IAS 10 and FRS 21, events after the balance sheet date

Events after the balance sheet date and before financial statements are issued can have important effects on the financial statements. For example, the bankruptcy of a major customer would normally be evidence that the trade receivable should be written off or an allowance made as at the balance sheet date.

There is another type of event after the balance sheet date - one that does not affect the position at the balance sheet date, but which still needs disclosure in some way to prevent users being misled. An example of such an event might be a material fall in the market value of investments.

General provisions

Events after the balance sheet date are divided into two types, corresponding to the two examples just given. The definition in IAS 10 is:

Events after the balance sheet date are those events, both favourable and unfavourable, that occur between the balance sheet date and the date when the financial statements are authorised for issue.
 
Two types of events can be identified:

(a) those that provide evidence of conditions that existed at the balance sheet date (adjusting events after the balance sheet date); and

(b) those that are indicative of conditions that arose after the balance sheet date (nonadjusting events after the balance sheet date).

Material adjusting events require changes to the financial statements.

Examples of such events given in IAS 10 and FRS 21 are:

(a) the resolution of a court case, as the result of which a provision has to be recognised instead of the disclosure by note of a contingent liability;

(b) evidence of impairment of assets:

     (i) bankruptcy of a major customer;

     (ii) sale of inventories at prices

suggesting the need to reduce the balance sheet figure to the net value actually realised.

Nonadjusting events do not, by definition, require an adjustment to the financial statements, but if they are of such importance that non-disclosure would affect the ability of users of the financial statements to make proper evaluations and decisions, the enterprise should disclose by note:

- the nature of the event;

- an estimate of its financial effect, or a statement that such an estimate cannot be made.

Examples of such events given in IAS 10 and FRS 21 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) expropriation of assets by government;

(e) destruction of a major asset by fire etc;

(f) a major business combination after the balance sheet date;

(g) sale of a major subsidiary;

(h) major dealings in the company's ordinary shares;

(i) abnormally large changes in asset prices or foreign exchange rates;

(j) changes in tax rates with a significant effect on current and deferred tax assets;

(k) entering into significant commitments or contingent liabilities;

(l) commencing major litigation arising solely out of events after the balance sheet date.

Further provisions of IAS 10 and FRS 21

(a) 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. If the owners or others have the power to amend the financial statements after issue, that fact should be disclosed.

(b) Going concern

If the management decides after the balance sheet date that it is necessary to liquidate the enterprise, the financial statements should not be prepared on a going concern basis.

(c) Dividends

Proposed dividends may no longer be recognised as liabilities if, as will normally be the case, they are proposed or declared after the balance sheet date.

The disclosure of proposed dividends may be given in one of two ways:

(a) by note

(b) on the face of the balance sheet as a separate component of equity.