Adjusting events are events that occur after the date of financial statements but before the date of their issuance that provide evidence of conditions that existed at the end of the reporting period. Companies are required to adjust their financial statements as a result of adjusting events.
Under IFRS, IAS 10 Events after the Reporting Period prescribes the accounting treatment for events that occur after the date of financial statements but before their issuance. It classifies events into adjusting events and non-adjusting events.
As financial statements provide information about financial position at a point in time and financial performance over a specific time period, these must reflect only conditions that exist during the period covered. However, if there is updated information about conditions that existed at the date of financial statements, updating the financial statements would improve relevance and faithful presentation of financial statements.
As the adjusting events are recognized in the financial statements of the period preceding them, they are also called recognized subsequent events.
Example 1: settlement of a contingency
In the financial statements for the year ended 31 December 20X1, LD Ltd 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 20X2. The financial statements are due for issue on 25 February 20X2. 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 20X1.
Example 2: indication of existence of impairment loss
In its financial statements for the year ended 31 March 20X2, IL Ltd. has an amount due from FD Ltd. amounting to $20 million. The financial statements are expected to be issued on 14 May 20X2. On 2 May 20X2, FD Ltd. declared bankruptcy and it is certain that IL Ltd will receive nothing because all the assets will be exhausted in satisfaction of the government claims. IL Ltd. should record an impairment loss of $20 million in the financial statements for the year ended 31 December 20X2 because the subsequent lack of recovery indicates that the company's receivable from FD Ltd was worth zero as at 31 March 20X2.
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 as at the date of the financial statement . 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. For example, impairment losses triggered by Covid-19 need not be reflected in financial statements for the financial statements prepared before, say March 2020.
You are the CFO of OG Ltd which is engaged in extraction of crude oil. The company has an account receivable valued at $70 million from PO Ltd in the financial statements for the year ended 30 June 20X1. Your financial statements are due to be issued on 8 August 20X1. PO Ltd is a refinery and one of its five units caught fire on 30 August 20X1. This is expected to impair the PO’s ability to purchase your output and pay you back. 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.
2 is correct. As the event occurred after the date of financial statements and there was no indication whatsoever of such an incident as the date of financial statements, the event should not impact prior period financial statements.