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PART 7: OTHER DISCLOSURE ISSUES

Chapter 24
Events occurring after balance sheet date
24.1

Paragraph 2 of AASB 110 states:


Events after the reporting date are those events, favourable and unfavourable, that
occur between the reporting date and the date when the financial report is authorised
for issue. Two types of events can be identified:
(a) those that provide evidence of conditions that existed at the reporting date
(adjusting events after the reporting date); and
(b) those that are indicative of conditions that arose after the reporting date (nonadjusting events after the reporting date).
As can be seen from the above, AASB 110 refers to adjusting events and non-adjusting
events. An adjusting event (which has also been commonly referred to as a Type 1 event) is
one that provides additional evidence of, or further elucidates, a condition which existed as at
the reporting date. It would be recognised in the financial statements either by being brought
to accountif it relates to an item which would itself be brought to accountor by being
included by way of a noteif it relates to an item which would usually be recognised only by
way of a notesuch as a contingent liability. As paragraph 8 of AASB 110 states:
An entity shall adjust the amounts recognised in its financial statements to reflect
adjusting events after the reporting date.
A non-adjusting event (which has commonly been referred to as a type 2 event) is an event
that occurred after the reporting date, and therefore creates a new condition. The financial
statements themselves would not be adjusted (unless the subsequent event indicates that the
entity is no longer a going concern), but note disclosure could be required depending upon
the materiality of the event. As paragraph 10 of AASB 110 states:
An entity shall not adjust the amounts recognised in its financial statements to
reflect non-adjusting events after the reporting date.
In relation to the note disclosures required by AASB 110 in relation to non-adjusting events,
paragraph 21 of AASB 110 states:
If non-adjusting events after the reporting date are material, nondisclosure could
influence the economic decisions of users taken on the basis of the financial report.
Accordingly, an entity shall disclose the following for each material category of
non-adjusting event after the reporting date:
(a) the nature of the event; and
(b) an estimate of its financial effect, or a statement that such an estimate cannot
be made.

24.2

Such an event would be a non-adjusting (or type 2) event. Non-adjusting events should be
disclosed in the notes to the financial statements with a description of the event, and where
possible, the financial effect of the event. Because non-adjusting events do not relate to any
conditions existing at reporting date, it would be inappropriate to adjust the balance sheet
(which provides the financial position as at reporting date), or the income statement (which

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provides the profit or loss for a period of time to reporting date). However, it should be
stressed that one exception to this rule relates to events that bring into question the going
concern assumption of the entity. If something happens after reporting date which causes the
entity to no longer appear to be a going concern, then paragraph 14 of AASB 110 requires
that the financial statements be adjusted. Paragraph 15 states:
Deterioration in operating results and financial position after the reporting date
may indicate a need to consider whether the going concern assumption is still
appropriate. If the going concern assumption is no longer appropriate, the effect is
so pervasive that this Standard requires a fundamental change in the basis of
accounting, rather than an adjustment to the amounts recognised within the
original basis of accounting.
Even though non-adjusting events do not relate to the financial period in question, it would
be inappropriate and misleading not to advise financial report readers of material information
that has come to light in the period since reporting date, but prior to the date when the
financial reports are authorised for issue. Omission of such information may, if considered
material, cause them to make resource allocation decisions that they may not have otherwise
made.
It should also be noted that Section 299 of the Corporations Act requires the directors to
provide information about significant after-balance-date events within their Directors Report.
24.3

(a)

To the extent that this does not impact the assumption that the entity is a going
concern then this is a non-adjusting event which should be disclosed by way of a note
to the financial statements. If the event is of such magnitude that the going concern
basis of valuation is no longer appropriate then consistent with paragraph 14 of
AASB 110, adjustments would be made directly to the financial statements.

(b)

To the extent that the new information provides further information about a condition
that existed at reporting date (being that the debt was doubtful) then the accounts
should be adjusted to reflect the fact that the debt is in doubt. That is, it is an
adjusting (or type 1) event. In relation to this example, external auditors typically
review receipts subsequent to reporting date, or search for information about
subsequent customer failures, to determine whether closing provisions for doubtful
debts appear adequate. Again, we would need to consider whether the event impacts
the going concern assumption.

(c)

This is a non-adjusting (type 2) event which should be documented in the notes to the
accounts to the extent that it is material.

(d)

This is an adjusting event which provides information about a debt which had been
incurred prior to reporting date, and adjustment to the accounts will be required.

(e)

Prior to the release of AASB 110, within Australia the final dividend would normally
have been included within the 30 June financial statements even though it was not
declared until after the reporting date. This situation has now changed. As paragraph
12 of AASB 110 states:
If an entity declares dividends to holders of equity instruments (as defined in
AASB 132 Financial Instruments: Disclosure and Presentation) after the
reporting date, the entity shall not recognise those dividends as a liability at
the reporting date.

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24.4

We will consider each of the events which have been disclosed by the directors of Petrol
Limited to decide whether they are adjusting or non-adjusting events. It is assumed that the
information has come to light prior to the financial statements being authorised for issue.
(a)

On 30 August 2008, the price of crude oil fell by $13 following a meeting of OPEC
nations. The fall in price may affect the valuation of stock on hand at 30 June 2008.
The valuation should be at the lower of cost and net realisable value as per AASB
102. Thus, if net realisable value is reduced as the selling price falls, then stock
valuation may need to be reduced.
The reduction in value will, however, only apply to stock on hand at 30 August 2008
which was on hand as at 30 June 2008.
In addition a note disclosing the permanent diminution in sales prices may be
required.

(b)

The sinking of the oil tanker on 5 July 2008 would be a non-adjusting event as it does
not provide any additional evidence or reveal conditions existing at the reporting date.
Thus, the tankers net book value of $15 000 000 and stock of $2 000 000 lost will be
disclosed by way of a note. In addition, the possible litigation claim by oyster farmers
for $50 000 000 should be disclosed as a contingent liability.
The provision which the company is carrying for possible clean-up costs of
$12 000 000 appears to be insufficient given the initial estimation of $14 000 000. As
a result, in this particular case the event would be giving us additional evidence of
conditions existing at reporting date. Thus, it would be appropriate to adjust the
provision to $14 000 000. Some may, however, argue that there is not a sufficient
connection between the event and the established provision.

(c)

Prior to the release of AASB 110, within Australia the final dividend would normally
be included within the 30 June financial statements even though it was not declared
until after the reporting date. This situation has now changed. As paragraph 12 of
AASB 110 states:
If an entity declares dividends to holders of equity instruments (as defined in
AASB 132 Financial Instruments: Disclosure and Presentation) after the
reporting date, the entity shall not recognise those dividends as a liability at the
reporting date.
The above requirement is further explained in paragraph 13.
If dividends are declared (i.e. the dividends are appropriately authorised and no
longer at the discretion of the entity) after the reporting date but before the
financial report is authorised for issue, the dividends are not recognised as a
liability at the reporting date because they do not meet the criteria of a present
obligation in AASB 137. Such dividends are disclosed in the notes in the financial
report in accordance with AASB 101 Presentation of Financial Statements.

(d)

On 1 July 2008 the company received notice from the Australian Taxation Office and
advice from its tax advisers that the provision for tax was inadequate. Thus, we have
additional evidence of a condition which existed at the reporting date and, therefore,
this will be an adjusting event. The adjustment should be separately shown given its
size and effect on the profit or loss of the entity.

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(e)

The managing director was terminated in May 2008. He commenced legal action in
August 2008. We must decide if the condition existed at the reporting date. The event
which triggered the claim was the sacking in May; however, it could be argued that
the event is the lodgement of the claim. The solicitors believe that the claim is likely
to be settled for $2 million. Therefore, it would be appropriate to adjust the accounts
and create a provision.
A contingent liability would be recognised in respect of the remaining $2 000 000.

(f)

We need to establish whether there were conditions existing at the reporting date. The
initial discussions were held at board meetings and a decision had been made, subject
to a feasibility study, prior to 30 June 2008. In addition the feasibility study was dated
15 June 2008 and some property, plant and equipment had been placed on the market.
The decision was not formally made until August 2008. For the conditions to exist
there must have been an intention to relocate prior to 30 June 2008. On the balance
of evidence available it would appear that there were conditions existing and we
would adjust for the losses on sale of property, plant and equipment and redundancy
costs.
However, if we decide that the condition did not exist until the August board meeting
when the decision was made, then the events will need to be disclosed by way of a
note.

24.5

24.6

(a)

The judgement establishes definitively a claim which was in existence at 30 June


2008, but of uncertain amount. Therefore, the amount is an adjusting event which
should be brought to account in the body of the financial statements.

(b)

In accordance with AASB 110, the change in tax rate is an adjusting event that would
require adjustment to the accounts (i.e. the accounts should be prepared using the
42% tax rate).

(c)

This fire falls into the non-adjusting category of eventsthat is, creating new
conditions, not previously existing at reporting date. This event should be disclosed
by way of a note to the extent it is material.

(d)

This event appears to be an adjusting event, requiring adjustment to the accounts.

(e)

This event would probably classify as a non-adjusting event, requiring disclosure in


the notes to the financial statements.

(a)

Prior to the release of AASB 110, dividends recommended after reporting date were
included in the financial statements even though the declaration was made after
reporting date. This is no longer the case. Paragraph 12 of AASB 110 now requires:
If an entity declares dividends to holders of equity instruments (as defined in
AASB 132 Financial Instruments: Disclosure and Presentation) after the
reporting date, the entity shall not recognise those dividends as a liability at the
reporting date.
Even though the financial statements would not incorporate the dividends, disclosure
in the notes to the financial statements would be required.

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24.7

(b)

This would be considered to be an adjusting event requiring adjustments to the


financial statements. At 30 June 2008 the financial statements should include a
provision to cover the costs associated with the intended closure of the division. The
actual costs incurred elucidate a condition that existed at reporting date.

(c)

This is a Type 2 event that should be disclosed in the notes to the financial statements.

(d)

This would probably be considered to be an adjusting event necessitating adjustments


to the financial statements. At reporting date there would have been some doubt
about the ability of the Eco-Friendly Leisure Company to pay its debts. The
information about the insolvency elucidates a condition that existed at reporting date.
The amount of $600 000 would be treated as a bad debt expense. Another issue that
warrants consideration is whether the insolvency of Eco-Friendly Leisure Company
will impact the applicability of the going-concern assumption of Lombok Ltd. If the
loss of this major customer is likely to affect whether or not Lombok is a going
concern, then the basis of valuation of the financial statement would need to be
adjusted.

(e)

This would be treated as an adjusting event, and the financial statements should be
adjusted accordingly. At reporting date Lombok Ltd had a claim against the supplier.
The out-of-court settlement clarifies the value of the claim.

(a)

The re-assessment of the entity as not being a going concern would be considered to
be an adjusting event. This is the case even though the events responsible for the
reassessment occurred after the reporting date (but before the date the financial
statements were authorised for issue).

(b)

As paragraph 12 of AASB 110 states:


An entity shall not prepare its financial report on a going concern basis if
management determines after the reporting date either that it intends to
liquidate the entity or to cease trading, or that it has no realistic alternative but
to do so.
This means that the assets would be valued on a basis tied to the liquidation value of
the assets.

24.8

(c)

The treatment required before AASB 110 was issued was that the financial statements
would not be altered if an event that threatened the going-concern assumption of the
entity occurred after reporting date. In principle this would appear to be in
accordance with the requirement that the financial statements be prepared on the basis
of conditions that were in existence at reporting date. However, it could be misleading
to financial statement readers to receive reports after the date the financial statements
are authorised for issue that are prepared on the basis of the going-concern
assumption when this assumption has subsequently proved to be incorrect. Students
should be encouraged to consider arguments for and against the adjustment of the
financial statements in situations where the going-concern assumption is impacted by
an event that occurs after reporting date.

(a)

The disclosure is this case would not be appropriate. This would be an adjusting event
because it reveals details about an obligation that existed at balance date. The
obligation arose due to the sale of a tractor with a faulty brake system.

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24.9

(b)

Note disclosure would be appropriate, but this would be a non-adjusting event as the
obligation is triggered by an incident that occurred after reporting date.

(c)

It would depend upon the date the action is based upon. If the fine related to actions
of the entity after reporting date then it would not be an adjusting event. If, however,
the entity is being fined for an infringement that occurred prior to reporting date, then
an adjustment to expenses and liabilities would be appropriate.

(a)

Note disclosure only is required, as the dividend is proposed after reporting date (see
AASB 110, paragraph 12).

(b)

Note disclosure only is required, as the event creates a new condition that was not
present at reporting date (see AASB 110, paragraph 22 (b)).

(c)

An adjustment, decreasing liabilities and inventory by $15 000, is required because the
inventory and corresponding liability had been recognised at an estimated amount of
$100 000 (see AASB 110, paragraph 9 (c)).

(d)

Note disclosure only, as the event creates a new condition that was not present at
reporting date (see AASB 110, paragraph 22 (i)).

(e)

Note disclosure only, as the event creates a new condition that was not present at
reporting date (see AASB 110, paragraph 22 (i)).

(f)

An adjustment is required to reduce expenses and liabilities by $30 000, because the
ATO decision reduces to nil the probability of payment of an obligation that existed at
reporting date.

(g)

Note disclosure only, as the change in tax rate commences after reporting date (see
AASB 110, paragraph 22 (h)).

(h)

An adjustment is required to increase expenses and liabilities by $300 000, because


the Committees determination elucidates the companys obligation to the CEO, which
existed but could not be reliably estimated at reporting date (see AASB 110,
paragraph 9 (d)).

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