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To adjust or not to adjust: how do you know?
IAS 10 Events after the Reporting Period is the standard that provides rules about adjusting and non-adjusting events, but understanding the distinction can be tricky
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It often takes months after an organisation has started its new financial year for its previous year’s statutory accounts to be prepared and authorised for issue. Events that take place within this time period are classified as ‘events after the reporting date’ and how they are accounted for is set out in IAS 10. A key requirement is that they must be classified as either adjusting or non-adjusting events.
Adjusting events
These are events that provide further evidence of conditions that already existed at the end of the reporting period. For example, if an organisation was involved in a court case before the end of its financial year, it is likely that a contingency asset or liability would have been included in its accounts if it is probable that damages would be received or have to be paid. However, if the case was resolved after year-end but before the accounts were authorised for issue, the result would be an adjusting event. This is because the case existed at year-end and while the outcome was unknown at that point, it now is known so the accounts have to be changed to reflect the organisation’s position fairly and accurately.
Similarly, if a customer was considered to be a doubtful receivable at year-end and then went into liquidation or declared bankruptcy, that would be an adjusting event as well. The customer going out of business would provide evidence that confirms it was financially unstable at year-end. Therefore, the organisation would need to adjust its accounts to write off the full amount that it now knows to be irrecoverable and no longer make a provision for it as doubtful.
In both cases, the organisation was aware of the existence of a condition or situation at year-end and will have made a provision or contingency. However, in the new financial year, but before accounts are authorised for issue, a further event has provided evidence that then enables the accounts to be adjusted to reflect the actual resolved or confirmed situation.
Non-adjusting events
In contrast, non-adjusting events are those that indicate a condition or situation that arose after the end of the reporting period. For example, if an organisation’s production plant was destroyed by a fire after its year-end but before it has issued its accounts, it will have experienced a non-adjusting event because of when it occurred. As the organisation wouldn’t have envisaged at year-end that it would have a fire in the new year and the financial consequence will only impact the current year’s accounts, the unissued accounts are not adjusted.
Material non-adjusting events
While unissued accounts are not changed as a consequence of non-adjusting events, if those events would make a difference to the economic decision-making of the users of the accounts – i.e. if the event is ‘material’ – then information about it would need to be included as a disclosure. This provides transparency and fulfils the qualitative characteristic of relevance, as material non-adjusting events can affect an organisation’s future performance and indicate its ability to exist as a going concern.
The disclosure would include information about the nature of the event and an estimate of its financial effect, or a statement that such an estimate cannot be made.
IAS 10 examples
The examples in this article have been taken from IAS 10, which contains others in relation to both adjusting and non-adjusting events. It also specifically covers two more important areas:
In effect, it means that dividend declarations are non-adjusting events but determining that an organisation is no longer a going concern is an adjusting event, if either happens in the time between the year-end and the accounts being authorised for issue.
KEY TAKEAWAYS
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