Adjusting events are events after the reporting period (also known as events after balance sheet date) that result in adjustment to the financial statements because they provide additional information related to conditions that exist at the date of financial statements.
Under IFRS, IAS 10 Events after the reporting period prescribes accounting treatment for events after the balance sheet date.
Adjusting events are recognized in the currently issued financial statements and are also known as 'recognized subsequent events'.
Example 1: Settlement of a Contingency
In the financial statements for the year ended 31 December 2011, LD Ltd has a created a provision for damages of $600,000 assuming a 60% probability that it will lose the legal case. The court decided that case against LD Ltd on 10 February 2012. The financial statements are due for issue on 25 February 2012. The company should adjust the provision upward by $400,000 to present a $1 million liability for damages because the judgment has confirmed the amount and existence of present obligation as at 31 December 2011.
Example 2: Indication of Existence of Impairment Loss
IL Ltd. has an amount due from FD Ltd. amounting to $20 million as at 30 March 2012. The financial statements are expected to be issued on 14 May 2011. FD Ltd. declared bankruptcy and it is certain that IL Ltd will receive nothing because all the assets will be exhausted in satisfaction of government claims. IL Ltd. should record an impairment loss of $20 million in the financial statements as at 31 December 2011 because the subsequent lack of recovery indicates that the company's receivable from FD Ltd was worth zero as at 30 March 2012.
Other examples of adjusting events include:
- Sale of inventories at below cost indicates that the net realizable value was lower than the cost and that inventory was overstated at the balance sheet. The resulting adjustment will reduce inventory value at the balance sheet date.
- Discovery of any fraud or errors in the financial statements requires adjustment to the financial statements.
Events that are not recognized in currently issued financial statements but are rather accounted for in the next year financial statements are called non-adjusting events or non-recognized subsequent events.
You are the CFO of OG Ltd which is engaged in extraction of oil and you have an amount of $70 million receivable from PO Ltd appearing in the financial statements for the year ended 30 June 2011. Your financial statements are due to be issued on 8 August 2011. PO Ltd is a refinery and one of its five refineries caught fire on 30 August 2011. Do you need to do anything related to this event to your financial statements?
- Yes. Because the receivable from PO Ltd is now impaired.
- No. Because a sudden accident such as fire has no condition existing at the balance sheet date.
- No. Because there are four other refineries still running and which means PO Ltd. is still a going concern and will pay for the loan (even if a little late)
- Both B & C.