnover by the end of the reporting period. However, duty drawback can be claimed on filing of application within the stipulated time or on discretion of the Department if filing of application is late. The application for duty drawback is filed on April 20, 20X2, which is after the stipulated time of 15 days of meeting the turnover condition. Duty drawback has been credited by the Department on June 28, 20X2 and financial statements have been approved by the Board of Directors of the company on July 26, 20X2. What would be the treatment of duty drawback credit as per the given information?

Solution –

In the instant case, the condition of exceeding the specified turnover was met at the end of the reporting period and the company was entitled for the duty drawback. However, the application for the same has been filed after the stipulated time. Therefore, credit of duty drawback was discretionary in the hands of the Department. Since the claim was to be accrued only after filing of application, its accrual will be considered in the year 20X2-20X3 only.

Accordingly, the duty drawback credit is a contingent asset as at the end of the reporting period 20X1-20X2, which will be realised when the Department credits the same.

As per para 35 of Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets, contingent assets are assessed continually to ensure that developments are appropriately reflected in the financial statements. If it has become virtually certain that an inflow of economic benefits will arise, the asset and the related income are recognised in the financial statements of the period in which the change occurs. If an inflow of economic benefits has become probable, an entity discloses the contingent asset.

In accordance with the above, the duty drawback credit which was contingent asset for the F.Y. 20X1 -20X2 should be recognised as asset and related income should be recognized in the reporting period in which the change occurs. i.e., in the period in which realisation becomes virtually certain, i.e., F.Y. 20X2 – 20X3.


Question 8 –

X Ltd. was having investment in  form of equity shares in another company as at the end of the reporting period, i.e., 31st March, 2012. After the end of the reporting period but before the approval of the financial statements it has been found that value of investment was fraudulently inflated by committing a computation error. Whether such event should be adjusted in the financial statements for the year 2011-12?

Solution –

Since it has been detected that a fraud has been made by committing an intentional error and as a result of the same financial statements present an incorrect picture, which has been detected after the end of the reporting period but before the approval of the financial statements. The same is an adjusting event. Accordingly, the value of investments in the financial statements should be adjusted for the fraudulent error in computation of value of investments.


Question 9 –

XYZ Ltd. was formed to secure the  tenders  floated  by a telecom company for  publication of telephone directories.  It  bagged the  tender  for  publishing  directories  for  Pune  circle for  5  years. It  has  made a profit  in  2013-2014,  2014-2015,  2015-2016  and  2016-2017. It bid in tenders for publication of directories for other circles – Nagpur, Nashik, Mumbai, Hyderabad but as per the results declared on 23rd April, 2017, the  company failed  to  bag any of these. Its only activity till date is publication of Pune directory. The contract for publication of directories for Pune will expire on 31st December 2017. The financial statements  for  the  F.Y.  2016-17  have  been  approved  by the  Board  of  Directors  on July 10, 2017. Whether it is appropriate to prepare financial statements on going concern basis?

Solution –

With regard to going concern basis to be followed for preparation  of financial statements,  Ind AS 10 provides as follows:

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

Deterioration  in  operating  results  and  financial  position  after   the  reporting period may indicate a need to consider whether  the going concern assumption  is still appropriate. If the  going  concern assumption  is no  longer  appropriate, the effect is so pervasive that this  Standard  requires  a fundamental  change in the basis of accounting, rather than an adjustment to the amounts recognised within the original basis of accounting.”

In accordance with the above, an entity needs to change the basis of  accounting if  the effect of deterioration in operating results and financial position is so pervasive that management determines after the reporting period either that it intends to  liquidate  the entity or to cease trading, or that it has no realistic alternative but to do so.

In the instant case, since contract is expiring on  31st December 2017  and  it is confirmed on 23rd April, 2017, i.e., after the end of the reporting  period  and before  the  approval  of the financial statements, that no further contact is secured, implies that the entity’s operations are expected to come to an  end.  Accordingly,  if  entity’s  operations  are expected to come to an end, the entity needs  to make a judgement as to  whether  it has  any realistic possibility to continue or not. In case, the entity determines that  it has  no realistic alternative of continuing the business, preparation of financial statements for 2016-17 and thereafter on going concern basis may not be appropriate.


 

Boost Your CA Final Preparation

Related Posts

Leave a Reply

Your email address will not be published. Required fields are marked *

CommentLuv badge

Boost Your CA Final Preparation