1
Various standards:
(IAS 10, 37 and 24)
Chapter
14
1
Various standards:
(IAS 10, 37 and 24)
Chapter
14
2
14.1
IAS 10 - Events after the reporting period
Events occur which may be favourable or unfavourable between the accounting year end date and
the signing of the financial statements. These events may or may not affect the figures in the
financial statements. If they effect the financial statements they are known as adjusting events, if
they don’t affect the financial statements they are known as non-adjusting events.
Time
Events after the reporting period end need to be reflected in the financial statements if they provide
additional evidence of conditions that existed at the year end date and are material. Disclosures
need to be made for materials events for the proper understanding of the accounts.
Adjusting events
Non-adjusting events
These require the accounts to be adjusted
because they provide additional evidence of
conditions existing at year end date.
These are events, which did not exist at the year
end date, but need to be disclosed as they are
material and to not to disclose them would
mislead the users of the accounts.
Examples
§ Non current assets – their valuation if
sold or impairment.
§ Insurance claims – if they were being
negotiated at year end date
§ Provision for bad debts - if new
information about a debtor has come to
light
§ Inventories and WIP – if sold after
year end for less than cost & NRV.
§ Changes in tax rate
§ Errors or frauds discovered
Examples
§ Issue of new share or loan capital after
the year end date
§ A major acquisition
§ A major disposal
§ Flood, fires or other catastrophes after
balance sheet date
The financial statements need to be adjusted
for any of the above events
Disclosure needs to be made in the financial
statements for the above if they are material
Year-end
Signing of accounts
Events occurring between this period can be
adjusting or non-adjusting
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Dividends
IAS 10 states that any dividends declared after the year end date must not be recognised as a
liability. This is because at the year end date there was no obligation to pay dividends.
This clashes with UK GAAP as incorporated entities are required to incorporate proposed
dividends even if they were declared after the year end date. IAS 10 does not permit this.
Lecture Example 14.1
How would the following matters be dealt with?
(i)
The professional valuation of a property one month after the year end date at a figure
of £270,000 below the market value.
(ii)
The destruction of a company’s factory two weeks after the year end date. The factory
was not insured due to an administrative error and the loss has been estimated at £500,000.
(iii)
When drafting the final accounts, a company’s accountant includes a figure of £6,500 as the
net realisable value of damaged inventory. The cost of these items was £8,200 and the
normal selling price would be £9,700. Between the year end date and approval of the
accounts, the items are sold for £9,100. Assume these figures are material.
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14.2
IAS 37: Provisions, contingent liabilities and contingent assets
(Tutor note: IAS 37 is not examinable in this paper; this is additional reading for better
understanding).
A provision is a liability (an obligation to transfer economic benefits as a result of past transactions
or events) of uncertain timing and amount. Uncertainty is what distinguishes a provision from
another type of liability such as trade payables.
IAS 37 states that an organisation can only make a provision if certain criteria are met.
The double entry for setting up a provision is:
Debit
Expense (income statement)
Credit Provisions (statement of financial position)
When a provision is paid, it won’t affect the income statement:
Debit
Provisions (statement of financial position)
Credit Bank (statement of financial position)
Provisions must be reviewed every year and adjusted accordingly.
Traditionally, companies were urged to be prudent and be cautious about future outcomes by
providing for possible losses / costs.
However this was abused as companies started to set up provisions when there was no need to.
These provisions were then released in future periods to smooth profits.
IAS 37 stops the abuses of provisions by ensuring that the strict criterion is met before provisions
can be made.
Criteria for making a provision
A provision should be recognised in the financial statements when all the below are met. (PPR)
P
Present obligation (legal or constructive) as a result of past transaction or events
P
Probable transfer of economic benefits to settle (more likely than not)
R
Reliable estimate can be made of obligation
If these conditions are not met, then no provision can be made in the financial statements.
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Contingent liabilities
A contingency is a condition that exists at the year end date, but whose outcome can only be
confirmed by the occurrence of one or more uncertain future events, which are may be outside the
control of the company.
A contingent liability described by IAS 37 either a possible obligation or a present obligation that
does not meet all the criteria for a provision.
Accounting treatment is:
1
Do not recognise in the financial statements
2
Only disclose the information if it is material. If the contingent liability is remote, then no
disclosure is required.
An example of a contingent liability is a customer suing for compensation, but the outcome of
the court case is uncertain at the year end date.
Contingent asset
A possible asset that arises as a result of past transaction or events, but whose existence will only be
confirmed by the occurrence or non occurrence of one or more uncertain future events, which may
be outside the control of the company.
Accounting treatment is:
1
Do not recognise in the financial statements as an asset or income in the income statement.
2
Only disclose the information if it is material, and probable that there will be inflow of
economic benefits.
An example of a contingent asset is the company suing another party for compensation, but
the outcome of the court case is uncertain at the year end date.
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14.3
IAS 24 related parties
(Tutor note: IAS 24 is not examinable in this paper, this is additional reading for better
understanding).
IAS 24 related party disclosure is a disclosure requirement where a company might not be carrying
out transactions at a normal arms length basis. Users of the accounts need to know if the
organisation has undertaken any transactions with a related party as this could affect their decision
making process
The key requirements are to:
· Identify the related parties
· Disclose any transactions undertaken with the related parties, being at arms length
or not
· Disclose any outstanding amounts
Related parties
Two or more parties are related parties when at any time during the financial period: -
a)
One party has direct or indirect control over the other party, or
b)
Parties are subject to common control from the same source, or
c)
One party has significant influence over the financial and operating policies of the
other.
d)
Parties are subject to significant influence from the same source.
Examples of related party
· Companies in same group
· Associates and joint ventures
· Directors
· Pension funds
· Key management
· Someone owning more than 20% of voting rights
· Companies managed under a management contract
· Partnerships, companies, trusts, other entities
Control - The ability to direct the financial and operating policies of an entity with a view to
gaining economic benefits from its activities.
Related party transactions - The transfer of assets or liabilities or the performance of services by,
to or for a related party irrespective of whether a price is charged.
Accounting treatment for related party transactions
· Names of the transacting related parties, and the relationship
· Description of transactions, the amounts involved and the amounts due to and from at the
year end date.
· The amounts written off in respect of debts from related parties
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Summary of chapter “various accounting standards – IAS 10, IAS 37 and IAS 24”
IAS 10 - Events after the reporting period
Events occur which may be favourable or unfavourable between the accounting year end date and
the signing of the financial statements. These events may or may not affect the figures in the
financial statements. If they effect the financial statements they are known as adjusting events, if
they don’t affect the financial statements they are known as non-adjusting events.
Adjusting events
Non-adjusting events
These require the accounts to be adjusted
because they provide additional evidence of
conditions existing at year end date.
These are events, which did not exist at the
year end date, but need to be disclosed as they
are material and to not to disclose them would
mislead the users of the accounts.
Examples
§ Non current assets – their valuation if
sold or impairment.
§ Insurance claims – if they were being
negotiated at year end date
§ Provision for bad debts - if new
information about a debtor has come to
light
§ Inventories and WIP – if sold after
year end for less than cost & NRV.
§ Changes in tax rate
§ Errors or frauds discovered
Examples
§ Issue of new share or loan capital after
the year end date
§ A major acquisition
§ A major disposal
§ Flood, fires or other catastrophes after
balance sheet date
The financial statements need to be adjusted
for any of the above events
Disclosure needs to be made in the financial
statements for the above if they are material
Dividends
IAS 10 states that any dividends declared after the year end date must not be recognised as a
liability. This is because at the year end date there was no obligation to pay dividends.
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IAS 37: Provisions, contingent liabilities and contingent assets
A provision is a liability (an obligation to transfer economic benefits as a result of past transactions
or events) of uncertain timing and amount. Uncertainty is what distinguishes a provision from
another type of liability such as trade payables. A provision should be recognised in the financial
statements when all the below are met. (PPR).
P
Present obligation (legal or constructive) as a result of past transaction or events
P
Probable transfer of economic benefits to settle (more likely than not)
R
Reliable estimate can be made of obligation
Contingent liabilities
A contingency is a condition that exists at the year end date, but whose outcome can only be
confirmed by the occurrence of one or more uncertain future events, which are may be outside
the control of the company.
A contingent liability described by IAS 37 either a possible obligation or a present obligation that
does not meet all the criteria for a provision.
Accounting treatment is:
§ Do not recognise in the financial statements
§ Only disclose the information if it is material. If the contingent liability is remote, then no
disclosure is required.
Contingent asset
A possible asset that arises as a result of past transaction or events, but whose existence will only
be confirmed by the occurrence or non occurrence of one or more uncertain future events, which
may be outside the control of the company.
Accounting treatment is:
§ Do not recognise in the financial statements as an asset or income in the income statement.
§ Only disclose the information if it is material, and probable that there will be inflow of
economic benefits.
IAS 24 related parties
IAS 24 related party disclosure is a disclosure requirement where a company might not be
carrying out transactions at a normal arms length basis. Users of the accounts need to know if the
organisation has undertaken any transactions with a related party as this could affect their decision
making process
The key requirement is to:
1
Identify the related parties
2
Disclose any transactions undertaken with the related parties, being at arms length or not
3
Disclose any outstanding amounts
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Solutions to Lecture Examples
Solution to Lecture Example 14.1
a)
This is an adjusting event, since the valuation provides information about a condition
existing at the balance sheet. It would become a non-adjusting event only if it could be
proved that the decline in value occurred after the year-end.
b)
This is a non-adjusting event as it occurred after the balance sheet date. However as it is a
material amount it will need to be disclosed by a way of note.
c)
The valuation in the accounts should be adjusted to £8,200 (cost), since the NRV has turned
out to be higher than the cost. This is a adjusting post balance sheet event.
Solution to Lecture Example 14.2
For a provision to be recognised the PPR must be met
1
Present obligation as the result of a past event.
2
Probable transfer
3
Reliable estimate
1 PC Worldcom
Present obligation – Yes – the past (obligating) event is the sale of the product, which gives rise to
a legal obligation (under the contract).
Probable transfer – Yes, there will probably be claims for the warranties as a whole.
Reliable estimate – PC Worldcom can use past data to predict
Therefore – recognise a provision, the amount to be recognised based on past experience.
2 Parks & Mincer plc
Present obligation – Yes – The past event is the sale of the product which gives rise to a
constructive obligation.
Probable transfer- yes
Reliable estimate – Parks & Mincer plc can use past history to predict
Therefore – recognise a provision.
3 Unfortunate plc
Present obligation – No at the balance sheet date.
The obligating event is the announcement of the plan, which creates a constructive obligation.
This did not take place until after the year end date.
Therefore no provision is recognised at the year end date