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In practical reality after the end of the year or even after the balance sheet date, there may be some events after the reporting period: an event, which could be favorable or unfavorable, that occurs between the end of the reporting period and the date that the financial statements are authorized for issue. Adjusting events are those providing evidence of conditions existing at the end of the reporting period, whereas non-adjusting events are indicative of conditions arising after the reporting period (the latter being disclosed where material).
Egyptian Standard No. (7) and IAS 10 contains requirements for when events after the end of the reporting period should be adjusted in the financial statements. Events after the end of reporting period may be classified into two types: 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. Non-adjusting event: An event after the reporting period that is indicative of a condition that arose after the end of the reporting period.
Events after the end of reporting period may be classified into two types:
1- Adjusting Events
2- Non-Adjusting Events
Key Definitions
The balance sheet date is a date as of which the information in a statement of financial position is stated. This date is usually the end of a month, quarter, or year.
Date of Authorization for Issue: is usually taken to be the date when the board of directors authorizes the issue of financial statements. Where management is required to issue its financial statements to a supervisory board or shareholders for approval, the authorization is considered to be complete upon the management’s authorization for the issue of financial statements rather than when the supervisory board or shareholders give their approval.
Adjusting events after the reporting period
1- The settlement after the reporting period of a court case that confirms that the entity had a present obligation at the end of the reporting period. The entity adjusts any previously recognized provision related to this court case in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets or recognizes 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 IAS 37;
2- The receipt of information after the reporting period indicating that an asset was impaired at the end of the reporting period, or that the amount of a previously recognized impairment loss for that asset needs to be adjusted. For example, the bankruptcy of a customer that occurs after the reporting period date usually confirms that a loss existed at the end of the reporting period on a trade receivable and that the entity needs to adjust the carrying amount of the trade receivable;
3- Compensation from the insurance company / if a fire occurred in the warehouse before the balance sheet date (12/31) and the company estimated the compensation at one million pounds and recorded it as a current asset (compensation from the insurance company) in the balance sheet and the date of authorization for issue March 10, for example, and on February 25 the final agreement with the insurance company on the amount of 800,000, this event has to be modified because it is related to an asset that was recorded in the company's books of one million and must be reduced to its true value of 800,000. But if the insurance company informed the company on March 15 of the value of the final insurance, then in this case no settlements or modifications in the financial statements, but disclosure in the notes;
4- The sale of inventories after the reporting period can give evidence about the net realizable value of the inventory at the end of the reporting period;
Meaning that the inventory’s value of 10 million pounds in the financial statements and as a result of economic conditions, the inventory was not sold during the month of January, and on February 10, the company was able to sell its inventory by making a deal with a customer of 6 million, and it was date of authorization for issue on February 15, in this is case the company must recognize the reduction in the inventory value of 4 million in the financial statements on December 31, because the date of sale was prior to the date of authorization for issue
Also in the event of impairment of assets if there are indications in the subsequent period of impairment of Assets, which leads to a decrease in the recoverable amount
Non-adjusting events after the reporting period
1- A decline in fair value of investments between the end of the reporting period and the date when the financial statements are authorized for issue. The decline in fair value does not normally relate to the condition of the investments at the end of the reporting period, but reflects circumstances that have arisen subsequently. Therefore, an entity does not adjust the amounts recognized in its financial statements for the investments. Similarly, the entity does not update the amounts disclosed for the investments as at the end of the reporting period, although it may need to give additional disclosure under paragraph 21;
2- Commencing major litigation arising solely out of events that occurred after the reporting period;
3- Abnormally large changes after the reporting period in asset prices or foreign exchange rates;
4- Entering into significant commitments or contingent liabilities, for example, by issuing significant guarantees;
5- If dividends are declared after the reporting period but before the financial statements are authorized for issue, the dividends are not recognized as a liability at the end of the reporting period because no obligation exists at that time. Such dividends are disclosed in the notes in accordance with IAS 1 Presentation of Financial Statements;
6- The destruction of a major production plant by a fire after the reporting period;
7- changes in tax rates or tax laws enacted or announced after the reporting period that have a significant effect on current and deferred tax assets and liabilities;
8- Major ordinary share transactions and potential ordinary share transactions after the reporting period.
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. Accordingly, an entity shall disclose the following for each material category of non-adjusting event after the reporting period.
Disclosure
An entity shall disclose the date when the financial statements were authorized for issue and who gave that authorization. If the entity’s owners or others have the power to amend the financial statements after issue, the entity shall disclose that fact.
In some cases, an entity needs to update the disclosures in its financial statements to reflect the information received after the reporting period, even when the information does not affect the amounts that it recognizes in its financial statements. One example of the need to update disclosures is when evidence becomes available after the reporting period about a contingent liability that existed at the end of the reporting period. In addition to considering whether it should recognize or change a provision under IAS 37, an entity updates its disclosures about the contingent liability in the light of that evidence.
The financial statements are based on some accounting estimates such as provisions (doubtful debts - litigation provisions).
If an entity has not applied a new standard or interpretation that has been issued but is not yet effective, the entity must disclose that fact and any and known or reasonably estimable information relevant to assessing the possible impact that the new pronouncement will have in the year it is applied.
Accounting Policies
Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. Accounting standards may include more than one accounting policy, such as straight-line depreciation or declining balance method of depreciation, or inventory valuation method using FIFO and weighted average, or capitalized interest costs on the asset
In the notes to the financial statements, the entity presents the accounting policy used
An entity shall select and apply its accounting policies consistently for similar transactions, other events and conditions, unless a Standard or an Interpretation specifically requires or permits categorization of items for which different policies may be appropriate. If a Standard or an Interpretation requires or permits such categorization, an appropriate accounting policy shall be selected and applied consistently to each category.
The company can change its accounting policy, for example, when there is a modification in the standards, such as canceling LIFO, meaning that the company must be transferred to FIFO or to the weighted-average cost method
The entity will change its accounting policy if it believes that changing the policy results in the financial statements providing more reliable and more relevant information
And when there is a change in the accounting policy of the company, such as changing the depreciation method, for example, from one method to another method, this means that a settlement must be made to the value of the accumulated depreciation account in order for it to equal its value in the new method in the current year and the depreciation is calculated in the new and old method and the difference between them is created an adjusting entries and second side will be the retained earnings
This will be, according to each case, it is possible to reduce or increase the retained earnings or reduce or increase the accumulated depreciation
Second, Changes in accounting policies
An entity is permitted to change an accounting policy only if the change:
- Is required by a standard or interpretation; or
- Results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity's financial position, financial performance, or cash flows.
For example, if the company uses FIFO method in pricing the issuance of the inventory, and the company finds after a period that it is the best method of pricing the issuance of the inventory in this industry to which the company belongs is the weighted average method because it gives better results and the change in accounting policies is first applied retrospectively. As if it was applied from the beginning if this matter could be applied in practice, and if it was impractical to apply the accounting policy retroactively from the beginning, then the opening balances are adjusted in the earliest date
Third, Changes in accounting estimates
As a result of the uncertainties inherent in business activities, many items in financial statements cannot be measured with precision but can only be estimated. Estimation involves judgments based on the latest available, reliable information. For example, estimates may be required of: bad debts; inventory obsolescence; the fair value of financial assets or financial liabilities; the useful lives of, or expected pattern of consumption of the future economic benefits embodied in, depreciable assets; and warranty obligations. The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability. An estimate may need revision if changes occur in the circumstances on which the estimate was based or as a result of new information or more experience. By its nature, the revision of an estimate does not relate to prior periods and is not the correction of an error. A change in the measurement basis applied is a change in an accounting policy and is not a change in an accounting estimate. When it is difficult to distinguish a change in an accounting policy from a change in an accounting estimate, the change is treated as a change in an accounting estimate. Recognize the effect of a change in an accounting estimate prospectively by including it in profit or loss in: the period of the change, if the change affects that period only; or the period of the change and future periods, if the change affects both.
Fourth, Errors
Errors can arise in respect of the recognition, measurement, presentation or disclosure of elements of financial statements. Financial statements do not comply with IFRS if they contain either material errors or immaterial errors made intentionally to achieve a particular presentation of an entity’s financial position, financial performance or cash flows. Potential current period errors discovered in that period are corrected before the financial statements are authorized for issue. However, material errors are sometimes not discovered until a subsequent period, and these prior period errors are corrected in the comparative information presented in the financial statements for that subsequent period.
An entity shall correct material prior-period errors retrospectively in the first set of financial statements authorized for issue after their discovery by:
- restating the comparative amounts for the prior period(s) presented in which the error occurred; or
- if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented.
