Minimum funding requirements and the limit on a defined benefit asset

Chapter 18 – Events After the Reporting Period Page 247 5 Adjusting Events An entity should adjust the amounts recognised in the financial statements to reflect any adjusting events that have been identified. [IAS 10.8] IAS 10 provides a number of specific examples of adjusting events. Such examples include:  the settlement of an outstanding court case that was provided for, or disclosed as a contingent liability, at the period end. The provision at the end of the reporting period should be amended to reflect the actual settlement figure, as this provides additional evidence as to the amount of the provision as required by IAS 37 Provisions, contingent liabilities and contingent assets. If a contingent liability was initially disclosed at the end of the reporting period, a provision should now be recognised, since the settlement provides information that a present obligation which can be reliably measured existed at the end of the reporting period;  information received after the end of the reporting period about the value or recoverability of an asset recognised at the period end. This might be evidence that the net realisable value for inventories was lower than estimated, in which case the inventories figure should be written down accordingly;  the finalisation of bonuses that were payable at the period end in accordance with IAS 19 Employee benefits; and  the discovery of fraud or errors which show that amounts recognised or information disclosed at the end of the reporting period were incorrect. 6 Non-adjusting Events An entity should not adjust amounts recognised in the financial statements which reflect non- adjusting events that have occurred after the end of the reporting period. [IAS 10.10] Non-adjusting events should instead be disclosed where the outcome of such events would influence the economic decisions made by users of the financial statements. Where the disclosure of such an event is required, the entity should provide details of the nature of the event and an estimate of its financial effect, or state that such an estimate cannot be made. IAS 10 provides a number of examples of non-adjusting events that would normally require disclosure, including:  the major purchase or disposal of assets such as property, plant and equipment or a subsidiary;  the destruction of assets caused by a fire occurring after the end of the reporting period;  the announcement of a major restructuring plan;  a significant fluctuation in foreign exchange rates that would affect amounts reflected in the financial statements;  significant changes in the number of ordinary shares of the entity, perhaps from a bonus issue or share split;  changes in tax rates that will have a significant effect on amounts reported for current and deferred tax in accordance with IAS 12 Income taxes; Chapter 18 – Events After the Reporting Period Page 248  entering into major commitments or providing a significant guarantee; and  the commencement of litigation following an event that happened after the end of the reporting period. This is not recognised as a provision since the entity did not have an obligation at the period end. Illustration 1 An entity’s draft financial statements for the year ended 31 December 2007 were finalised on 30 May 2008, approved by the finance director on 7 June 2008, authorised for issue on 20 June 2008 and approved by the shareholders on 5 July 2008. The following events occurred after the end of the reporting period assume all amounts are significant to the entity: 1 Notification on 18 Feb 2008 that a customer owing CU100,000 as at 31 December 2007 has gone into liquidation. The financial statements already include a specific provision of CU20,000 for this customer. This is an adjusting event as it provides more up to date in formation about a provision that was recognised at the end of the reporting period. The provision should be increased to CU100,000. 2 A rights issue on 6 April 2008 to raise CU1,500,000 for an acquisition. This is a disclosable non-adjusting event. The rights issue occurred after the end of the reporting period, but is considered to be of significant importance and should be disclosed in the financial statements. 3 Confirmation on 28 May 2008 from the entity’s insurer that they will pay CU500,000 for inventories that were destroyed in a fire on 24 December 2007. The entity had claimed CU650,000 and recognised this as a receivable in the financial statements. This is an adjusting event since it is in relation to an asset that was recognised at the end of the reporting period. The receivable should be reduced to CU500,000. 7 Dividends If dividends on equity shares have been declared after the end of the reporting period they do not meet the definition of a liability and therefore cannot be recognised as a liability at the end of the reporting period. To be recognised as a liability the entity should have an obligation at the end of the reporting period. The obligation to pay the dividend only arises when it has been declared, so it is at this date, i.e. date of declaration, that a liability should be recognised. Where dividends have been declared after the end of the reporting period, this should be disclosed in the notes to the financial statements. [IAS 10.12] Illustration 2 The recent financial calendar of an entity with a 31 December year end has included the following: Authorised by Approved in annual directors for issue general meeting Financial statements for 2006 28 February 2007 3 May 2007 Financial statements for 2007 28 February 2008 4 May 2008