UNIVERSITY OF JOHANNESBURG
COLLEGE FOR BUSINESS AND ECONOMICS
DEPARTMENT OF COMMERCIAL ACCOUNTING
FAC22B2
Unit 5 Events after reporting period
Tutorial Question
Learning objectives:
1. Be able to identify the events after the reporting date.
2. Be able to identify adjusting and non-adjusting events
3. Be able to process journal entries (where applicable) to adjust the financial statements
for events after the reporting date
4. Be able to present and disclose the nature and financial impact of the events after the
reporting date.
Question 1 24 Marks
In the scenario mentioned below, the end of the reporting period of FAC2 Ltd is 31 December
20X2 and the annual financial statements are authorized for issue on 30 March 20X3.
Suggested Solution
Scenario 1: Inventories destroyed 12 Marks
1. How must FAC2 Ltd account for the inventory if:
a) The amount of the loss is not material. Please use the 5 steps to answer the
question.
Step 1: Identify the condition/event
- The condition is that the fire that destroyed half of the inventory ()
Step 2: Identify the date the event happened.
- The event happened on the 15th of February 20X3. ()
Step 3: Based on the date, is it before the reporting date or not – to determine
if it is adjusting or non-adjusting
- The event happened after the reporting period. (^)
- The evidence of the existence of the condition was only known after the
reporting period. (^)
- Therefore, it is a non-adjusting event ()
Step 4: What needs to be done?
- Due to the loss being immaterial, the event does not have to be disclosed in
the notes to the financial statements. ()
Step 5: What is the adjustment?
- No journal entry
- No adjustment to the financial statements (^)
- No disclosure is required because the event is considered immaterial (^)
b) The loss is material
Steps 1 to 3 are the same in this scenario
- The event happened after the reporting period and therefore, it is a non-
adjusting event. ()
Step 4: What needs to be done
- Due to the loss being material, the nature of the event () and the estimated
financial impact will be disclosed. ()
Step 5: What is the adjustment?
- No journal entry
- No adjustment to the financial statements (^)
- Disclose the event, the nature of the event and the estimated financial
impact to the entity. (^)
Feedback to students:
- The difference between the loss being material and immaterial is on the disclosure.
- With the loss being material, the estimated financial impact of the loss should be included together with the
nature of the event, in the disclosure
2. Prepare the disclosure in the notes to the financial statements of FAC2 limited
based on Scenario 1(b) 2 Marks
Extract from the notes of the financial statements of FAC2 Ltd for the year ended 31
December 20X2 (^)
Events after the reporting period (^)
On 15 February 20X3, half of the inventories of the entity were destroyed by a fire (^). The
amount of the loss of inventories is estimated at R250 000 (^). From the inventories destroyed,
R120 000 was on hand on 31 December 20X2.
Scenario 2: Insolvent Debtor (13 marks)
1. How will FAC2 Ltd account for the above event? Please use the 5 steps to answer
the questions. (8 marks)
Step 1: Identify the condition/event
- The condition is that one of FAC2’s significant debtors was liquated. ()
Step 2: Identify the date the event happened.
- The condition arose during or existed at the 20X2 financial year even
though the event happened on the 5th of January 20X3. ()
Step 3: Based on the date, is it before the reporting date or not – to determine
if it is adjusting or non-adjusting
- The evidence of the condition existed at the end of the reporting period as it
was revealed that the debtor was experiencing financial difficulties for some
time. ()
- It is an adjusting event ()
Step 4: What needs to be done?
- The affected accounts will be adjusted in the financial statements for the year
ended 31 December 20X2 (^) and disclosed in the notes to the financial
statements. (^)
- Process journal entry (^)
- Adjust the accounts in the financial statements (^)
Step 5: What is the adjustment?
Dr Bad debts: (P/L: E) (^) R498 000
Cr Accounts Receivable (SFP: A) (^) R498 000
[R600 000(^) – (R600 000 X 17 cents) (^)]
2. Please show how the event will be presented (if necessary) in: (5 marks)
a) The Statement of profit or loss and
b) The statement of financial position of FAC2 Ltd as at 31 December 20X2
FAC2 Limited
Extract from the statement of profit or loss for the year ended 31 December 20X2(^)
R
Expenses (498 000) (^)(p)
Bad debts (^) (600 000 – (600 000 * 0.17))
FAC2 Limited
Extract from the statement of financial position as at 31 December 20X2 (^)
R
Assets (^)
Current assets (^)
Trade debtors/Accounts Receivable (^) (2 500 000 – 498 000) () 2 002 000
Total assets XXX
Scenario 3: Decrease in the market value of the investment 8 Marks
1. How will the entity account for the above event? Please use the 5-step approach
to answer the question, (6 marks)
Step 1: Identify the condition/event
- The condition is that the market value of the investment declined ()
Step 2: Identify the date the event happened.
- The event happened on the 15th of January 20X3, which is after the
reporting period ()
Step 3: Based on the date, is it before the reporting date or not – to
determine if it is adjusting or non-adjusting
- The evidence to the existence of the condition was only known after the
reporting period. ()
- It is a non-adjusting event ()
Step 4: What needs to be done?
- Due to the loss of R4 million being material (the decrease in the market
value of the investment refers to the materiality of the loss incurred), the
event will have to be disclosed in the notes to the financial statements. ()
Step 5: What is the adjustment?
- No journal entry
- No adjustment to the financial statements (^)
- Disclose the event, the nature and the estimated financial impact. (^)
Feedback to students:
- This solution shows you how the answer would differ if the market showed signs of improvement.
Note this:
- If the market recovers or shows signs of improvement before the financial statements are
authorized, then the loss in the investment might be regarded as immaterial and therefore, the
estimated financial implication will not be disclosed.
- This is due to the assumption that the entity will recover the loss and ideally, wouldn’t have to
recognize the loss as it would be regarded as immaterial.
2. Show how the event will be disclosed in the financial statements. (2 marks)
Notes to the financial statements of FAC 2 Ltd for the year ended 31 December 20X2 (^)
Events after the reporting period (^)
The market value of an investment of R10 million on 31 December 20X2 in a listed company
declined to R6 million during January 20X3(^). The investment has not yet shown any sign of
recovery, and the company could consequently suffer a loss of R4 million. (^)
