1. Week 5 MFRS110: Events After The Reporting Period

2. Learning objectives
Understand that, in the period between reporting date (or ‘balance sheet date’) and the date the financial report is authorised for issue, new information often becomes available that provides additional evidence of conditions that existed at reporting date, or reveals for the first time a condition that existed at reporting date, and that such new information must be reflected in the financial statements

3. Learning objectives (cont.)
Understand that financial statements are often not released for over 10 weeks after reporting date, and that to make them more ‘relevant’ it is sometimes appropriate to add notes giving additional information about material events that have occurred since the reporting date
Be aware of the specific disclosure requirements stipulated in MFRS 110 ‘Events After the Reporting Period’

4. What is an event after the reporting period?
Reporting date
often referred to as ‘balance date’
end of the financial period (period is typically 12 months)
for most companies reporting date is 31 December
Date financial statements are authorised for issue
for companies: date the Directors’ Declaration is signed
for other entities: date of final approval of the report by the entity’s management or governing body

5. What is an event after the reporting period?
After-reporting-date event
an event or circumstance that has arisen or information that has become available after reporting date but prior to the date the financial report is authorised for issue
MFRS 110 addresses:
the accounting treatment of events or transactions that occur or in respect of which information becomes available between the reporting date and when financial reports are authorised for issue

6. What is an event after the reporting period?
Time lag of many weeks or months between
end of financial year; and
date that shareholders and other interested parties receive the financial reports
Many material events can occur after reporting date but before the date the financial statements are authorised for issue
Failure to disclose such events can render accounts misleading

7. Subsequent period
B/S date FS authorised Issue FS (31 Dec) for issue (to shareholders) Subsequent period

8. Example:
The management of an entity completes draft financial statements for the year to 31 December 20X1 on 28 February 20X2.
On 18 March 20X2, 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 March 20X2.
The financial statements are made available to shareholders and others on 1 April 20X2.
The shareholders approve the financial statements at their annual meeting on 15 May 20X2.
The approved financial statements are then filed with a regulatory body on 17 May 20X2.
The financial statements are authorized for issue on 18 March 20X2 (date of board authorization for issue).

9. Definitions:
MFRS 110
those events, favorable and unfavorable, that occur between the balance sheet date and the date when the financial statements are authorized for issue.
2 types of events can be identified:
those that provide evidence of conditions that existed at the balance sheet date (adjusting events after the balance sheet date); and
those that are indicative of conditions that arose after the balance sheet date (non-adjusting events after the balance sheet date).

10. Recognition and Measurement
Adjusting Events after the balance sheet date
Amounts in the financial statements need to be adjusted to reflect the events after the balance sheet date.
Non Adjusting Events after the balance sheet date
Amounts in the financial statements do not need to be adjusted.
Usually the events are disclosed in the notes to the financial statements only.

11. Adjusting events after reporting date
can be both favourable and unfavourable
provide additional evidence of, or further clarify, conditions existing at reporting date
Financial statements are to reflect financial effect of events occurring after reporting date that
provide additional evidence of conditions existing at reporting date; or
reveal for the first time a condition that existed at balance sheet date

12. Adjusting events after reporting date
Additional information might become available to estimate more accurately year-end provisions
e.g. the settlement of a legal claim outstanding at reporting date
New information might come to light revealing for the first time a condition existing at reporting date
e.g. the destruction of a building at a remote site

13. Adjusting event: Bad & doubtful debts
An entity normally makes a provision for bad & doubtful debts
Certain events may cause the need to adjust the provision, e.g. bankruptcy of a customer after reporting date, which gives further evidence of an existing loss
E.g. An entity makes provision of 10% on all its trade receivables.
At the end of the financial year, a customer owing RM2m was declared a bankrupt.
Current provision: 10% x RM2m = RM0.2m
Further provision to be made: RM1.8m

14. Adjusting event: Bad & doubtful debts
E.g. As at X4, High Bhd had among its trade receivables a customer, Hopeful Bhd, who owed the company RM400,000. At this date, the directors were of the opinion that the debt was collectible and no provision for doubtful debt was made.
On 2.2.X5, Hopeful was placed under receivership.
High’s directors authorised the FS for issue on 31.5.X6.
Assume that Hopeful was able to pay 50 sen for every RM1 owed.
Receivership = an adjusting event after reporting date, gives more evidence of conditions at BS date
Provision to be made = 50% x RM400,000 = RM200,000

15. Adjusting event: Determining NRV of inventory
At the end of the FY, the carrying value of inventory is compared with its NRV
NRV = estimated selling price – selling expenses
NRV is an estimate, but the sale of inventory after the BS date gives further evidence of the NRV at BS date
E.g. At BS date, the carrying value of inventory of Roy was RM43,000 and the NRV was RM52,000. The inventory was sold after the year end but before the FS were authorised for issue, at RM42,000.
As the carrying value was lower at BS date, it would initially be disclosed at RM43,000.
But it needs to be adjusted lower by RM1,000 to RM42,000.

16. Adjusting event: Court case
If there is a court case at the end of the FY, there may be a contingent liability
If the amount can be measured, it has to be recognised & measured based on best estimate
If the amount cannot be determined, it needs to be disclosed
But if the case is settled in the subsequent period, the entity has to:
Adjust any existing provision, OR
Recognise a new provision

17. Adjusting event: Court case
E.g. Rainbow Drinks manufactures & sells fruit drinks.
A consumer fell ill after consuming the drinks over a long period of time. He needed medical attention and had to postpone his studies. He sued Rainbow for RM500,000 for pain & suffering caused.
Rainbow made a provision for liability of RM100,000. The court case was pending at the end of the year.
During the subsequent period, the case came to court & the judgment was in favour of the consumer & he was awarded damages of RM400,000.
Need to adjust provision for liability by RM300,000.

18. Adjusting event: Changes in judgment for uncertain tax positions
XYZ Company has evaluated a tax position as of x9, the company’s reporting date.
Management has concluded that the position should not result in the recognition of a liability.
In the subsequent period, the taxing authority prevailed in a highly similar court case.
Thus, it is highly likely that the company will not sustain its tax position.
XYZ Company now believes, based upon this new fact, that it will ultimately need to remit taxes of RM100,000 to the taxing authority.
XYZ Company will record an additional tax expense and tax liability of RM100,000 in the X9 financial statements.

19. Adjusting event: Impairment of assets
Assets are reviewed for impairment at the reporting period.
There could be indications of impairment or no impairment.
If entity obtains information during the subsequent period of an asset impairment, or of an increase/decrease in the provision for asset impairment  adjustment needs to be made

20. Adjusting event: Acquisition cost or proceeds on disposal of assets
Sometimes the cost of assets purchased or proceeds on disposal are only determined after the BS date
These are adjusting events & need to be recognised in the FS.

21. Adjusting event: Profit sharing/bonus
Sometimes an entity has a present legal or constructive obligation at the BS date to make payments as a result of events before that date
Amount only determined after the BS date
E.g. ABC Bhd has a profit sharing plan to pay its employees 5% of its profit before tax (before profit sharing bonus) if it exceeds RM200m.
On completing the preparation of the FS, PBT is RM230m.
Recognise an expense of 5% x RM230m = RM11.5m

22. Adjusting event: Fraud/error
The discovery of fraud/errors after the BS date needs to be adjusted
To correct the FS.

23. Non-adjusting events Non-adjusting events
can be both favourable and unfavourable
provide evidence about new conditions created after reporting date
No adjustments made to the FS or to amounts already recognised
If an event is material of nature, it should be disclosed in the notes of:
the nature of the event
the estimate of the financial effect , if any, or a statement that such as estimate cannot be made

24. Non – Adjusting Events: Examples
major business combination or an entity disposing of a major subsidiary
announcing a plan to discontinue an operation
purchases of major assets
expropriation of major assets by government
destruction of major production plant by fire
announcing or commencing major restructuring
major ordinary share transactions or potential ordinary share transactions

25. Non – Adjusting Events: Examples
change in tax rate/law enacted (that have a significant effect on current & deferred tax assets/liabilities
abnormal changes in asset prices or foreign exchange rates
Entering into significant commitments/contingent liabilities, e.g. Issuing significant guarantees
Commencing major litigation arising solely out of events occurring after the reporting period.

26. Non – Adjusting Events: Example
E.g. Super Bhd’s current year FS end on 31.3.X5. On 16.4.X5, the board of directors agreed to sell a subsidiary called Lemon Bhd. The directors authorised the FS for issue on 30.8.X5.
The event occurred in the subsequent period.
Indicative of conditions that arose AFTER the reporting period.
Non-adjusting event.
Note to the FS:
Subsequent to the reporting period, the company decided to sell Lemon Bhd for a cash consideration of RM2.5 million.

27. Special issue :Dividend
proposed and declared dividends AFTER BS date should NOT be recognised as liability in balance sheet.
MFRS 101 (Presentation of FS) allows the dividends to be disclosed:
on the face of balance sheet as a separate component of equity
in the notes to FS

28. Special issue: Going concern
Management intends to liquidate the entity or cease trading, GC assumption may no longer appropriate.
FRS 101 requires a change in the basis of accounting and disclosure in the notes to FS
Assets may need to measured at FV less costs to sell (breakup values)

29. Additional Disclosure:
Date of authorisation of FS & who gave the authorisation (usually directors)
Update on disclosure on conditions after the BS date
E.g. new information about the contingent liabilities that existed at the reporting period should be disclosed

30. MFRS 110: Decision tree The Balance Sheet date Between
Date of fin. State
Authorised for issue
Favourable and unfavourable
Fin. State
For the period
Future Events
Those that provide
Further evidence
Those that are
Indicative of condition
Special Issue
Dividend
Going
Concern
Adjusting Events
Non -Adjusting
Events

31. Summary
The chapter considers various issues associated with events occurring after reporting date
After-balance-date events are either adjusting events or non-adjusting events
For adjusting events
either adjust the financial statements (if material); or
disclose them in the notes
For non-adjusting events
disclose them in the notes (if material)

32. Class Exercise
Energy Savers estimated its closing inventory at cost to be RM1.4m as at FYE X8.
The FS were authorised for issue on 31.3.X9.
On 1.2.X9, the government passed a law that classified the main ingredients of the products sold by the company as hazardous to health.
Sales dropped & the company had to sell the stock at far below cost.
24-32

33. Class Exercise
As at the reporting period Energy Savers had a long term bank loan which was due for settlement on 31.8.X9.
As at the reporting date, Energy Savers had not received any confirmation of rescheduling the repayment.
On 3.3.X9, before the FS were authorised for issue, the bank agreed for the repayment to be postponed to 31.8.x10.
24-33