RELEVANT TO ACCA QUALIFICATION PAPER F8
Subsequent events
Students of financial reporting and auditing papers will have to gain an
understanding of how subsequent events (also known as ‘events after the
reporting period’) affect the financial statements of an entity. This article will
consider the financial reporting aspects concerning subsequent events using a
case study type scenario, and will then discuss the auditing requirements that
candidates of Paper F8, Audit and Assurance need to be aware of.
Financial reporting considerations
In almost all circumstances, financial statements will not be finalised until a
period of time has elapsed between the year-end date and the date on which
the financial statements are (expected to be) issued. Therefore, regard has to
be given to events that occur between the reporting date and the date on which
the financial statements are (expected to be) authorised for issue.
IAS 10, Events After the Reporting Period stipulates the accounting and
disclosure requirements concerning transactions and events that occur
between the reporting date and the (expected) date of approval of the financial
statements. Among other things, IAS 10 determines when an event that occurs
after the reporting date will result in the financial statements being adjusted,
or where such events merely require disclosure within the financial statements.
Such events are referred to in IAS 10 as ‘adjusting’ or ‘non-adjusting’ events.
Students who have studied Paper F3, Financial Accounting will have come
across such terminology and it is imperative that they can differentiate
between an adjusting and a non-adjusting event. IAS 10 prescribes the
definitions of such events as follows:
Adjusting event
An event after the reporting period that provides further evidence of conditions that
existed at the end of the reporting period, including an event that indicates that the
going concern assumption in relation to the whole or part of the enterprise is not
appropriate.1
Non-adjusting event
An event after the reporting period that is indicative of a condition that arose after the
end of the reporting period.1
Example 1
You are the trainee accountant of Gabriella Enterprises Co and are preparing
the financial statements for the year-ended 30 September 2010. The financial
statements are expected to be approved in the Annual General Meeting, which
2
SUBSEQUENT EVENTS
APRIL 2011
is to be held on Monday 29 November 2010. Today’s date is 22 November
2010. You have been made aware of the following matters:
1. On 14 October 2010, a material fraud was discovered by the
bookkeeper. The payables ledger assistant had been diverting funds into
a fictitious supplier bank account, set up by the employee, which had
been occurring for the past six months. The employee was immediately
dismissed, legal proceedings against the employee have been initiated
and the employee’s final wages have been withheld as
part-reimbursement back to the company.
2. On 20 September 2010, a customer initiated legal proceedings against
the company in relation to a breach of contract. On 29 September 2010,
the company’s legal advisers informed the directors that it was unlikely
the company would be found liable; therefore no provision has been
made in the financial statements, but disclosure as a contingent liability
has been made. On 29 October 2010, the court found the company
liable on a technicality and is now required to pay damages amounting
to a material sum.
3. On 19 November 2010, a customer ceased trading due to financial
difficulties owing $2,500. As the financial statements are needed for the
board meeting on 22 November 2010, you have decided that because
the amount is immaterial, no adjustment is required. The auditors have
also confirmed that this amount is immaterial to the draft financial
statements.
Required:
(a) For each of the three events above, you are required to discuss whether the
financial statements require amendment.
Answer:
When presented with such scenarios, it is important to be alert to the timing of
the events in relation to the reporting date and to consider whether the events
existed at the year-end, or not. If the conditions did exist at the year-end, the
event will become an adjusting event. If the event occurred after the year-end, it
will become a non-adjusting event and may simply require disclosure within the
financial statements.
