A fairly straightforward standard, that surprisingly causes confusion among professionals in real life.
IAS 10 covers all events, favorable and unfavorable, that occur between the end of the reporting period and the date when the financial statements are authorized for issue.
The standard splits the events into 2 categories:
- Adjusting events
- Non-adjusting events
A common misconception is that people erroneously tend to believe that an adjusting event is a material one, and a non-adjusting event an immaterial one.
By default in accounting we focus on the material items. Therefore, the key difference between the two categories is not materiality; instead is the year of recognition in the FS.
Adjusting events after the reporting period
Those are the events that provide evidence of conditions that existed at the end of the reporting period:
- Bad debts
- Outcome of legal cases
- Inventory impairment due to decrease in NRV
For adjusting events the FS of the reporting year should be amended accordingly.
Non-adjusting events after the reporting period
Indicative of conditions that arose after the end of the reporting period. For instance:
- Natural disasters (e.g. wildfires, floods, hurricanes etc.)
- Issue of shares
- Impairment of a quoted investment
Non-adjusting events can be very significant for users of the financial statements and so are disclosed, but their effect is not accounted for until the following year’s financial statements.
However, if any event after the reporting period (adjusting or non-adjusting), indicates that the business is not a going concern (i.e. the entity will be liquidated or cease trading), reporting year’s financial statements must be adjusted to reflect that the entity is not a going concern.
Which of the following events taking place after the year end but before the financial statements were authorized for issue would require adjustment in accordance with IAS 10?
- Three lines of inventory held at the year-end were destroyed by flooding in the warehouse.
- The directors announced a major restructuring.
- Two lines of inventory held at the year-end were discovered to have faults rendering them unsaleable.
- The value of the company’s investments fell sharply.
Event number 3 “Two lines of inventory held at the year-end were discovered to have faults rendering them unsaleable”. This is because, we can assume that these faults also existed at the year end, so this is the only option which would require adjustment.
The other statements have all taken place after the year end.