IAS 8

ACCOUNTING POLICIES, CHANGE IN ACCOUNTING

ESTIMATES AND ERRORS
Accounting Policies:
Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in
preparing and presenting financial statements.
Examples:
 IAS 2: Inventory Valuation Method: FIFO or AVCO
 IAS 16: Cost model or revaluation model
Consistency Of Accounting Policies:
An entity shall select and apply its accounting policies consistently for similar transactions, other events and
conditions, unless a Standard or an Interpretation specifically requires or permits categorisation of items for which
different policies may be appropriate. If a Standard or an Interpretation requires or permits such categorisation, an
appropriate accounting policy shall be selected and applied consistently to each category (for e.g. IAS 39/IFRS 9
Derivative FVTPNL)
Changes In Accounting Policies:
An entity is permitted to change an accounting policy only if the change:
• Is required by a standard or interpretation; or
• Will make the information in the financial statements more relevant and reliable.
Effect of a Change in Accounting Policies:
If there is a change in accounting policy, then the change in accounting policy is applied retrospectively.
Retrospective application means adjusting the opening balance of each affected component of equity for the
earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if
the new accounting policy had always been applied. However, if the adjustment to opening retained earnings
cannot be reasonably determined, the change should be adjusted prospectively, i.e. included in the current
period’s statement of profit or loss.
Disclosures Relating To Changes In Accounting Policies:
When a business entity makes a change in accounting policy, there should be a note in the financial statements
which should explain:
 the nature of the change in accounting policy
 the reason why the change in accounting policy has been made, and
 a statement of the effect the change has had on the figures in the financial statements in the current financial
year and prior years (to the extent that is practicable)
Accounting Estimate:
Accounting Estimate is a method adopted by an entity to arrive at estimated amounts for the financial statements.
Examples:
 Depreciation method
 Allowance for doubtful debts
 Useful life of the Asset
 Residual value of the fixed asset
Change in Accounting Estimate:
A change in accounting estimate is an adjustment of the carrying amount of an asset or liability, or related
expense, resulting from reassessing the expected future benefits and obligations associated with that asset or
liability.
 Effect of a Change in Accounting Estimates:
The effect of a change in an accounting estimate shall be recognised prospectively by including it in profit or loss
in:
 the period of the change, if the change affects that period only, or
 the period of the change and future periods, if the change affects both.

Disclosures Relating To Changes Accounting Estimates:

When a business entity makes a change in accounting estimate, there should be a note in the financial statements
which should explain:
 the nature and amount of a change in an accounting estimate that has an effect in the current period or is
expected to have an effect in future periods
 if the amount of the effect in future periods is not disclosed because estimating it is impracticable, an entity
shall disclose that fact.

Prior Period Errors:

Prior period errors are omissions from, and misstatements in, an entity's financial statements for one or more
prior periods arising from a failure to use, or misuse of, reliable information that was available and could
reasonably be expected to have been obtained and taken into account in preparing those statements. Such errors
result from mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of
facts, and fraud.
The general principle in IAS 8 is that an entity must correct all material prior period errors retrospectively in the
first set of financial statements authorised for issue after their discovery by:
 restating the comparative amounts for the prior period(s) presented in which the error occurred; or
 if the error occurred before the earliest prior period presented, restating the opening balances of assets,
liabilities and equity for the earliest prior period presented.

QUESTIONS
1. Which of the following is a change in accounting policy as opposed to a change in estimation technique?
 An entity has previously charged interest incurred in connection with the construction of tangible non-current
assets to the statement of profit or loss. Following the revision of IAS 23 Borrowing Costs, and in accordance with
the revised requirements of that standard, it now capitalises this interest.
 An entity has previously depreciated vehicles using the reducing balance method at 40% pa. It now uses the
straight-line method over a period of five years.
 An entity has previously shown certain overheads within cost of sales. It now shows those overheads within
administrative expenses.
 An entity has previously measured inventory at weighted average cost. It now measures inventory using the first in
first out (FIFO) method.
2. Which TWO of the following situations would not require a prior year adjustment per IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors?
A. In last year's financial statements, inventories were understated by a material amount due to system error
B. A company has changed its allowance for irrecoverable receivables from 10% of outstanding debt to
everything over 120 days old
C. A new accounting standard has been issued that requires a company to change its accounting policy but gives
no guidance on the specific application of the change itself
D. A company has chosen to value inventory using FIFO rather than AVCO as in previous periods
E. A company has decided to move from charging depreciation on the straight line basis to the reducing balance
basis
3. In accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors how is a change in
accounting estimate accounted for?
A. A By changing the current year figures but not the previous years' figures
B. B By changing the current year figures and the previous years' figures
C. C No alteration of any figures but disclosure in the notes
D. D Neither alteration of any figures nor disclosure in the notes
4. During 20X1 a company discovered that certain items had been included in inventory at 31 December 20X0 at a
value of $2.5 million but they had in fact been sold before the year end. The original figures reported for the year
ending 31 December 20X0 and the figures for the current year 20X1 are given below:
20X1 20X0
$000 $000
Sales 52,100 48,300
Cost of sales (33,500) (30,200)
–––––– ––––––
Gross profit 18,600 18,100
Tax (4,600) (4,300)
–––––– ––––––
Net profit 14,000 13,800
–––––– ––––––
The retained earnings at 1 January 20X0 were $11.2 million. The cost of goods sold in 20X1 includes the $2.5
million error in opening inventory.
Show the 20X1 statement of profit or loss with comparative figures and the retained earnings for each year.
Disclosure of other comprehensive income is not required. Assume that the adjustment will have no effect on
the tax charge.

IAS 2
INVENTORIES
What is Inventory?
Inventories are assets:
• held for sale in the ordinary course of business; (Finished Goods)
• in the process of production for such sale (WIP); or
• in the form of materials or supplies to be consumed in the production process or in the rendering of
services. (Raw and Packing Material)

How does Inveotry affect Financial Statements?

It affects the financial statement in two ways:
 Statement of financial position: it is included as a current asset
 Statement of profit or loss: opening and closing inventory have a direct impact on cost of sales and therefore profits.

Accounting treatment:
Opening Inventories
Dr Cost of sales (I/S)
Cr Inventories (SOFP)
Closing Inventories
Dr Inventories (SOFP)
Cr Cost of sales (I/S)
Inventory Valuation Rule
Inventories should be measured at the lower of cost and net realisable value for each separate item or group
of items.
Cost:
The cost of inventories will consist of all the expenditure in bringing the product into present location and saleable
condition: -
• Purchase (e.g. Purchase price and import duties)
• Costs of conversion (direct cost and production overheads)
• Other costs incurred in bringing the inventories to their present location and saleable condition, e.g.
carriage inwards
Net Realisable Value:
Net Realisable Value is the revenue expected to be earned in the future when the goods are sold after deducting
selling costs, if any. It is calculated as:
$
Estimated selling price X
Less: estimated costs of completion (X)
Less: estimated selling and distribution costs (cost to sell) (X)
X
Inventory Valuation Methods:
Unit Cost Method
This is the actual cost of purchasing identifiable units of inventory. Only used when items of inventory are
individually distinguishable and of high value.
FIFO:
FIFO assumes that materials are issued out of inventory in the order in which they were delivered into inventory,
i.e. for costing purposes, the first items of inventory received are assumed to be the first ones sold. The cost
of closing inventory is the cost of the most recent purchases of inventory.
AVCO:
AVCO calculates a weighted average price for all units in inventory. Issues are priced at this average cost, and the
balance of inventory remaining would have the same unit valuation. The weighted average price can be
calculated periodically or continuously.
Periodic weighted average cost
With this inventory valuation method, an average cost per unit is calculated based upon the cost of opening
inventory plus the cost of all purchases made during the accounting period. This method of inventory
valuation is calculated at the end of an accounting period when the total quantity and cost of purchases for
the period is known.
Continuous weighted average cost
With this inventory valuation method, an updated average cost per unit is calculated following a purchase of
goods. The cost of any subsequent sales is then accounted for at that weighted average cost per unit. This
procedure is repeated whenever a further purchase of goods is made during the accounting period.
Profits in periods of rising prices: -
In times of rising prices, using FIFO method will mean the financial statements show higher inventory values and
higher profit.

Disclosure Requirements:
According to IAS 1 Presentation of Financial Statements companies are required to disclose the accounting policies
adopted in preparing their financial statements, including those used to account for inventories. IAS 2 also requires
that the total carrying amount of inventories are broken down into appropriate sub-headings or classifications and
that the total amount of inventory carried at net realisable value is disclosed.
 An example of a specimen disclosure note is as follows:
Inventories are valued at the lower of cost and net realisable value for each separate product or item. Cost is
determined by recognising all costs required to get inventory to its location and condition at the reporting date
and is applied on a 'first in, first out' basis. Net realisable value is the expected selling price of inventory, less any
further costs expected to be incurred to achieve the sale.
Raw materials 200
Work in progress 600
Finished goods 350
1,150

QUESTIONS
1. Value the following items of inventory:
 Materials costing $12,000 bought for processing and assembly for a profitable special order. Since buying
these items, the cost price has fallen to $10,000.
 Equipment constructed for a customer for an agreed price of $18,000. This has recently been completed at a
cost of $16,800. It has now been discovered that, in order to meet certain regulations, conversion with an
extra cost of $4,200 will be required. The customer has accepted partial responsibility and agreed to meet half
the extra cost.
2. IAS 2 Inventories requires inventory to be valued at the lower of cost and net realisable value. Cost includes all
expenditure incurred in bringing the items to their present location and condition. Which of the following would
NOT normally be included as part of the cost of inventory in a manufacturing business?
i. Costs of transporting finished goods to customers’ premises
ii. Storage costs for raw materials, stored at the premises of a third party
iii. Discounts allowed for prompt payment by customers
iv. Discounts received for bulk purchases
A. (ii) and (iv) only
B. (iii) only
C. (i) and (iii) only
D. (i) and (iv) only
3. The following costs relate to a unit of goods:
Cost of raw materials $1, Direct labour $0.50
During the year $60,000 of production overheads were incurred. 8,000 units were produced during the year which
is lower than the normal level of 10,000 units. This was as a result of a fault with some machinery which resulted in
2,000 units having to be scrapped. At the year-end, 700 units are in closing inventory. What is the value of closing
inventory?
4. Posh plc has the following units in inventory at the end of 20X9.
Units Cost per unit ($)
Raw materials 5,000 25
Work in progress 2,000 30
Finished goods 1,000 35

Finished items usually sell for $50 per unit. However, water damage caused by improper storage of inventory will
mean that 300 units of finished goods will be sold at 60% of the normal selling price less costs to sell of $5 per
item. A further $5.50 per unit is still to be incurred to finish off the items of work in progress.
In accordance with IAS 2 Inventories, at what amount should inventories be stated in the statement of financial
position of Posh plc as at the end of 20X9?
5. A company has inventory on hand at the end of the reporting period as follows.
Attributable
Raw Material Attributable Expected Selling
Item Units Productions
Cost $ Selling Costs $ Price $
OHs $
A 300 160 15 12 185
B 250 50 10 10 75
At what amount will inventories be stated in the statement of financial position in accordance with IAS 2?
6. The following information relates to Carnberwell’s year-end inventory of finished goods:-
Direct costs of Production Expected selling and Expected
materials and labour overheads incurred distribution overheads Selling price
$ $ $ $
Inventory Category 1 2,470 2,100 480 5,800
Inventory Category 2 9,360 2,730 150 12,040
Inventory Category 3 1,450 850 190 2,560
13,280 5,680 820 20,400
What amount should finished goods inventory be stated in the company’s statement of financial position?
7. For Morgan the direct cost of production of each unit of inventory is $46 (including carriage inwards of $11 and
import duties of $1 on the raw materials element). Production overheads amount to $15 per unit. Currently the
goods can only be sold if they are modified at a cost of $17 per unit. The selling price of each modified unit is
$80 and selling costs are estimated at 10% of selling price. At what value should each unmodified unit of
inventory be included in the statement of financial position?
8. The inventory counters of Crocodile Co inform you that there are 6,000 items of product A, and 2,000 of product
B, these cost $10 and $5 respectively. They also tell you the following information:
Product A – 500 of these were found to be defective and would be sold at a cut price of$8.
Product B – 100 of these were also to be sold for $4.50 with selling expenses of $1.50 each.
What figure should appear in Crocodile's statement of financial position for inventory?
9. A business sells three products X, Y and Z. The following information was available at the year-end:
DESCRIPTION X Y Z
Cost $7/Unit $10/Unit $19/Unit
NRV $10/Unit $8/Unit $15/Unit
Units 100 200 300
What is the Value of Closing inventory?
A. $8,400
B. $6,800
C. $7,100
D. $7,200
10. Storm, an entity, had 500 units of product X at 30 June 20X5. The product had been purchased at a cost of $18 per
unit and normally sells for $24 per unit. Recently, product X started to deteriorate but can still be sold for
$24 per unit, provided that some rectification work is undertaken at a cost of $3 per unit. What was the value of
closing inventory at 30 June 20X5?
11. Hurricane, an entity, had 1,500 units of product Y at 30 June 20X8. The product had been purchased at a cost of
$30 per unit and normally sells for $40 per unit. Recently, product Y started to deteriorate and can now be sold for
only $38 per unit, provided that some rectification work is undertaken at a cost of $10 per unit. What was the
value of inventory at 30 June 20X8?
 IAS 37
Provisions, Contingent Liabilities and Contingent Assets
What is Liability?
A Liability is a present obligation of the entity arising from past events, the settlement of which is expected to
result in an outflow from the entity of resources embodying economic benefits.

What is Provision?
A provision is defined as a liability of uncertain timing or amount.

Criteria for recognising a provision:

IAS 37 requires a provision be recognised when all of the following apply:
 an entity has a present obligation (legal or constructive) as a result of a past event;
 it is probable that an outflow of resources embodying economic benefits will be required to settle the
obligation; and
 a reliable estimate can be made of the amount of the obligation
A provision is accounted for as follows: -
Debit Expense Account (I/S)
Credit Provision Account (SOFP)
Legal Obligation:
A legal obligation is an obligation that derives from:
• the terms of a contract,
• legislation, or
• other operation of law

Constructive Obligation:
A constructive obligation is an obligation that derives from an entity’s actions where:
• by an established pattern of past practice, published policies, or a sufficiently specific current stataement, the
entity has indicated to other parties that it will accept certain responsibilities, and
• as a result, the entity has created a valid expectation on the part of those other parties that it will discharge
those responsibilities

Contingent Liability:
A contingent liability is defined as:
• a possible obligation that arises from past events and whose existence will be confirmed only by the
occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the
entity; or
• a present obligation that arises from past events but is not recognised because:
i. it is not probable that an outflow of resources embodying economic benefits will be required to settle
the obligation, or
ii. the amount of the obligation cannot be measured with sufficient reliability
When a provision is not recognised in the financial statements because it does not meet the criteria specified in
IAS 37, it may still need to be disclosed as a contingent liability in the financial statements.

Contingent Asset:
A contingent asset is defined as:
a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-
occurrence of one or more uncertain future events not wholly within the control of the entity.
 Probability of occurrence Liability Asset
Virtually Certain (>95%) Provide (Create Provision) Recognise Asset
Probable (51% to 95%) Provide (Create Provision) Contingent Asset (Disclose)
Possible (5 to 50%) Contingent Liability (Disclose) Do Nothing
Remote (<5%) Do Nothing Do Nothing

Movement in Provision
Provisions should be reviewed at each statement of financial position date and adjusted to reflect the current best
estimate.
Increase in provision: Dr Relevant expense account
Cr Provision
Decrease in provision: Dr Provision
Cr Relevant expense account

A reliable estimate can be made:

Provisions should be recognised at the best estimate. If the provision relates to one event, such as the potential
liability from a court case, this should be measured using the most likely outcome. If the provision is made up of
numerous events, such as a provision to make repairs on goods within a year of sale, then the provision should be
measured using expected values.

Warranty provisions:
A provision is required at the time of the sale rather than the time of the repair/replacement as the making of the
sale is the past event which gives rise to an obligation. This requires the seller to analyse past experience so that
they can estimate:
• how many claims will be made – if manufacturing techniques improve, there may be fewer claims in the future
than there have been in the past
• how much each repair will cost – as technology becomes more complex, each repair may cost more.
The provision set up at the time of sale:
• is the number of repairs expected in the future multiplied by the expected cost of each repair
• should be reviewed at the end of each accounting period in the light of further experience.

Guarantees:
In some instances (particularly in groups) one entity will make a guarantee on behalf of another to pay off a loan,
etc. if the other entity is unable to do so.
A provision should be made for this guarantee if it is probable that the payment will have to be made. It may
otherwise require disclosure as a contingent liability.

Future operating losses/future repairs:

No provision may be made for future operating losses or repairs because they arise in the future and can be
avoided (close the division that is making losses or sell the asset that may need repair) and therefore no obligation
exists.

Onerous contracts:
'An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract
exceed the economic benefits expected to be received under it'.
The signing of the contract is the past event giving rise to the obligation to make the payments and those
payments, discounted if the effect is material, will be the measure of the excess of cost over the benefits.
A provision for this net cost should be recognised as an expense in the statement of profit or loss in the period
when the contract becomes onerous. In subsequent periods, this provision will be increased by the unwinding of
the discount (recognised as a finance charge) and reduced by any payments made.
 Restructuring provisions:
'A restructuring is a programme that is planned and controlled by management, and materially changes either:
• the scope of a business undertaken by an entity, or
• the manner in which that business is conducted'
A provision may only be made if:
• a detailed, formal and approved plan exists, and
• the plan has been announced to those affected.
The provision should:
• include direct expenditure arising from restructuring
• exclude costs associated with ongoing activities.
Any provision may only be made if a present obligation exists.
In the context of a restructuring, a detailed, formal and approved plan must exist. This in itself is not enough to
create a provision, because management may change its mind.
A provision should only be made if the plan has also been announced to those affected. This creates a constructive
obligation, because management is now very unlikely to change its mind.
The restructuring provision may only include direct expenditure arising from the restructuring, which is both
necessarily entailed by the restructuring, and not associated with the ongoing activities of the entity.
It should therefore include costs such as redundancies and write-downs on property plant and equipment.
Costs associated with retraining or relocating staff, marketing or investment in new systems and distribution
networks may not be included in the provision, because they relate to the future conduct of the business.

QUESTIONS
1. A retail store has a policy of refunding purchases by dissatisfied customers, even though it is under no legal
obligation to do so. Its policy of making refunds is generally known. Should a provision be made at the year end?
2. An entity sells goods with a warranty covering customers for the cost of repairs of any defects that are discovered
within the first two months after purchase. Past experience suggests that 88% of the goods sold will have no
defects, 7% will have minor defects and 5% will have major defects. If minor defects were detected in all products
sold, the cost of repairs would be $24,000. If major defects were detected in all products sold, the cost would be
$200,000. What amount of provision should be made?
3. An entity has to rectify a serious fault in an item of plant that it has constructed for a customer. The individual
most likely outcome is that the repair will succeed at the first attempt at a cost of $400,000, but there is a chance
that a further attempt will be necessary, increasing the total cost to $500,000. What amount of provision should
be recognised?
4. Rowsley is a company that carries out many different activities. It is proud of its reputation as a ‘caring’
organisation and has adopted various ethical policies towards its employees and the wider community in which it
operates. As part of its annual financial statements, the company publishes details of its environmental policies,
which include setting performance targets for activities such as recycling, controlling emissions of noxious
substances and limiting use of non-renewable resources.
The company has an overseas operation that is involved in mining precious metals. These activities cause
significant damage to the environment, including deforestation. The company incurred capital costs of $100
million in respect of the mine and it is expected that the mine will be abandoned in eight years' time. The mine is
situated in a country where there is no environmental legislation obliging companies to rectify environmental
damage, and it is very unlikely that any such legislation will be enacted within the next eight years. It has been
estimated that the cost of cleaning the site and re-planting the trees will be $25 million if the replanting were
successful at the first attempt, but it will probably be necessary to make a further attempt, which will increase the
cost by a further $5 million. The company's cost of capital is 10%.
Discuss whether a provision for the cost of cleaning the site should be made and prepare extracts of the
financial statements.
5. On 14 June 20X5 a decision was made by the board of an entity to close down a division. The decision was not
communicated at that time to any of those affected and no other steps were taken to implement the decision by
the year end of 30 June 20X5. The division was closed in September 20X5.
Should a provision be made at 30 June 20X5 for the cost of closing down the division?
6. Randall is currently preparing its financial statements for the year ended 31 March 20X8. The board has met to
discuss the following issues:
i. Some of the products sold by Randall are sold with warranties enabling customers to return faulty goods
within 2 years of purchase. Randall will either repair the product or refund the sales value to the customer.
During the year the sales value of products sold with such warranties totalled $300,000. Based on past
experience it is anticipated that 20% of these products will be returned under the terms of the warranty.
Of the goods that are returned it is expected that 5% will be beyond repair and Randall will need to refund the
full sales value to the customer.
The remaining 95% of returned goods will be able to be repaired. This will cost Randall, on average, 30% of the
items sales price.
Some of the goods that have been sold this year have already been returned under the terms of the warranty.
Randall has incurred costs of $5,000 in respect of these items.
As at 31 March 20X7, Randall’s financial statements showed a provision of $14,000 in respect of warranty
costs. This was made up of $4,000 in relation to goods sold during the year ended 31 March 20X6 and $10,000
in respect of goods sold during the year ended 31 March 20X7. The warranty in respect of items sold during
the year ended 31 March 20X6 has expired as at 31 March 20X8. During the year ended 31 March 20X8,
$3,000 of costs were incurred in respect of warranty claims made in relation to goods sold in the year ended
31 March 20X7.
ii. A month before the year-end, a fire destroyed a significant proportion of Randall’s inventories. Randall has
since been negotiating compensation with their insurers. Initially, the insurers were of the view that Randall
had not followed applicable legislation to protect against fire damage and were contesting the claim. Randall
was confident that they had complied with the legislation and referred the matter to their solicitors. In April
20X8 the board of directors received a letter from the insurance company stating that they are satisfied that
Randall did comply with appropriate legislation. The solicitors have advised the directors that it is now
probable that they will receive compensation in the region of $50,000.
Explain how these matters should be dealt with in the financial statements of Randall in the year ended 31
March 20X8. (Your answer should quantify amounts where possible.)
7. Sebastian Co is currently involved in four legal cases, all of them unrelated.
• In Case A, Sebastian Co is suing a supplier for $100,000.
• In Case B, Sebastian Co is suing a professional adviser for $200,000.
• In Case C, Sebastian Co is being sued by a customer for $300,000.
• In Case D, Sebastian Co is being sued by an investor for $400,000.
Sebastian Co has been advised by its lawyers that the probabilities of success in each case are as follows:
Case Likelihood of Sebastian Co winning the case
A 10%
B 90%
C 98%
D 60%
State the accounting treatment for each of the four cases.
8. A former employee is claiming compensation of $50,000 from Harriot for wrongful dismissal. The company’s
solicitors have stated that they believe that the claim is unlikely to succeed. The legal costs relating to the claim are
likely to be in the region of $5,000 and will be incurred regardless of whether or not the claim is successful.
How should these items be treated in the financial statements of Harriot?
 A. Provision should be made for $55,000
B. Provision should be made for $50,000 and the legal costs should be disclosed by note
C. Provision should be made for $5,000 and the compensation of $50,000 should be disclosed by note
D. No provisions should be made but both items should be disclosed by note
9. Blacksmith has claimed compensation of $30,000 from another entity for breach of copyright. The solicitors of
Blacksmith have advised the directors that their claim is likely to succeed. How should this item be treated in the
financial statements of Blacksmith?
A. The item should not be included in the financial statements
B. The item should be disclosed by note in the financial statements
C. The financial statements should show an asset of $30,000
D. The financial statements should show an asset of $30,000 and a note should be included explaining the item
10. X is currently defending two legal actions:
• An employee, who suffered severe acid burns as a result of an accident in X’s factory, is suing for $20,000,
claiming that the directors failed to provide adequate safety equipment. X’s lawyers are contesting the claim,
but have advised the directors that they will probably lose.
• A customer is suing for $50,000, claiming that X’s hair-care products damaged her hair. X’s lawyers are
contesting this claim, and have advised that the claim is unlikely to succeed.
How much should X provide for these legal claims in its financial statements? $___________

IAS 10
EVENTS AFTER THE REPORTING PERIOD
EVENTS AFTER THE REPORTING PERIOD:
Those events, both favourable and unfavourable, that occurs between the end of the reporting period and the
date when the financial statements are authorised for issue. There are 02 types of events:
 Adjusting Events
 Non-Adjusting Events
ADJUSTING EVENTS:
Those events that provide evidence of conditions that existed at the end of the reporting period.
Typical examples of adjusting events given in IAS 10 are:
a. the resolution of a court case;
b. evidence of impairment of assets;
c. bankruptcy of a major customer;
d. sale of inventories at prices lower that their cost;
e. discovery of fraud or errors.
Accounting For Adjusting Events:
Financial statements should be adjusted for adjusting events.

NON-ADJUSTING EVENTS:
Those events that are indicative of conditions that arose after the end of the reporting period.
Typical examples of non-adjusting events given in IAS 10 are:
a. decline in market value of investments;
b. announcement of a plan to discontinue part of the enterprise;
c. major purchases and sales of assets;
d. destruction of a major asset by fire etc;
e. sale of a major subsidiary;
f. major dealings in the company's ordinary shares
g. Entering into significant commitments or contingent liabilities
h. Commencing a court case arising out of events after the reporting date.
 Accounting For Non-Adjusting Events:
For material non-adjusting events, the enterprise should disclose by note:
• the nature of the event; and
• an estimate of its financial effect, or a statement that such an estimate cannot be made.

FURTHER PROVISIONS COVERED BY IAS 10:

Authorisation For Issue Of Financial Statements:
An enterprise should disclose the date when the financial statements were authorised for issue and who gave that
authorisation.
Going Concern:
If the management decides after the end of the reporting period that it is necessary to liquidate the enterprise, the
financial statements should not be prepared on a going concern basis.
Dividends:
If an entity declares dividends after the reporting period, the entity shall not recognise those dividends as a liability
at the end of the reporting period. That is a non-adjusting event.

QUESTISONS
1. Anderson's year end is 31 December 20X7. The following events all occurred in January 20X8. State whether the
events below would be classed as adjusting or non-adjusting events.
 Insolvency of a customer
 Loss of inventory due to a flood
 Completion of the purchase of another company
 Evidence showing that the net realisable value of inventory is below cost
 A court case from August is settled by Anderson
 The discovery of a fraud showing the financial statements were incorrect
2. Shortly after the reporting date a major credit customer of an entity went into liquidation because of heavy trading
losses and it is expected that little or none of the $12,500 debt will be recoverable. $10,000 of the debt relates to
sales made prior to the year-end and $2,500 relates to sales made in the first two days of the new financial year.
In the 20X1 financial statements the whole debt has been written off, but one of the directors has pointed out
that, as the liquidation is an event after the reporting date, the debt should not in fact be written off but disclosure
should be made by note to this year’s financial statements, and the debt written off in the 20X2 financial
statements.
Advise whether the director is correct.
3. Jackson Co’s year end is 31 December 20X0. In February 20X1 a major customer went into liquidation and the
directors believe that they will not be able to recover the $450,000 owed to them. How should this item be treated
in the financial statements of Jackson Co for the year ended 31 December 20X0?
A. The $450,000 should be disclosed by note as an irrecoverable debt
B. The financial statements are not affected at all
C. The financial statements for 20X0 are not affected, but the balance should be written off in 20X1
D. The financial statements should be adjusted to show the $450,000 as an irrecoverable debt
4. Which TWO of the following could be classified as adjusting events occurring after the end of the reporting period
for the year ended 31 December 20X1:
A. A serious fire, occurring 1 month after the year-end, that the damaged the sole production facility, causing
production to cease for 3 months.
B. One month after the year-end, a notification was received advising that a large receivables balance would not
be paid as the customer was being wound up. No payments are expected from the customer.
C. A large quantity of parts for a discontinued production line was discovered at the back of the warehouse
during the year-end inventory count on 30 December. The parts have no value except a nominal scrap value
 and need to be written off.
D. The entity took delivery of a new machine from the USA in the last week of the financial year. It was
discovered almost immediately afterwards that the entity supplying the machine had filed for bankruptcy and
would not be able to honour the warranties and repair contract on the new machine. Because the machine
was so advanced, it was unlikely that any local entity could provide maintenance cover.
E. An asset held for sale was held in current assets at $70,000 in the financial statements, but was sold for
$65,000 after the year end.