Indian Accounting Standard 10, Events after the Reporting Period
There is always a time lag between the end of the reporting period and the date on which the financial statements are approved for issue. Thus, a question arises should the events that occur between the said two dates have an impact on the financial statements. If yes, to what extent? How should these be reflected? Should these be disclosed? Indian Accounting Standard (Ind AS) 10 provides guidance on these and similar issues.
The objective of Ind AS 10 is to prescribe:
(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.
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:
- Adjusting events after the reporting period – those that provide evidence of conditions that existed at the end of the reporting period.
- Non-adjusting events after the reporting – those that are indicative of conditions that arose after the reporting.
Exception: 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 the breach, shall be considered as an adjusting event.
The following is an example of adjusting events after the reporting period that require an entity to adjust the amounts recognised in its financial statements, or to recognise items that were not previously recognised.
Settlement of a court case: The settlement arrived at after the reporting period of a court case that confirms that the entity had a present obligation at the end of the reporting period. In this case, the entity adjusts any previously recognised provision related to this court case in accordance with Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets, or recognises a new provision. The entity does not merely disclose a contingent liability because the settlement provides additional evidence that would be considered in accordance with paragraph 16 of Ind AS 37.
Some examples of non-adjusting events after the reporting period that would generally result in disclosure are as follows:
- announcing a plan to discontinue an operation;
- the destruction of a major production plant by a fire after the reporting period.
If an entity declares dividends to holders of equity instruments after the reporting period, the entity shall not recognise those dividends as a liability at the end of the reporting period.
An entity should 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.
It may be noted that the entity shall make disclosures as specified in Ind AS 1, Presentation of Financial Statements, if:
- the financial statements are not prepared on a going concern basis; or
- the 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. These events or conditions requiring disclosure may arise after the reporting period.
Date when financial statements are approved for issue
The Standard requires an entity to disclose:
- the date when the financial statements were approved for issue;
- who gave this approval; and
- the fact that the entity’s owners or others have the power to modify the financial statements after issue.
These disclosures are necessary as it is important for users to know when the financial statements were approved for issue as the financial statements do not reflect the events after this date.
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.
If non-adjusting events after the reporting period are material, non-disclosure could influence the economic decisions that users make on the basis of the financial statements, the entity should 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.
Distribution of Non-cash Assets to Owners
Appendix A of Ind AS 10 provides guidance with regard to distribution of noncash assets as dividends to owners. The Appendix prescribes that the liability to pay a dividend shall be recognised when the dividend is appropriately authorised and is no longer at the discretion of the entity. This liability shall be measured at the fair value of the 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.