- 15 Marks
Question
(a) There is usually a lead time between the end of an entity’s accounting year and when the financial statements are approved and signed off by the directors. In between this period, there are two types of events according to IAS 10-Events After The Reporting Period, which may require consideration when preparing financial statements.
Required:
Identify and explain these events and state how they are treated in the financial statements. (4 Marks)
(b) Company A is indebted to company B to the tune of N50,000,000. The financial year-end of company B is 30 June 2014. On 30 July 2014, company B received a letter from a liquidator advising it that company A has gone into insolvency. The letter revealed that company A ceased operations a month ago and that company B is only likely to receive a liquidation dividend of 20k for every naira owed by company A. It is the normal practice of company B’s board to approve the audited financial statements three months after the financial year end.
Required:
- Explain how the above transactions should be treated in the financial statements of company B in accordance with IAS 10-Events After The Reporting Period. (2 Marks)
- Prepare journal entries that are required to adjust company B’s financial statements to account for the above event. (2 Marks)
- State what would have been the treatment in the financial statements assuming it was fire that destroyed company B’s factory building on 30 July 2014. (3 Marks)
(c) The directors of XYZ Plc declared that a dividend of N1 per ordinary share be paid to shareholders on the company’s register as at 15 April 2014. The financial statements were approved by the company’s board on 30 May 2014. The shareholders, at the company’s annual general meeting held on 15 June 2014, approved the payment of the dividend to eligible shareholders on 1 July 2014.
Required:
Explain how the dividend proposed by the Directors should be treated in the financial statements of XYZ Plc in accordance with IAS 10. (4 Marks)
Answer
(a) Types of Events After the Reporting Period and Their Treatment
- Adjusting Events: These are events that provide additional evidence of conditions that existed at the end of the reporting period. Adjustments are required to the financial statements to reflect the impact of these events. An example is the settlement of a court case, which confirms a liability that was already present at the year-end.
- Non-Adjusting Events: These are events that reflect conditions that arose after the reporting period. Such events do not lead to adjustments in the financial statements but may require disclosure if they are material. An example is the announcement of a major business acquisition after the year-end.
(b) Treatment of Liquidation Event in Financial Statements
- Treatment of Company A’s Insolvency: Since the insolvency of Company A was confirmed after the reporting date (June 30, 2014), this is considered an adjusting event. The financial statements of Company B should recognize the expected loss on the receivable from Company A as it reflects conditions existing at the reporting date.
- Journal Entries:
Account Debit (N) Credit (N) Impairment Loss 40,000,000 Receivables from Company A (To record impairment on receivable due to liquidation event) - Alternative Treatment for Non-Adjusting Event (e.g., Fire Damage):
If the event was a fire that occurred on July 30, 2014, destroying Company B’s factory building, it would be considered a non-adjusting event. No adjustments would be made to the financial statements, but significant disclosures would be required, describing the nature of the event, financial impact, and any insurance recoveries if applicable.
(c) Dividend Treatment in Financial Statements
According to IAS 10, dividends declared after the reporting period are considered non-adjusting events. Therefore, the dividend proposed by the directors of XYZ Plc on April 15, 2014, should not be recorded as a liability in the financial statements for the year ending prior to that date. Instead, it should be disclosed in the notes to the financial statements, indicating the amount and date of approval by the shareholders.
- Topic: Consolidated Financial Statements (IFRS 10)
- Series: MAY 2015
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