IAS 10 – Knowsia

FR – L2 – Q68 – Events After the Reporting Period

Explain adjusting and non-adjusting events with three examples each per IAS 10.

Question

(a) Explain the terms “adjusting events” and “non-adjusting events” and give three examples of each

(b) Yamfo Retail Limited, a chain of departmental stores has distributed its operations into four Divisions i.e. Food, Furniture, Clothing and Household Appliances. The following information has been extracted from the records:
(i) The company allows the dissatisfied customers to return the goods within 30 days. It is estimated that 5% of the sales made in June 20X4 will be refunded in July 20X4.
(ii) On June 2, 20X4, three employees were seriously injured as a result of a fire at the company’s warehouse. They have lodged claims seeking damages of GH¢2.0 million from the company. The company’s lawyers have advised that it is probable that the court may award compensation of GH¢400,000.
(iii) Under a new legislation, the company is required to fit smoke detectors at all the stores by December 31, 20X4. The company has not yet installed the smoke detectors.
(iv) On June 20, 20X4, the board of directors decided to close down the Household Appliances Division. However, the decision was made public after June 30, 20X4.
(v) The company has a large warehouse in Kumasi which was acquired under a three-year rent agreement signed on April 1, 20X3. The agreement is non-cancellable and the company cannot sub-let the warehouse. However, due to operational difficulties, the company shifted the warehouse to a new location.
(vi) A 15% cash dividend was declared on July 5, 20X4.

Required
Describe how each of the above issue should be dealt with in the financial statements for the year ended June 30, 20X4. Support your point of view in the light of relevant International Accounting Standards.

Answer

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Tags: Adjusting Events, Financial Statements, IAS 10, IAS 37, Non-Adjusting Events, Provisions, Retail Operations
Level: Level 2

Topic: and Contingent Assets (IAS 37)

FR – L2 – Q46 – Events After the Reporting Period

Explain accounting treatment for post-year-end events affecting receivables, property, inventory, subsidiaries, and other events for Earley Enterprises.

Question

Earley Enterprises is finalising its accounts for the year ended 31 December 20X3. The following events have arisen since the year end and the financial director has asked you to comment on the final accounts.

(a) At 31 December 20X3 trade receivables included a figure of GH¢250,000 in respect of NedenCorp. On 8 March 20X4, when the current debt was GH¢200,000, NedenCorp went into receivership. Recent correspondence with the receiver indicates that no dividend will be paid to unsecured creditors.

(b) On 15 March 20X4 Earley Enterprises sold its former head office building, Whiteley Grove, for GH¢2.7 million. At the year end the building was unoccupied and carried at a value of GH¢3.1 million.

(c) Inventories at the year-end included GH¢650,000 of a new electric tricycle the Oparis. In January 20X4 the European Union declared the tricycle to be unsafe and prohibited it from sale. An alternative market, in Bongaria, is being investigated, although the current price is expected to be cost less 30%.

(d) Stingray Ltd, a subsidiary in Outer Sarnia, was nationalised in February 20X4. The Outer Sarnia authorities have refused to pay any compensation. The net assets of Stingray Ltd have been valued at GH¢200,000 at the year end.

(e) Freak floods caused GH¢150,000 damage to the Southridge branch of Earley Enterprises in January 20X4. The branch was fully insured.

(f) On 1 April 20X4 Earley Enterprises announced a 1 for 1 rights issue aiming to raise GH¢15 million.

Required

Explain how you would respond to the matters listed above.

Answer

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Tags: Adjustments, Disclosures, Events After Reporting Period, Financial Statements, IAS 10, Impairment, Inventories, Subsidiaries
Level: Level 2

Topic: Events After the Reporting Period

AAA – L3 – Q58- Reporting

Evaluate the audit opinion for Yams Co’s change in depreciation method, assessing materiality and compliance with IAS 16.

Question

Yams Co
The directors of Yams Co have decided that this year, motor vehicles should be depreciated on a reducing balance basis. Previously this has been done on a straight line basis. Profits have fallen by GH₵18,000 as a result.

Required:
Discuss the impact on the auditor’s report, considering materiality and compliance with relevant accounting standards.

Answer:
The relevant figure in terms of materiality is GH₵18,000. This represents 12% of profit before tax, which is above 5%, so the amount is material.

Depreciation of non-current assets is described in IAS 16. A change from one method of depreciation to another is permissible only on the grounds that the new method will give a fairer presentation of the results and of the financial position. Such a change does not, however, constitute a change of accounting policy (IAS 8); it is a change in accounting estimate.

In Yams Co there is nothing to suggest that such a change in accounting estimate is warranted. Furthermore, motor vehicles are a normal class of non-current asset, so it would be highly unusual to change the method of depreciation.

If the directors are unable to give a satisfactory explanation for the change, a modified audit opinion on the grounds of material misstatement would be appropriate. The qualification is only material (and not pervasive) and an ‘except for’ opinion is correct

(b) Plantain Co
A competitor of Plantain Co wrote a damaging article about one of its products. Having consulted its lawyers, Plantain Co has decided to take legal action and is suing the competitor for GH₵500,000. The court case will be heard in September of this year and Plantain Co’s lawyers have informed them that there is an 80% chance of success. As a result, Plantain Co has adjusted its profits upwards by GH₵100,000.

Required:
Discuss the impact on the auditor’s report, considering materiality and compliance with relevant accounting standards.

(c) Papaya Co
On 10 February 20X5, Papaya Co were informed that one of their leading customers had gone into liquidation. At 31 December 20X8, the balance owed was GH₵45,000. The directors thought they had better reflect this in the financial statements so they disclosed this in the notes to the financial statements.

Required:
Discuss the impact on the auditor’s report, considering materiality and compliance with relevant accounting standards.

(d) Melon Co
During the valuation of inventory it was discovered that a line of inventory had been valued under LIFO. This had resulted in a misstatement of GH₵8,000. A further line of inventory was clearly obsolete and should not have been included at all. In the financial statements, this had been included at a valuation of GH₵4,000.

Required:
Discuss the impact on the auditor’s report, considering materiality and compliance with relevant accounting standards.

Answer

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Tags: Adjusting Events, Auditor’s Report, IAS 10, Liquidation, Material Misstatement, Receivables
Level: Level 3

Topic: Reporting

Tag (SQ): IAS 10

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FR – L2 – Q68 – Events After the Reporting Period

Explain adjusting and non-adjusting events with three examples each per IAS 10.

FR – L2 – Q46 – Events After the Reporting Period

Explain accounting treatment for post-year-end events affecting receivables, property, inventory, subsidiaries, and other events for Earley Enterprises.

AAA – L3 – Q58- Reporting

Evaluate the audit opinion for Yams Co’s change in depreciation method, assessing materiality and compliance with IAS 16.

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FR – L2 – Q68 – Events After the Reporting Period

Explain adjusting and non-adjusting events with three examples each per IAS 10.

You're reporting an error for "FR – L2 – Q68 – Events After the Reporting Period"

FR – L2 – Q46 – Events After the Reporting Period

Explain accounting treatment for post-year-end events affecting receivables, property, inventory, subsidiaries, and other events for Earley Enterprises.

You're reporting an error for "FR – L2 – Q46 – Events After the Reporting Period"

AAA – L3 – Q58- Reporting

Evaluate the audit opinion for Yams Co’s change in depreciation method, assessing materiality and compliance with IAS 16.

You're reporting an error for "AAA – L3 – Q58- Reporting"

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