Tutorial 7 FA IV

Question 1 [(a) and (b) discussed during lecture hours]

MFRS110 Events after the Reporting Period deals with events after the reporting period.
(a) Explain in the context of MFRS110, the term "events after the reporting period".
– Paragraph 3

Events occurring between the reporting period and the date on which financial
statements are authorised for issue.
2 types of events can be identified:
i. Those events that provide further evidence of conditions that existed at the
reporting period
ii. Those events that are indicative of conditions that arose subsequent to the
reporting period.

(b) What is the treatment stated by MFRS110 in dealing with this event? - Paragraph 8,10,21

Recommended treatments
Events requiring adjustments
Assets and liabilities should be adjusted for events occurring after the reporting period
that provide additional evidence to assist with the estimation of amounts relating to
conditions existing at the reporting period. Or the events indicate that the going concern
assumption in relation to the whole or part of the enterprise is not appropriate.

Events requiring disclosure by note

Assets and liabilities should not be adjusted for, but disclosure should be made of those
events occurring after the reporting period that does not affect the condition of assets or
liabilities at the reporting period. But it is such important that non-disclosure would
affect the ability of the users of the financial statements to make proper evaluations and
decisions.

If the events occurring after the reporting period are to be disclosed by note, the
following information should be provided:

1. The nature of the events

2. An estimated of the financial effects, or a statement that such an estimate cannot be
made.
(c) The accounts of Evaluation Sdn Bhd for the year ended 31 December 2020 are to be approved on
23 March 2021. In February 2021, there was a labour dispute over wages causing a strike by the
employees. This led to disruption in production causing an estimated loss of RM10 million.

Advise the directors as to how the above event would be dealt with in the accounts for the year ended
31 December 2020.
The lost of RM10 million is clearly a non-adjusting event occurring after the reporting period,
since the condition ( loss through a strike ) did not exists at 31 December 2018.
The amount is material and the event should be disclosed by way of note containing information
as indicated above.
An assessment would also have to be made on whether this event affects the ability of the
company to continue in operational existence.

Question 2
Consider each of the following events which occurred after the reporting period of 31 March 2020 but
before the financial statements are authorised for issued. Assume materiality to exist in every case.

(a) Office equipment used in the factory which was recorded as RM100,000 in the accounts was
damaged by flood on 4 April 2020.

This is a non-adjusting event as the condition arose subsequent to the reporting period.
Disclosure however is required as the amount is significant. Office equipment of
RM100,000 was damaged due to fire at 4 April 2020.

(b) In order to finance a new development project, 2,000,000 ordinary shares of RM1.50 each
were issued on 8 April 2020.

This is a non-adjusting event as the condition arose subsequent to the reporting period.
Disclosure however is required as the amount is significant. 2,000,000 ordinary shares of
RM1.50 each had been issued on 8 April 2020 to finance a development project.

(c) Some obsolete inventories of the company stated at the cost of RM8,000 were subsequently
sold for RM1,000.

This is an adjusting event as it provides further evidence of condition that existed at the
reporting period. The RM 7,000 is to be charged out to the Statement of profit or loss as
inventories loss.

(d) A credit sale of RM15,000 was made to a customer on 10 April 2020. However, he was
declared bankrupt by the court on 15 May 2020. The amount of the debt is irrecoverable.

This is a non-adjusting event as the condition arose subsequent to the reporting period.
Disclosure of the amount of RM15,000 owed by the customer who had been declared
bankruptcy however is required.
 (e) The directors proposed to declare 10% dividends on the 15,000,000 ordinary shares of
RM1.50 each.

This is a non-adjusting event as the condition arose subsequent to the reporting period.
The proposal of declaring dividends of 10% on the 15,000,000 ordinary shares however
is to be disclosed.

Required:
How each of the above items should be dealt with in the accounts for the year ended 31 March 2020
in accordance with MFRS110.

Question 3
Consider each of the following events occurring after the reporting period on 30 June 2020, but before
the financial statements are authorised for issue on 31 August 2020. Assume that all amounts are
material in each case.
(a) An issue of 2,500,000 ordinary shares at RM2.00 each on 10 July 2020 to finance the new
investment project.

This is a non-adjusting event as the condition arose subsequent to the reporting period.
Disclosure however is required as the amount is significant. 2,500,000 ordinary shares of
RM2.00 each had been issued on 10 July 2020 to finance a development project.

(b) A machine used in the factory which was recorded as RM150,000 in the accounts was
damaged by flood on 15 July 2020.

This is a non-adjusting event as the condition arose subsequent to the reporting period.
Disclosure however is required as the amount is significant. Machine of RM150,000 was
damaged due to flood on 15 July 2020.

(c) Inventories items which cost RM70,000 at the reporting period were subsequently sold for
RM25,000.

This is an adjusting event. Amount of RM45,000 to be deducted from the inventories as

at 31 June 2020, and recognised as expense in the income statement.

(d) A customer with outstanding amounts of RM25,000 was declared bankrupt on 25 July 2020.
The amount of the debt is irrecoverable.

This is an adjusting event as it providence further evidence of conditions existed at

reporting date. Specific allowance for doubtful debts to be provided and deducted from
receivable.

(e) The board of directors decided to declare a 5% final dividend on ordinary shares on 29 July
2020.

This is a non-adjusting event. The BOD decided to declare a 5% final dividend on

ordinary shares on 29 July 2020.

Required:
Explain how each of the above items should be dealt with in the accounts for the year ended 30 June
2020, in accordance with IAS10 Events after the Reporting Period.
Question 4
As at 31 December 2019, Hadapan Bhd (Hadapan) among its trade receivables a customer, Harapan
Sdn Bhd (Harapan), who owed the company RM600,000. At this date, Hadapan’s directors were of
the opinion that the debt was collectible and no allowance for doubtful debt was made.

On 2 February 2020, Harapan was placed under receivership. Hadapan directors authorised the
financial statements for issue on 15 May 2020. Assume that Harapan was able to pay 40 sen for each
RM1.00 owed.

Required:
Identify and explain the nature of the above event and the appropriate accounting treatment.

Harapan going under receivership is an event after the reporting period. This event gives more
evidence of the fair value of the financial instrument as Harapan would have had financial
difficulty for several months before the year-end.
Thus, the condition that Harapan might not able to settle the debt had already existed at the
reporting period. This condition was then confirmed by the event on 2 Feb 2020.
On the reporting date, no provision was made as it was estimated that 100% of the debt could
be collected. However, before the financial statements were signed the amount could be
collected was measures to be RM240,000.

Question 5
At the reporting period, the carrying value of inventories of Rehat Bhd were RM172,000 and the net
realisable value was RM208,000. The inventories were sold after the year-end but before the financial
statements were authorised for issue, at RM140,000.
Required:
Discuss the accounting treatment of the mentioned case.

As the carrying value was lower, the inventory would be disclosed at RM172,000 initially. The
actual sale price gives evidence that carrying value has to be adjusted to RM140,000 (less cost to
sell). The loss of RM32,000 is recognised in the current year.

This is a non-adjusting event and said that NRV RM208,000 is higher than cost RM172,000. There
is no evidence that the inventory damaged by the year end.

The answer is adjusted event as the subsequent disposal at SP below cost and NRV provide
evidence of damage. Unless the question said is due to fireflood etc.

Accounting treatment:

The amount recognised as a receivable in the statement of financial position will be adjusted by
debiting doubtful debt expense of RM360,000 and crediting allowance for doubtful debts
RM360,000 in the 2019 financial statements.
Question 6
MFRS110 Events after the reporting period defines the accounting treatment of material events
occurring after the reporting period.
Required:
Explain what changes would have to be made to the following items in the balance sheet if it became
clear, shortly after the reporting period, that the going concern basis was no longer appropriate.

 Plant and equipment

Plant and equipment are normally valued at cost or valuation less depreciation. If the going
concern basis was no longer appropriate, net realisable value on the basis of short-term sale
would have to be adopted instead.

 Inventory

Inventory is normally valued at the lower of cost and net realisable value. If the going concern
basis no longer applied, net realisable value on the basis of short-term sale would have to be
substituted.

 Bank loan

Bank loan, if shown as non-current liabilities, would have to be reclassified as current liabilities.

Question 7
(a) The objective of MFRS110 Events after the Reporting Period is to prescribe the treatment of
events that occur after an entity’s reporting period has ended.

Required:
Define the period to which MFRS110 relates and distinguish between adjusting and non-adjusting
events.

MFRS110 related to events taking place between the last day of the reporting period (the year
end date) and the date on which the financial statements are approved and signed by the
directors. This period is usually several months.

Adjusting events are events taking place after the reporting period which provide further
evidence of conditions existing at the end of the reporting period or which call into question the
going concern status of the entity.

For this reason, adjusting events require adjustment to be made to the financial statements. If
going concern is no longer applicable, the financial statements must be prepared on a break-up
basis.

Non-adjusting events provide evidence of condition arising after the end of the reporting period.
If material, these should be disclosed by note, but they do not require that the financial
statements be adjusted.
(b) Wawasan Sdn. Bhd. (Wawasan) completed its financial statements for the year ended 31 March
2020. Its financial statements were authorised for issued by its directors on 6 May 2020 and the AGM
(Annual General Meeting) will be held on 3 June 2020. The following matters have been brought to
your attention:

(i) On 12 April 2020, a fire completely destroyed the company’s largest warehouse and the
inventories it contained. The carrying amounts of the warehouse and the inventories were
RM10 million and RM6 million respectively. It appears that the company has not updated
the value of its insurance cover and only expects to be able to recover a maximum of
RM9 million from its insurers. Wawasan’s trading operations have been severely
disrupted since the fire and it expects large trading losses for some time to come.

This is a non-adjusting event as it does not affect the valuation of property or

inventory at the year end.

It will certainly need to be disclosed in the notes to the financial statements,

disclosing separately the RM16 million loss and the expected insurance recovery of
RM9 million.

However, it would be treated as adjusting if the scale of losses were judged to

threaten the going concern status of Wawasan.

(ii) A single class of inventory held at another warehouse was valued at its cost of
RM460,000 at 31 March 2020. In April 2020, 70% of this inventories were sold for
RM280,000 on which Wawasan’s sale staff earned a commission of 15% of the selling
price.

The sale in April 2020 gives further evidence regarding the realisable value of
inventory at the year end and so an adjustment will be required.

If 70% of the inventory was sold for RM280,000 less commission of RM42,000, it has
a net realisable value (NRV) of RM238,000.

Because the inventory stated as “A single class of inventory...”, on this basis, the
total cost of RM460,000 should be restated at NRV of RM340,000. So inventory at
the end of the reporting period should be written down by RM120,000.
238 x 100/70 = 340; 460 – 340 = 120

(iii) On 18 May 2020, the government announced tax charges which have the effect of
increasing Wawasan’s deferred tax liability by RM650,000 as at 31 March 2020.

This charge has occurred outside the period specified by IAS 10, so it is not treated
as an event after the reporting period. Had it occurred prior to 6 May 2020, it will
have been treated as a non-adjusting event requiring disclosure in the notes.

The increase in the deferred tax liability will be accounted for in the year 2021
financial statements.

Required:
Explain the required treatment of the items (i) to (iii) by Wawasan in its financial statements for the
year ended 31 March 2020.
Note: assume all items are material and are independent of each other.