Week 4

ACF 1101

Events after the Reporting

Period
(LKAS 10)
Lecture Outline
• Objectives of LKAS 10
• Scope of LKAS 10
• Definitions
• Events after the Reporting Period
• Recognition & Measurement
• Going Concern
• Disclosures
Objective of LKAS 10
It prescribes :
– When an entity should adjust its financial
statements for events after the reporting period;
and
– The disclosures that an entity should give about the
date when the financial statements were
authorized for issue and about events after the
reporting period.
The standard also requires that an entity should not
prepare its financial statements on a going concern basis
if events after the reporting period indicate that the
going concern assumption is not appropriate.
Scope of LKAS 10
This standard shall be applied in:
→ The accounting for events after the
reporting period, and

→ Disclosure of events after the reporting

period
Definitions
The following terms are used in this standard
with the meanings specified:
→ Events after the reporting period
Events after the Reporting Period

Those are the events

Favaourable Unfavourable

That occur between the end of the reporting

period and the date when the financial
statements are authorized to issue.
Events after the Reporting Period cont….

Date of Authorization of
Reporting Period
Financial Statements for Issue

• The Accounting period • Financial statements are

(Reporting period) is authorized for issue
the time period for when they are authorized
which the company or for issue by those
organization reports charged with governance
financial performance and control which is
and financial position. normally the board of
directors.
Events after the Reporting Period cont….

The process involved in authorizing the financial

statements for issue will vary depending upon the
management structure, statutory requirements and
procedures followed in preparing and finalizing the
financial statements.
Events after the Reporting Period cont….

In some cases, an entity is required to submit its

financial statements to its shareholders for approval
after the financial statements have been issued. In such
cases, the financial statements are authorized for issue
on the date of issue, not the date when shareholders
approve the financial statements.
Events after the Reporting Period cont….

Example:
The Management of an entity:
↦ completes drafts financial statements for the year to 31 March
2016, on 28 May 2016.
↦ On 18 June 2016, the Board of Directors reviews the financial
statements and authorizes them for issue.
↦ The entity announces its profit and selected other financial
information on 19 June 2016.
↦ The financial statement are made available to shareholders and
others on 1 July 2016.
↦ The shareholders approve the financial statements at their annual
meeting on 15 August 2016 and the approved financial statements
are then filed with a regulatory body on 17 August 2016.
The financial statements are authorized for issue on 18 June
2016(Date of Board Authorization for issue)
Events after the Reporting Period cont….

In some cases, the management of an entity is required

to issue its financial statements to a supervisory board
(made up solely of non-executives) for approval. In
such cases, the financial statements are authorized for
issue when the management authorizes them for issue
to the supervisory board.
Events after the Reporting Period cont….

Two Types of Events

NON-ADJUSTING EVENTS
ADJUSTING EVENTS AFTER
AFTER THE REPORTING
THE REPORTING PERIOD
PERIOD

• Those that provide • Those that are indicative

evidence of conditions of conditions that arose
that existed at the end after the reporting
of the reporting period. period.
Recognition & Measurement –
Adjusting events after the reporting period
An entity shall adjust the amounts recognized in its
financial statements to reflect adjusting events after the
reporting period.
Recognition & Measurement –
Adjusting events after the reporting period
Example 01:
The settlement after the reporting period of a court case
that confirms that the entity had a present obligation at
the end of reporting period. The entity adjusts any
previously recognized provision related to this court case
in accordance with LKAS 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 LKAS 37.
Recognition & Measurement –
Adjusting events after the reporting period
Example 02:
The receipt of information after the reporting period
indicating that an asset was impaired at the end of reporting
period, or that the amount of a previously recognized
impairment loss for that asset need to be adjusted.
i). the bankruptcy of a customer that occurs after the
reporting period on a trade receivable and that the entity
needs to adjust the carrying amount of the trade receivable

ii). the sale of the inventories after the reporting period

may give evidence about their net realizable value at the
end of the reporting period.
Recognition & Measurement –
Adjusting events after the reporting period
Example 03:
The determination after the reporting period of the cost
of assets purchased or the proceeds from assets sold,
before the end of reporting period.

Example 04:
The determination after the reporting period of the
amount of profit sharing or bonus payments, if the entity
had a present legal or constructive obligation at the end
of reporting period to make such payments as a result of
events before that date (LKAS 19- Employee Benefits).
Recognition & Measurement –
Adjusting events after the reporting period
Example 05:
The discovery of fraud or errors that show that the
financial statements are incorrect.
Recognition & Measurement –
Non-adjusting events after the reporting period
An entity shall not adjust the amounts recognized in its
financial statements to reflect non-adjusting events after
the reporting period.
Examples:
↦ Major business combinations or dispositions of major
subsidiary
↦ Announcing a plan to discontinue an operation
↦ Major purchase of assets, classification of assets held
for sale (SLFRS 5) or expropriation of major assets by
Government
↦ The destruction of a major production plant by a fire.
Recognition & Measurement –
Non-adjusting events after the reporting period
↦ Announcing, or commencing the implementation of
major restructuring
↦ A major ordinary share transaction or potential
ordinary share transactions.
↦ An abnormally larger change in asset prices or foreign
exchange rate.
↦ A change in tax rates or the enactment or
announcement of tax laws that significantly affect
current and different tax asset and liabilities.
↦ Entry into significant commitments or contingent
liabilities, for example, by issuing significant
guarantees.
Recognition & Measurement –
Non-adjusting events after the reporting period
↦ Start of major litigation (legal case) arising solely out
of events that occurred after the reporting period
↦ A decline in market value of investments, and
↦ A declaration of dividends to holders of equity
instruments.
Recognition & Measurement – Dividends
If an entity declares dividends to holders of equity
instruments after the reporting period, the entity shall
not recognize those dividends as a liability at the end of
reporting period.

If dividends are declared after the end of reporting

period but before the financial statements are authorized
for issue, the dividends are not recognized as a liability at
the end of reporting period because they do not meet the
criteria of a present obligation in LKAS 37. Such
dividends are disclosed in the notes in accordance with
LKAS 1, Presentation of Financial Statements (Revised
2012)
Going Concern
An entity does not prepare its financial statements on a
going concern basis if management determines after the
end of reporting period either:
↦ that it intends to liquidate the entity or
↦ To cease trading
↦ That it has no realistic alternative to do so.

Decline in operating results and financial position after

the reporting period may indicate a need to consider
whether the going concern assumption is still
appropriate.
Going Concern
LKAS 1 specifies required disclosures if:
a. The financial statement are not prepared on a going
concern basis; or
b. Management is aware of material uncertainties
related to events or conditions that may cast
significant doubt upon the entity’s ability to continue
as a going concern. The events or conditions
requiring disclosure may arise after the end of
reporting period.
Disclosures - Date of Authorization for Issue
An entity shall disclose:
↦ the date when the financial statements were
authorized for issue, and
↦ who gave that authorization, and
↦ If the entity’s owners or others have the power to
amend the financial statements after issue.
Disclosures - Updating Disclosure about
conditions at the reporting period
If an entity receives information after the end of
reporting period about condition that existed at the end
of reporting period, it shall update disclosures that relate
to those conditions, in the light of the new information,
even when the information does not affect the amounts
that it recognizes in the financial statements.
Disclosures - Non-adjusting events after the
reporting period
If non-adjusting events after the reporting period are
material, non-disclosure could influence the economic
decisions of users taken 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:
a) The nature of the event; and
b) An estimate of its financial effect, or a statement that
such an estimate can not be made.
Disclosures - Non-adjusting events after the
reporting period
The following are example of non-adjusting events after
the reporting period that would generally result in
disclosure;
a) A major business combination requires specific
disclosures in such cases or disposing of a major
subsidiary.
b) Announcing a plan to discontinue an operation.
c) Major purchases or assets, classification of assets as
held for sale. Other disposals of assets, or
expropriation of major assets by Government.
d) The destruction of a major production plant by a fire
after the reporting period.
Disclosures - Non-adjusting events after the
reporting period
e) announcing, or commencing the implementation of a
major restructuring
f) Major ordinary share transactions and potential
ordinary share transactions after the reporting
period.
g) Abnormally large changes after the reporting
period in asset prices of foreign exchange rates;
h) Changes in tax rates or tax laws enacted or
announced after the balance sheet date that have a
significant effect on current and deferred tax assets
and liabilities
Disclosures - Non-adjusting events after the
reporting period
i) Entering in to significant commitments or contingent
liabilities, for example, by issuing significant
guarantees; and
j) Commencing major litigation arising solely out of
events that occurred after the reporting period.
Did we??????????
• Objectives of LKAS 10
• Scope of LKAS 10
• Definitions
• Events after the Reporting Period
• Recognition & Measurement
• Going Concern
• Disclosures
Week 5

Provisions, Contingent
Liabilities and Contingent Assets
(LKAS 37)
Lecture Outline
• Objectives of LKAS 37
• Scope of LKAS 37
• Definitions
• Recognition
• Measurement
• Disclosures
• Decision Tree
Objective of LKAS 37

It is to:
↠ Ensure that appropriate recognition criteria and
measurement bases are applied to provisions,
contingent liabilities and contingent assets; and,
↠ Ensure that sufficient information is disclosed in
the notes to enable users to understand their
nature, timing and amount.
Scope of LKAS 37
This standard shall be applied by all entities in
accounting for provisions, contingent liabilities and
contingent assets except:
↠ Those resulting from executory contracts, except
where the contract is onerous
↠ Those covered by another standard:
↠ LKAS 19 – Financial Instruments
↠ LKAS 11 – Construction Contract
↠ LKAS 12 – Income Taxes
↠ LKAS 17 – Leases
↠ LKAS 19 – Employee Benefit
↠ SLFRS 4 – Insurance Contracts
↠ SLFRS 3 – Business Combination
↠ LKAS 18 - Revenue
Scope of LKAS 37
Executory Contracts
An executory contract is a contract made by two parties
in which the terms are set to be fulfilled at a later date.
The contract stipulates that both sides still have duties
to perform before it becomes fully executed. 
Example:
Rental lease:
Tenant is required to pay the landlord rent; landlord
required to provide living space.
Definitions
The following terms are used in this standard with the
meanings specified:
↠ Provision
↠ Liability
↠ Obstructive Event
↠ Legal Obligation
↠ Constructive Obligation
↠ Contingent Liability
↠ Contingent Asset
↠ Onerous Contract
Provision
A provision is a liability of uncertain time or amount.
Example:
ABC Ltd. was sued by a customer for low quality
ingredients.
Legal expert is of the opinion that customer will win
the case against ABC Ltd. and court usually fine the
companies for Rs. 50,000.
The accountant is of view that case still to be decided
therefore there is no liability.
According to legal expert opinion there is liability of
Rs. 50,000 (reliable estimate) and therefore a
provision is to be recognized.
Liability
A liability is a present obligation of the entity arising
from past events, the settlement of which is expected to
result in an outflow from the entity of resources
embodying economic benefits.

Example:
↠The loan received by the company from a bank.
↠The amount owe to the suppliers
Obligating Event
An obligating event is an event that creates a legal or
constructive obligation that results in an entity having
no realistic alternative to settling that obligation.
Legal Obligation
It is an obligation that derives from:
↠ A contract
↠ Legislation
↠ Other operation of law

Example:
By legal contracts
↠Purchase invoice is a legal contract – Creditors

By act of Parliament and other statues

↠EPF, ETF, Employee compensation, tax payments

By other laws
↠Penalty imposed by the court on environmental pollution
Constructive Obligation
It is an obligation that derives from an entity's actions
where:
a) By an established pattern of past practice,
published policies or a sufficiently specific current
statement, the entity has indicated to other parties
that it will accept certain responsibilities; and
b) As a result, the entity has created a valid
expectation on the part of those other parties that
it will discharge those responsibilities.
Constructive Obligation
Example:
As a result of past practices
↠ A car dealer pays the first insurance premium on
behalf of the customer. This was the practice for
more than ten years.

By published statements
↠ Real Estate Company published an advertisement
in news papers informing that it will give free
wireless telephone connection with every land
purchase.
Contingent Liability
A contingent liability is:
a) A possible obligation that arises from past events
and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more
uncertain future events not wholly within the control
of the entity; or
b) A present obligation that arises from past events but
is not recognized because:
↠ It is not probable that an outflow of resources
embodying economic benefits will be required to
settle the obligation; or
↠ The amount of the obligation cannot be measured
with sufficient reliability.
Contingent Liability
Example:
The production of ABC Ltd. has damaged the
environment and it is expected that fine will be
imposed on ABC Ltd. for amount of 10 million.

Though the company can reliably measure the

liability since, the obligation will arise only if an
unfavourable decision has been declared by the court
against the company, so the company can address the
above fine as a contingent liability in the books.
Contingent Asset
It is a possible asset that arises from past events and
whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the entity.

Example:
A company involved in a lawsuit with the expectation to
receive compensation has a contingent asset, because
the outcome of the case is not yet known and the amount
is yet to be determined. 
Onerous Contract
It is a contract in which the unavoidable costs of
meeting the obligations under the contract exceed the
economic benefits expected to be received under it.
Example:
An entity operates profitably from a factory that it has
leased under an operating lease.
During December 2015 the entity relocates its
operations to a new factory.
The lease on the old factory continues for the next four
years, it cannot be cancelled and the factory cannot be
re-let to another user.
Reimbursement
Where some or all of the expenditure required to settle
a provision is expected to be reimbursed by another
party, the reimbursement shall be recognised when, and
only when, it is virtually certain that reimbursement will
be received if the entity settles the obligation.
Example:
Insurance Contracts
Recognition - Provisions
A provision should be recognized when:
• An entity has a present obligation as a result of a
past event. Such an obligation may arise from a
legally binding arrangement such as a contract or
from a constructive obligation.
• It is probable that an outflow of resources
embodying economic benefits will be required to
settle the obligation.
• A reliable estimate can be made of the amount of
the obligation.
If those conditions are not met, no provision shall be
recognized.
Recognition – Present Obligation
In rare cases it is not clear whether there is a present
obligation.
In these cases, a past event is deemed to give rise to a
present obligation if, taking account of all available
evidence, it is more likely than not that a present
obligation exists at end of each reporting period.
On the basis of such evidence:
(a) where it is more likely than not that a present
obligation exists at the end of the reporting period,
the entity recognises a provision (if the recognition
criteria are met); and
Recognition – Present Obligation
(b) where it is more likely that no present obligation
exists at the end of the reporting period, the entity
discloses a contingent liability, unless the possibility
of an outflow of resources embodying economic
benefits is remote.
Recognition – Past Event
A past event that leads to a present obligation is called an
obligating event. For an event to be an obligating event, it
is necessary that the entity has no realistic alternative to
settling the obligation created by the event. This is the
case only:
(a) where the settlement of the obligation can be
enforced by law; or
(b) in the case of a constructive obligation, where the
event (which may be an action of the entity) creates
valid expectations in other parties that the entity will
discharge the obligation.
Recognition – Probable Outflow to Settle
For a liability to qualify for recognition there must be:
↠a present obligation
↠the probability of an outflow of resources
embodying economic benefits to settle that
obligation.

Where it is not probable that a present obligation exists,

an entity discloses a contingent liability,

Where it is probable that a present obligation exists, a

provision is recognized.
Recognition –
Contingent Liability & Contingent Asset
A contingent liability or asset should be disclosed in the
financial statements rather than being recognized in the
balance sheet.
↠A contingent liability should be disclosed unless the
possible outflow of resource to meet the liability is
remote.
↠A contingent asset should be disclosed when the
expected inflow of economic benefits is probable.
Measurement – Best Estimate
The amount recognised as a provision shall be the best
estimate of the expenditure required to settle the
present obligation at the end of the reporting period.

The best estimate of the expenditure required to settle

the present obligation is:
↠the amount that an entity would rationally pay to
settle the obligation at the end of the reporting
period; or
↠to transfer it to a third party at that time.
Measurement – Best Estimate - Example
An entity sells goods with a warranty under which customers
are covered for the cost of repairs of any manufacturing
defects that become apparent within the first six months
after purchase.
If minor defects were detected in all products sold, repair
costs of 1 million would result.
If major defects were detected in all products sold, repair
costs of 4 million would result.
The entity’s past experience and future expectations indicate
that, for the coming year,
75 per cent of the goods sold will have no defects,
20 per cent of the goods sold will have minor defects and
5 per cent of the goods sold will have major defects.
Measurement – Best Estimate - Example
The entity assesses the probability of an outflow for the
warranty obligations as a whole.

How much is the expected value of the cost of repairs?

(75% of nil) + (20% of 1m) + (5% of 4m)

0 + Rs. 200,000 + Rs. 200,000 = Rs. 400,000

Disclosures – Provision
For each class of provision, an entity shall disclose:
↠The carrying amount at the beginning and end of
the period

↠Additional provisions and increases too existing

provisions made

↠Amounts incurred and charged against the

provision

↠Unused amounts reversed

Disclosures – Provision
For each class of provision, an entity shall disclose:
↠The carrying amount at the beginning and end of
the period
↠Additional provisions and increases too existing
provisions made
↠Amounts incurred and charged against the
provision
↠Unused amounts reversed
↠A brief introduction of the nature of the obligation
↠Expected timing of any resulting outflows of
economic benefits
↠Any amount of expected reimbursement
Disclosures – Contingent Liability

↠ A brief introduction of the nature of the contingent

liability

↠ Where practicable, an estimate of its financial effect,

↠ an indication of the uncertainties relating to the

amount or timing of any outflow; and

↠ the possibility of any reimbursement.

Disclosures – Contingent Assets

Where an inflow of economic benefits is probable, an

entity shall disclose a brief description of the nature of
the contingent assets at the end of the reporting period,
and, where practicable, an estimate of their financial
effect, measured using the principles set out for
provisions
Decision Tree
Did We?????
• Objectives of LKAS 37
• Scope of LKAS 37
• Definitions
• Recognition
• Measurement
• Disclosures
• Decision Tree
Next week…………

Week 6 -
Inventories
(LKAS 2)