Post Balance sheet events are those events both favourable and unfavourable that occur between the balance sheet date and the day the accounts are approved by the Board of Directors.

Types of Events

• Adjusting events &
• Non-adjusting events.

• Adjusting events being those that provide additional evidence about conditions existing at the balance sheet date or are events.
• Non-adjusting events are those that are indicative of conditions that arose after the balance sheet date.

Examples of adjusting events

An enterprise should adjust the amounts recognised in its financial statements to reflect adjusting events after the balance sheet date. The following are adjusting events which require an enterprise to adjust the amounts recognised in its financial statements.

• The resolution after the balance sheet date a court case which, because it confirms that an enterprise already had a present obligation at the balance sheet date, requires the enterprise to adjust a provision already recognised, or to recognise a provision instead or merely disclosing a contingent liability.
• The bankruptcy of a customer which occurs after the balance sheet date usually confirms that a loss already existed at the balance sheet date on a debtor and that the company needs to adjust the carrying amount of debtors by writing off the amount that is irrecoverable.
• The sale of stock after the balance sheet date may give evidence about the net realisable value at the balance sheet date. This can be used to revalue the stock to the lower of cost and net realisable value.
• The discovery of a fraud or errors that show that the financial statements were incorrect.

Examples of non-adjusting post balance sheet events

A company should not adjust the amounts recognised in its financial statements to reflect non-adjusting events after the balance sheet.

Decline in the market value of investments between the balance sheet date and the date when the financial statements are authorised for issue. The fall in the market value does not normally relate to the condition of the investments at the balance sheet date, but reflects circumstances that have arisen in the following period. Therefore the company should not adjust the carrying value of its investments.

Post Balance Sheet Events

Included under considerations of post balance sheet events are those events ordinarily referred to as window dressing. This involves transactions that are entered into before the balance sheet date with the sole purpose of altering the appearance of the balance sheet. They mature or reverse immediately after the balance sheet date.

The provisions of the standard.

• Changes should be made to the amounts in the financial statements when it is an adjusting event or it indicates that the going concern assumption is not appropriate to the whole or a significant portion of the entity.
• Material non-adjusting events should be disclosed in the financial statements if their non disclosure would affect the ability of the reader to reach a proper understanding of the financial position or they include transactions which reverse or mature immediately after the balance sheet date but were entered into before the balance sheet date with the primary purpose of altering the appearance of the balance sheet.

• The information to be disclosed is:

• The nature of the event.
• A prudent estimate of the financial effect or a statement that it is not practicable to make such a statement.

Management’s use of Post Balance Sheet events

Financial year ends artificially breakdown the line of companies into fixed periods of time. In reality, an entity’s life is continuous. Invariably, there will always be transactions in progress at the balance sheet date i.e. started in the year under review and materialising/maturing in the following year. To determine the position at the balance sheet date, reference will have to be made to the maturity of the transactions concerned. Thus to value assets and liabilities for balance sheet purposes and to determine the charges or credits to the profit and loss account, management must consider post balance sheet events.

Audited financial statements become public knowledge well after the year end and even though they relate to a past date, they are used for making decisions in the period after they become public knowledge. Consequently, should an event take place between the balance sheet date and the date the financial statements become public and such event is not brought to the attention of the readers of the financial statements those financial statements may be considered not to be giving a true and fair view.

The Auditors interest in Post Balance Sheet Events

Therefore management have used post balance sheet events in preparing the financial statements, the auditor has an interest in ensuring that the post balance sheet events have been properly accounted for.

Timing considerations

1. Balance sheet date.
2. Date the directors approve the draft accounts.
3. Date the auditor signs his audit report.
4. The intervening period from the date of signing the audit report to the date of despatching the audited financial statements to the shareholders.
5. An AGM at which the members either adopt or reject the financial statements.

At the AGM if the Financial Statements are adopted then the auditors responsibility towards those Financial Statements ceases.

The Auditors procedures with regard to Post Balance Sheet Events

1. Discuss with management whether they are of any such events and if so obtain a full listing of those events.
2. Review minutes of management’s looking for such matters as losses of major contracts, acquisition of a major new business, approval of capital expenditure, the effect of man-made and natural disasters and management plans on discontinuance of sectors of the entity.
3. Review major transactions documents and primary books such as material payments, material receipts, material sales, material purchases.
4. Consider whether all material post balance sheet events have been identified and accounted for properly.

CONTINGENCIES

The standard describes a contingency, as a condition existing at the balance sheet date whose ultimate outcome is dependent on the occurrence or non-occurrence of one or more uncertain future events. A contingent gain or loss is a gain or loss dependent on a contingency. The standard then identifies 3 possible conditions of a contingency:-

1. Probable
2. Possible
3. Remote

Where:-

PROBABLE means very likely to materialise.

POSSIBLE means can materialise.

REMOTE means unlikely to materialise.

The standard then says:

LOSSES

1. If a loss is probable, and it can be estimated with reasonable accuracy it should be provided for in the financial statements.
2. If a loss is probable but it cannot be estimated with reasonable accuracy it should be disclosed.
3. If a loss is possible it should be disclosed.
4. If the possibility of loss is remote, even disclosure is not necessary.

GAINS

1. If a gain is probable, do not accrue in the Financial Statement only disclose.
2. If a gain is possible or remote, disclosure is not necessary.

The information to be disclosed is:-

1. The nature of the contingency.
2. The events likely to affect the ultimate outcome.
3. A prudent estimate of the financial effect or a statement that it is not practicable to make such a statement.

The Auditor’s Procedures

• Obtain a listing of contingencies identified by management with full management assessment as to whether the contingency is probable, possible or remote.
• Examine the evidence or documentation that management have used to identify and classify the contingencies.
• Search for any other contingencies that may not have been recognised by management.
• Communicate with the relevant third parties for their assessment of the position.
• Consider whether the requirements of the standard have been complied with:

The most common contingencies are:

• Guarantees
• Pending litigation or claims &
• Discounted bills.

Guarantees

The auditor should refer to the minutes and send and obtain a reply to a bank letter.

Discounted Bills

Again a bank letter should be obtained.

Claims

Refer to earlier notes on pending litigation.