Reasons increase in disclosure requirements are varied:

1. Complexity of the business environment.

The increasing complexity of business operations magnifies the difficulty of distilling

economic events into summarized reports. Areas such as derivatives, leasing, business
combinations, pensions, financing arrangements, revenue recognition and deferred taxes are
complex. As a result, companies extensively use notes to the financial statements to explain
these transactions to explain these transactions and their future effects

2. Necessity for timely information.

Today, more than ever before, users are demanding information that is current and predictive.
For example, users want to more complete interim data.

3. Accounting as a control and monitoring device.

Regulations recently sought public disclosure such as phenomenon as management

compensation, off balance-sheet, financing arrangements and related-party transactions.
Many of these newer disclosure requirements enlist accountants and auditor as the agents to
assist in controlling and monitoring these concerns ((1) provide more forward-looking
information; (2) focus more on the factors that create longer-term value, including non-
financial measures; and (3) better align information reported externally with the information
reported internally)

Explain what is the following:

i) Event after reporting period –

 It is actually the events favorable and unfavorable that occur between balance sheet
date and the date when the financial statements are authorized for issued.
 Data authorized for issue varies depending management structure, statutory
requirement and procedures.
 The accounting treatment for events after the reporting period prescribing whether a
company have to make an adjustment in its financial statement and update the
disclosure in the notes to the account.
 The disclosure of a company should make the date when the financial statement was
authorized for issue and the events occurs after reporting period date.
  A company should not prepare its financial statements on a going concern basis if
events after the reporting period indicate that the going concern assumption is not
appropriate.

ii) Two types of events can be identified:

a) Those that provide evidence of conditions that existed at the end of the
reporting period (adjusting events after the reporting period)
b) Event that occurs after reporting period date that give significant impact of current
and future year of financial statements. Those that are indicative of conditions
that arose after the reporting. Should be disclosed so that they can make
narration about nature of the events and the financial impact. (non-adjusting
events after the reporting date)

iii) Accounting treatment for each type:

1. Adjusting events after the reporting period

If an entity receives information after the reporting period about conditions that
existed at the end of the reporting period, it shall update disclosures that relate to
those conditions, in the light of new information.
It is providing additional new information event already existed and recorded in
financial statement at the end of the period to warrant company to do an
adjustment so that it can reflect additional new information that have gotten
during the event has happened.
An entity shall adjust the amounts recognized in its financial statements to reflect
the adjusting events after the reporting period.
- We need to do an adjustment and update the disclosure note of what
nature of event of what has happened and give narration of the
financial impact.

For example: if a loss on an account receivable results from a customer's bankruptcy

subsequent to the statement of financial position date, the company adjusts the financial
statements before their issuance. The bankruptcy stems from the customer's poor financial
health existing at the statement of financial position date.
The same criterion applies to settlements of litigation. The company must adjust the financial
statements if the events that gave rise to the litigation, such as personal injury or patent
infringement, took place prior to the statement of financial position date.

2. Non-adjusting events after the reporting period

Events that provide evidence about conditions that did not exist at the statement
of financial position date but arise subsequent to that date.
An entity shall not adjust the amounts recognized in its financial statements to
reflect non-adjusting events after the reporting period.
Event after reporting period the adjustment not necessary. the business should
provide disclosure notes to the account.
However, an entity may disclose:
 The nature of the event, and
 An estimate of its financial effect.
 If cannot reliable estimate a statement has to include the statement
stating that reliable estimate of financial impact cannot be made.

For example:

• A major business combination after the reporting period or disposing of a major subsidiary.

• Announcing a plan to discontinue an operation or commencing the implementation of a

major restructuring.

• Major purchases of assets, other disposals of assets, or expropriation of major assets by

government

• The destruction of a major production plant or inventories by a fire or natural disaster after
the reporting period

BRIEF EXERCISE 24.3

The end of the financial statement period for Morlan SA was on the 31st of December
2019 and the financial statements were then authorized for issue on the 10th of March
2020. Therefore, events after the reporting period would be between the end of the
statement of the financial position date and authorization date which is from 31st of
December 2019 to 10th of March 2020.
1. A liability estimated at 160,000 at December 31, 2019 was settled on 29
February 2020, at 170,000.

This specific scenario is settlement of provision of liability made should be considered as an

event after reporting period.

- It occurs between the reporting and the authorization date in which from 31 December
2019 to 10 March 2020.

- The settlement of liability should be categorized as an adjusting event because the

settlement provides new additional information about the estimated amount settlement on the
provision of liability.

- Since this is adjusting event we need to adjust figure that being made in financial
statements.

- Adjusting entry

Debit Credit
Provision for Lawsuit (Liability) 160,000
Retained Earnings 10,000
Cash 170,000

Disclosure:

The subsequent event that being made for Morlan SA that effect the balance sheet at 31
December 2019 whereby the net income reduced by $10,000.

2. A flood loss of 80,000 occurred on March 1 2020

● The flood loss on 1 March 2020 should be considered as an event after reporting
period as the event occurs between the balance sheet date of 31 December and
authorization date of 10 March 2020.

● The flood loss of $80,000 is non adjusting event due to the circumstances that event
has occurred after the balance sheet date. It does not provide any evidence about
conditions that the event already existed before the balance sheet date. This event also
provides about new conditions that arise subsequent to the reporting date.
● Therefore, Morlan SA should disclose to the notes about the nature of the event and
estimate of its financial effect.

● This event does nor require any adjustment of financial statements but a disclosure
about a flood loss should be made

Disclosure:

● Subsequent to balance sheet of 31 December 2019, a flood loss of $80,000 had been
occurred on March 1, 2020.

EXERCISE 24.1

E24.1 (LO2) (Subsequent Events) Keystone Corporation issued its financial statements for
the year ended December 31, 2019, on March 10, 2020. The following events took place
before the statements were authorized for issue early in 2020.

a. On January 10, 10,000 ordinary shares of $5 par value were issued at $66 per share.

Instructions

Discuss how the preceding subsequent events should be reflected in the 2019 financial
statements.

● Issuance of ordinary share is an event after the reporting period as outline in MFRS 110 as
it occurs in between the balance sheet date of 31 December 2019 and the authorization date
of 10 March 2020.

● The issuance of ordinary shares on 10 January 2020 should be recognized as a non-

adjusting event because the issuance of the ordinary share occurs after the balance sheet date.

● It does not provide any new information about conditions that the event already existed
before the balance sheet date. It is only the event that arises after the balance sheet date.

● Therefore, there will be no requirement for Keystone Corporation to adjust the financial
statement. However, the issuance of ordinary share should be disclosed in the notes to
account as well as the financial impact as follows

“Subsequent to the balance sheet date of 31 December 2019, the issuance of ordinary shares
had occurred after the balance sheet date, on 10 January 2020. 10,000 ordinary shares of $5
par value were issued at $66 per share by Keystone Corporation. The issuance of these
10,000 ordinary shares had increase the ordinary share capital by $50,000 ($5 x 10,000) and
increase the ordinary share premium account by $610,000 [($66-$5) x 10,000]

b) b. On March 1, Keystone determined after negotiations with the taxing authorities

that income taxes payable for 2019 should be $1,320,000. At December 31, 2019, income
taxes payable was recorded at $1,100,000.

● This scenario relating to the income taxes payable for 2019 will be considered as an event
after the reporting period as it occurs between the balance sheet date/reporting date of 31 st of
December 2019 and 10th of March 2020 (authorization date).

● It will be considered as an adjusting event as it provides additional information about

conditions which is the appropriateness of entry that has been previously reported-
understatement of income taxes payable that existed at the reporting date.

● Therefore, we will be required to make an adjusting entry by crediting an amount of

$220,000 to income taxes payable as well as to make an updated disclosure to reflect the new
information obtained.

Income taxes payable (previous entry) = $1,100,000

Income taxes payable (correcting entry) =$1,320,000

Date Account description $ $

Retained earnings 220,00
0
Income taxes payable 220,000
(To make adjustment of previous understatement of
liability)

Disclosure:

● Subsequent to the balance sheet date of 31st of December 2019, the amount of $1,320,000
which is $220,000 recorded more than the amount that has been previously reported in the
financial statements.

● As a result, the net income and retained earnings will decrease by $220,000 due to the
increase in liability (adjustment of previous understatement of liability).
CONCEPT ANALYSIS 24.4

CA24.4 (LO1) (Subsequent Events) At December 31, 2018, Coburn plc has assets of
£10,000,000, liabilities of £6,000,000, share capital of £2,000,000 (representing 2,000,000
ordinary shares at £1 par), and retained earnings of £2,000,000. Net sales for the year
2018 were £18,000,000, and net income was £800,000. You are making a review of
subsequent events on February 13, 2019, and you find the following.

Instructions
State in each case how the 2018 financial statements would be affected, if at all.

1. On February 3, 2019, one of Coburn's customers declared bankruptcy. At December

31, 2018, this company owed Coburn £300,000, of which £60,000 was paid in
January 2019.

● The declaration of bankruptcy of Coburn’s customers on 3 February, 2019 is considered to

be an event after reporting period as it happens between the balance sheet date 31 Dec
2018 and authorization date (assuming 13 Feb, 2019 is the authorization date).

● This is an adjusting event because the declaration provides information about the
condition whether the customer can pay the debt or not.

● Since $60,000 is paid back to Coburn already the financial statements should be adjusted
for the expected loss pertaining to the remaining receivable of $240,000.

Adjustment:
3 Feb 2019 $ $
Bad debt expenses 240,000
Accounts receivable 240,000
(To record bad debt expenses on bankrupt customer)

In financial statement:
New net income = $560,000 (800,000 – 240,000)
New asset = $9,760,000 (10,000,000 – 240,000)
Disclosure:
“Subsequent to the reporting date of 31 December 2018, a customer that owed Coburn
$300,000 has declared bankruptcy but $60,000 is received before the declaration. The
remaining $240,000 has been written off as bad debt expense and deducting the account
receivables by the same amount as expense. Reducing the net income to $560,000 and asset
to $9,760,000.

2. On January 18, 2019 one of three major plants of the client burned.

▪ The damage of one of the plants in the fire that occurs on January 18, 2019 is
considered to be an event after the reporting date as it happens between the balance sheet
date on 31 Dec 2018 and authorization date 13 Feb 2019.
▪ This is considered as a non-adjusting event because it does not provide any additional
information about conditions of plant at the reporting period.
▪ Thus, Coburn should not make an adjustment to the balance sheet however it needs to
record this information in notes to account by making a report that the fire loss and refer to it
in connection with the income statement, since earnings power is presumably affected.
Disclosure:
“Subsequent to the reporting date of 31 December 2018, one of the three major plants of the
client has damaged in a fire. Financial loss to this damage plant cannot be reliably
estimated.”

3. On January 23, 2019, a strike was called at one of Coburn's largest plants, which
halted 30% of its production. As of today (February 13), the strike has not been settled.

● The strike called at one of Coburn’s largest plants cannot be considered an event after the
reporting period as strikes are considered as general knowledge only therefore disclosure is
not required.

4. A major electronics enterprise has introduced a line of products that would compete
directly with Coburn's primary line, now being produced in a specially designed new
plant. Because of manufacturing innovations, the competitor has been able to achieve
quality similar to that of Coburn's products but at a price 50% lower. Coburn officials
say they will meet the lower prices, which are high enough to cover variable
manufacturing and selling costs but which permit recovery of only a portion of fixed
costs.

● The new line of products introduced by one of Coburn’s competitor is considered as an

event after the reporting date as it happens between the balance sheet date 31 December
2018 and the authorization date of 13 Feb 2019.
● This is considered as a non-adjusting event as the introduction of new line of products
happen after the reporting date thus it is not provides the new additional information
about the existing condition in the balance sheet date.
● Coburn should make a disclosure in the footnote indicating the nature of this event and
the financial impact.
● However, all the costs cannot be estimated reliably at this point of time.
Disclosure:
“Subsequent to the reporting date of 31 December 2018, one of the competitors of Coburn
has introduce a new line of product causing Coburn to sell its product at the price of 50%
lower.”

5. Merchandise traded in the open market is recorded in the company's records at £1.40
per unit on December 31, 2018. This price had prevailed for 2 weeks, after release of an
official market report that predicted vastly enlarged supplies; however, no purchases
were made at £1.40. The price throughout the preceding year had been about £2, which
was the level experienced over several years. On January 18, 2019, the price returned to
£2, after public disclosure of an error in the official calculations of the prior December,
correction of which destroyed the expectations of excessive supplies. Inventory at
December 31, 2018, was on a lower-of-cost-or-net realizable value basis.

▪ The increase in the market price of inventory is considered as an event after the reporting
date as it happens between the balance sheet date 31 Dec 2018 and authorization date 13 Feb
2019.

▪ This is an adjusting event as the adjustment of inventory price provide information

about the existing condition at balance sheet date.
▪ $2 is a stable price that has been prevailed for many years while $1.40 has only remained
for 2 weeks due to error in official calculations.

Disclosure:
“Subsequent to the reporting date of 31 December 2018, an adjustment of market price of
inventory is made, increase from $1.40 to $2, affecting the amount of inventory and reducing
retained earnings.

6. On February 1, 2019, the board of directors adopted a resolution accepting the offer
of an investment banker to guarantee the marketing of £1,200,000 of preference shares.

● The approval of board of directors to guarantee the marketing of £1,200,000 of preference

shares is considered as an event after the reporting date as it happens between the balance
sheet date 31 Dec 2018 and authorization date 13 Feb 2019.
● This is considered a non-adjusting event because the approval of board of directors to
issue £1,200,000 of preference shares provide evidence about conditions that did not exist in
the statement of financial position.
● No adjustment needed in the financial statements but disclosure in the footnote is required.

Disclosure:
“Subsequent to the reporting date of 31 December 2018, the board of directors has approved
issuance of £1,200,000 of preference shares which will increase the equity and asset.”