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Section 26 – Events after the End of the Reporting Period
Section 32 defines events after the end of the reporting period and sets out principles for recognising, measuring and disclosing those events.
Recognition and measurement
Extract from FRS 105 – Section 26.2 – 26.3
Adjusting events after the end of the reporting period
26.2 Events after the end of the reporting period are those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue. There are two types of events:
(a) those that provide evidence of conditions that existed at the end of the reporting period (adjusting events after the end of the reporting period); and
(b) those that are indicative of conditions that arose after the end of the reporting period (non-adjusting events after the end of the reporting period).
26.3 Events after the end of the reporting period include all events up to the date when the financial statements are authorised for issue, even if those events occur after the public announcement of profit or loss or other selected financial information.
OmniPro comment
It is clear that Section 26 applies from the start of the accounting period up until the date the financial statements are authorised for issue. Preliminary announcement of results are ignored, it is the date the financial statements are approved by the directors for filing that matters.
The exception to Section 26.2(b) is where conditions have arisen after the period end (from period end to the date of signing the auditor’s report) that indicate that the going concern concept is no longer appropriate then this should be treated as an adjusting post balance sheet event.
Example 1: Application
A piece of land sold by a Company subject to planning where planning had not been obtained pre year end, should not be recognised as a sale in that year. The fact that planning is obtained post year end is not an adjusting post balance sheet event.
If on the other hand this was sold without planning and if planning is obtained the price will increase, then the sale would be recognised at its fair value at the balance sheet date depending on probabilities. If just after year end, planning is or is not obtained, then the year end sale is not adjusted. It is instead treated as a non-adjusting post balance sheet event and therefore disclosed.
Adjusting events after the end of the reporting period
Extract from FRS 105 – Section 26.4 – 26.5
26.4 A micro-entity shall adjust the amounts recognised in its financial statements to reflect adjusting events after the end of the reporting period.
26.5 The following are examples of adjusting events after the end of the reporting period that require a micro-entity to adjust the amounts recognised in its financial statements, or to recognise items that were not previously recognised:
(a) The settlement after the end of the reporting period of a court case that confirms that the micro-entity had a present obligation at the end of the reporting period. The micro-entity adjusts any previously recognised provision related to this court case in accordance with Section 16 Provisions and Contingencies or recognises a new provision. The micro-entity does not merely disclose a contingent liability. Rather, the settlement provides additional evidence to be considered in determining the provision that should be recognised at the end of the reporting period in accordance with Section 16.
(b) The receipt of information after the end of the reporting period indicating that an asset was impaired at the end of the reporting period, or that the amount of a previously recognised impairment loss for that asset needs to be adjusted. For example:
(i) the bankruptcy of a customer that occurs after the end of the reporting period usually confirms that a loss existed at the end of the reporting period on a trade receivable and that the micro-entity needs to adjust the carrying amount of the trade receivable; and
(ii) the sale of inventories after the end of the reporting period may give evidence about their selling price at the end of the reporting period for the purpose of assessing impairment at that date.
(c) The determination after the end of the reporting period of the cost of assets purchased, or the proceeds from assets sold, before the end of the reporting period.
(d) The determination after the end of the reporting period of the amount of profit- sharing or bonus payments, if the micro-entity had a legal or constructive obligation at the end of the reporting period to make such payments as a result of events before that date (see Section 23 Employee Benefits).
(e) The discovery of fraud or errors that show that the financial statements are incorrect.
OmniPro comment
The above provides examples of adjusting post balance sheet events which are:
- Settlement of legal cases after year end
- Information about bankruptcy of a debtor after year end
- Information about inventory impairment
- Providing further information on the measurement of assets sales/purchases made pre year end
- Information about fraud or errors within that reporting periods financial statements
- As detailed below, a decision to cease trading or liquidate an entity after year end but before authorising the accounts for issue is an adjusting event and the accounts should be prepared on a break-up basis.
See below some further examples proving the points above.
Example 2: Recoverability of trade debtor balances
Company A was owed CU100,000 from customer B at year end. Following year end the customer got into financial difficulty and is trying to enter an arrangement with creditors. Based on discussions with the Customer here, it is likely these events would force Company A to provide against the receivable balance of CU100,000.
Example 3: Indicators of impairment of PPE/land etc.
Company A owns a property stated in the year end accounts at CU500,000. Prior to issuing the financial statements a valuation was performed on this property for the purposes of valuing the company. This placed a value of CU300,000. Under Section 22, this is an indicator of impairment and a provision should be made to write the asset down to CU300,000 assuming the fair value less cost to sell is higher than value in use.
Example 4: Profit on sale of plant after year end following decision to close
Company A decided to close one of its factories and has announced the closure and redundancies to all relevant parties pre year end. In accordance with Section 16 a provision for restructuring costs has been included in the year end accounts. Subsequent to the year end the company sold its factory for a profit. Can the entity use the profit element to reduce the provision?
The answer is no as Section 16 specifically disallows profits on disposal of fixed assets to be netted against a provision. Therefore it is a non-adjusting event. Fixed assets would be dealt with by Section 22-Impairment of assets.
Example 5: Closing office and relocating
Company A has operations in a number of counties. Prior to year end it announced that one of the locations would close and that all staff will be relocated to another location. All parties have been advised pre year end and the client has included a provision for same. Is this an adjusting event/can a provision be included?
The answer is no, as Section 16 specifically dis-allows relocation provisions.
Non-adjusting events after the end of the reporting period
Extract from FRS 105 – Section 26.6 – 26.7
26.6 A micro-entity shall not adjust the amounts recognised in its financial statements to reflect non-adjusting events after the end of the reporting period.
26.7 Examples of non-adjusting events after the end of the reporting period include:
(a) A decline in market value of investments between the end of the reporting period and the date when the financial statements are authorised for issue. The decline in market value does not normally relate to the condition of the investments at the end of the reporting period, but reflects circumstances that have arisen subsequently. Therefore, a micro-entity does not adjust the amounts recognised in its financial statements for the investments.
(b) An amount that becomes receivable as a result of a favourable judgement or settlement of a court case after the reporting date but before the financial statements are authorised for issue. This would be a contingent asset at the reporting date (see paragraph 16.18). However, agreement on the amount of damages for a judgement that was reached before the reporting date, but was not previously recognised because the amount could not be measured reliably, may constitute an adjusting event.
OmniPro comment
Detailed below are examples of non-adjusting events where disclosure would be required:
- Decline in market value of investments since year end – non-adjusting post balance sheet event (Section 26.7(a)).
- Favorable judgement in a court case after year end where judgement given pre year end but not able to measure reliably – then an adjusting post-balance sheet event (Section 26.7(b)).
- Favorable judgement in a court case after year end where it was considered remote that money would be received – then a non-adjusting post-balance sheet event.
- A major business combination or disposal of a major subsidiary
- Announcement of a plan to discontinue an operation
- Major purchases of assets, disposals or plans to dispose of assets, or expropriation of major assets by government
- The destruction of a major production plant by a fire
- Announcement, or commencement of the implementation, of a major restructuring
- Issues or repurchases of an entity’s debt or equity instruments
- Abnormally large changes in asset prices or foreign exchange rates
- Changes in tax rates or tax laws enacted or announced that have a significant effect on current tax assets and liabilities. Here these would include changes in tax rates which were enacted after the balance sheet date.
- Entering into significant commitments or contingent liabilities, for example, by issuing significant guarantees;
- Commencement of major litigation arising solely out of events that occurred after the end of the reporting period
- Subsequent rectification of a breach or default of covenants on loans, or the renegotiation of the terms of the loan is not an adjusting event therefore the liabilities should be shown within current liabilities in the financial statements at the year end.
- Significant acquisitions or disposals made after the balance sheet date. Where there is a present and a binding agreement that has been entered into
- Inventory physically damaged or destroyed after year end (whether by fire, flood or disaster etc.) is a non-adjusting event. Disclosure may be required where material.
- Dividends declared after the year end (see section below).
Going concern
Extract from FRS 105 – Section 26.8 – 26.9
26.8 A micro-entity shall not prepare its financial statements on a going concern basis if management determines after the end of the reporting period that it either intends to liquidate the micro-entity or to cease trading, or that it has no realistic alternative but to do so.
26.9 Deterioration in operating results and financial position after the reporting period may lead management to determine that they intend to l liquidate the micro-entity or to cease trading or that they have no realistic alternative but to do so. If the going concern basis of accounting is no longer appropriate, the effect is so pervasive that this section requires a fundamental change in the basis of accounting.
OmniPro comment
In ROI where accounts are prepared under the micro entities regime, Company Law requires specific disclosures when the financial statements are not prepared on a going concern basis or there are uncertainties that cast doubt about the entity’s ability to continue as a going concern. This is not applicable in the UK however it would be good practice to include this fact.
Once a decision has been made to close post year end it is evident that the accounts should be restated to a break up basis.
The disclosure requirements required in ROI are that the financial statement must have disclosures detailing the fact that they have been prepared on a break-up basis the reasoning why the financial statements have not been prepared on a going concern basis.
See below an example disclosure where accounts are prepared on a basis other than a going concern.
Example 6: Other than Going concern disclosure
Basis of preparation
The company intends to cease operations by XXXX and to transfer all its operations to XXXXX.
The financial statements have not been prepared on a going concern basis. Where appropriate, the carrying values of assets have been restated to their recoverable amounts, and liabilities have been restated to their estimated settlement amounts and classified as current. Provision has been made for all closure costs arising from the decision to cease trading.
Preparation of financial statements on a break up basis involves the company making estimates and assumptions that affect the reported amounts of assets and liabilities. Estimates are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances, and are continually re-evaluated.
Dividends
Extract from FRS 105 – Section 26.10
26.10 If a micro-entity declares dividends to holders of its equity instruments after the end of the reporting period, the micro-entity shall not recognise those dividends as a liability at the end of the reporting period because no obligation exists at that time.
OmniPro comment
It is clear that dividends declared after year end are a non-adjusting event; instead they should be disclosed as a commitment.
Dividends which are approved by the directors/members prior to year end and therefore accrued should be disclosed in the financial statements for ROI entities. There is no specific requirement to UK entities to disclose this fact.
Company law in ROI requires the disclosure of dividend declared after year end but before the issue of the financial statements.
Transition exemptions
Section 28 provides no exemptions on adoption of Section 26 of FRS 105. This is not an issue as the standard is the same as what was included in FRSSE/old GAAP/FRS 102.
Principal transition adjustments
As detailed above there are no differences between FRSSE/old GAAP/FRS 102 and Section 26. While there is less guidance in Section 26 than the other standards, the guidance in the other standards will be used to assess whether an item is an adjusting or non-adjusting post balance sheet event.
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