-Example 1 During the year 2005, Reliance Limited was sued by a competitor for Rs.

15 million for infringement of a trademark. Based on the advice of the companys legal counsel, Reliance Limited accrued the sum of Rs. 10 million as a provision in its financial statements for the year ended December 31, 2005. Subsequent to the balance sheet date, on February 15, 2006, the Supreme Court decided in favour of the party alleging infringement of the trademark and ordered the defendant to pay the aggrieved party a sum of Rs. 14 million. The financial statements were prepared by the companys management on January 31, 2006, and approved by the board on February 20, 2006. Should Reliance Limited adjust its financial statements for the year ended December 31, 2005?

Solution Reliance Limited should adjust the provision upward by Rs. 4 million to reflect the award decreed by the Supreme Court (assumed to be the final appellate authority on the matter in this example) to be paid by Reliance Limited to its competitor. Had the Judgment of the Supreme Court been delivered on February 25, 2006, or later, this post-balance sheet event would have occurred after the cut off point (i.e., the date the financial statements were authorized for original issuance). If so, adjustment of financial statements would not have been required. Example 2 Tata Limited carries its inventory at the lower of cost and net realizable value. At December 31, 2005, the cost of inventory, determined under the first-in, first-out (FIFO) method, as reported in its financial statements for the year then ended, was Rs. 10 million. Due to severe recession and other negative economic trends in the market, the inventory could not be sold during the entire month of January 2006. On February 10, 2006, Tata Limited entered into an agreement to sell the entire inventory to a competitor for Rs. 6 million. Presuming the financial statements were authorized for issuance on February 15, 2006, should Tata Limited recognize a write-down of Rs. 4 million in the financial statements for the year ended December 31, 2005? Solution: Yes, Tata Limited should recognize a write-down of Rs. 4 million in the financial statements for the year ended December 31, 2005.

Example 3 The statutory audit of Taj Limited for year ended June 30, 2005, was completed on August 30, 2005. the financial were signed by the managing director on September 8, 2005, and approved by the shareholders on October 10, 2005. the next events have occurred. 1) On July 15, 2005 a customers owing Rs. 9,00,000 to Taj Limited filed for bankruptcy. The financial statements include an allowance for doubtful debts pertaining to this customer only of Rs. 50,000. 2) Taj Limited s issued capital comprised 100,000 equity shares, the company announced a bonus issue of 25,000 shares on august 1, 2005. 3) Specialized equipment costing Rs. 5,45,000 purchased on March 1, 2005 was destroyed by fire on June 13, 2005. On June 30, 2005, Taj Limited has booked a receivable of Rs. 4,00,000 from the insurance company pertaining to this claim. After the insurance company completed its investigation, it was discovered that the fire took place due to negligence of the machine operator. As a result, the insurers liability was zero on this claim by Taj Limited. How should Taj Limited account for these three post-balance sheet events?

Solution 1) Taj Limited should increase its allowance for doubtful debts to Rs. 9,00,000 because the customers bankruptcy is indicative of a financial condition that existed at the balance sheet date. This is an adjusting event. 2) IAS 33, Earnings per Share, requires a disclosure of transaction as Stock splits or rights issue, which are of signification importance at the balance sheet. This is a non-adjusting event, and only disclosure is needed. 3) This is an adjusting event because it relates to an asset that was recognized at the balance sheet date. However, as the insurance companys liability is Zero, Taj Limited must adjust its receivable on the claim to zero. Example 4 At the balance sheet date, December 31, 2005, Taj Limited carried a receivable from XYZ, a major customer, at Rs. 10 million. The authorization date of the financial statements is on February 16, 2006. XYZ declared bankruptcy on Valentines Day (February 14, 2006.) Taj Limited will: a) Disclose the fact XYZ has declared bankruptcy in the footnotes. b) Make a provision for this post-balance sheet event in its financial statements (as opposed to disclosure in footnotes). c) Ignore the event and wait for the outcome of the bankruptcy because the event took place after the year-end. d) Reverse the sale pertaining to this receivable in the comparatives for the prior period and treat this as an error under IAS 8. Answer: (b)

Example 5 Ram Limited built a new factory building during 2005 at a cost of Rs. 20 million. At December 31, 2005, the net book value of the building was Rs. 19 million. Subsequent to year-end, on March 15, 2006, the building was destroyed by fire and the claim against the insurance company proved futile because the cause of the fire was negligence on the part of the caretaker of the building. If the date of authorization of the financial statements for the year ended December 31, 2005, was March 31, 2006, Ram Limited should: a) Write off the net book value to its scrap value because the insurance claim would not fetch any compensation. b) Make a provision for one-half of the net book value of the buildings. c) Make a provision for three-fourths of the net book value of the building based on prudence. d) Disclose this non-adjusting event in the footnotes. Answer: (d) Example 6 Tata Motors Limited deals extensively with foreign entities, and its financial statements reflect these foreign currency transactions. Subsequent to the balance sheet date, and before the date of authorization of the issuance of the financial statements, there were abnormal fluctuations in foreign currency rates. Tata Motors Limited should a) Adjust the foreign exchange year-end balances to reflect the abnormal adverse fluctuations in foreign exchange rates. b) Adjust the foreign exchange year-end balances to reflect all the abnormal fluctuations in foreign exchange rates (and not just adverse movements). c) Disclose the post-balance sheet event in footnotes as a non-adjusting event. d) Ignore the post-balance sheet event. Answer: (c) Example 7 Arun Limited decided to operate a new amusement park that will cost Rs. 1 million to build in the year 2005. Its financial year end is December 31, 2005. Arun Limited. Has applied for a letter of guarantee for Rs. 7, 00,000. The letter of guarantee was issued on March 31, 2006. the audited financial statements have been authorized to be issued on April 18, 2006. The adjustment required to be made to the financial statement for the year ended December 31, 2005, should be a) Booking a Rs. 7, 00,000 long-term payable. b) Disclosing Rs. 7, 00,000 as a contingent liability in 2005 financial statement. c) Increasing the contingency reserve by Rs. 7,00,000. d) Do nothing.

Answer: (b) Example 8 A new drug named AAA was introduced by Beta Chemicals Limited in the market on December 1, 2005. Beta Chemicals Limited s Financial year ends on December 31, 2005. it was the only company that was permitted to manufacture this patented drug. The drug is used by patients suffering from an irregular heartbeat. On March 31, 2006, after the drug was introduced, more than 2,000 patients died. After a series of investigation, authorities discovered that when this drug was simultaneously used with DDD, a drug used to regulate hypertension, the patients blood would clot and the patient suffered a stroke. A lawsuit for Rs. 200 crores has been filed against Beta Chemicals Limited. The financial statements were authorized for issuance on April 30, 2006. which of the following option is the appropriate accounting treatment for this post-balance sheet event under Ind-AS 10? a) The entity should provide Rs. 200 crores because this is an adjusting event and the financial statements were authorized to be issued after the accident. b) The entity should disclose Rs. 200 crores as a contingent liability because it is an adjusting event. c) The entity should disclose Rs. 200 crores as a contingent liability because it is a present obligation with an improbable outflow. d) Assuming the probability of the lawsuit being decided against Beta Chemicals Limited is remote, the entity should disclose it in the footnotes, because it is a nonadjusting material event. Answer: (C)