IAS 10 Events After the Balance Sheet Date prescribes the accounting for, and disclosure of, events after the balance sheet date.
Events after the balance sheet date are those events that occur between the balance sheet date and the date when the financial statements are authorized for issue.
Events After the Balance Sheet Date may be classified into two categories:
- Adjusting events and
- Non-adjusting events.
An entity adjusts the amounts recognised in the financial statements to reflect adjusting events after the balance sheet date.
Adjusting events are those that provide evidence of conditions that existed at the balance sheet date (e.g. the settlement of a court case after the balance sheet date that confirms that the entity had a present obligation at the balance sheet date; the bankruptcy of a customer that occurs after the balance sheet date usually confirms that a loss existed at the balance sheet date on a receivable).
An entity does not adjust the amounts recognized in the financial statements to reflect non-adjusting events after the balance sheet date.
Non-adjusting events are those that are indicative of conditions that arose after the balance sheet date (e.g. a decline in the market value of investments between the balance sheet date and the date when the financial statements are authorized for issue).
For each material category of non adjusting event after the balance sheet date, an entity discloses the nature of the event and an estimate of its financial effect.
Dividends declared after the balance sheet dates are not recognized as a liability at the balance sheet date.
Financial statements are not prepared on a going concern basis if management determines after the balance sheet date either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so.
The financial statements disclose the date when the financial statements were authorized for issue, and who gave that authorization.
The relevant authority on post balance sheet events is ISA. The preparation of profit and loss account and balance sheet will always involve the consideration of events which have or will occur after the balance sheet date. The reason being there are numerous transactions in progress at the balance sheet date whose outcome is uncertain and therefore events subsequent to the balance sheet date which have occurred or are expected to occur need to be examined to determine the appropriate values of assets and liabilities. Examples abound such as the collectability of debts, the net realisable value of old stocks, the outcome of litigation. Even the value of fixed assets is a function of their expected future useful life.
Since the directors in preparing the accounts will invariably use post balance sheet events, the auditor must obtain evidence that all post balance sheet events have been considered and where appropriate used and balance sheet values correctly incorporate post balance sheet events.
- The questions that arise are concerned with what subsequent events should be taken into account and how should they be treated in the accounts
i. Financial statements should be prepared on the basis of conditions existing at the balance sheet date.
ii. A material post balance sheet event requires changes in the amounts to be included in the financial statements where:
- It is an adjusting event or
- It indicates that application of the going concern assumption to whole or a material part of the company is not appropriate.
iii. A material post balance sheet event should be disclosed where:
- It is a non-adjusting event of such materiality and its non disclosure would affect the ability of the users of financial statements to reach a proper understanding of the financial position or
- It is the reversal or maturity after the year end of a transaction entered into before the year end, the substance of which is primarily to alter the appearance of the company's balance sheet.
iv. In respect of each post balance sheet event which is required to be disclosed under paragraph (iii) above, the following information should be stated by way of note in the financial statement:
- The nature of the event and
- An estimate of the financial effect or a statement that is not practicable to make such as estimate.
v. The estimate of the financial effect should be disclosed before taking account of taxation and the taxation implication should be explained where necessary for a proper understanding of the financial position.
vi. The date on which the financial statement is approved by the board of directors should be disclosed in the financial statements.
Post balance sheet events occupy a very important place in auditing and therefore there is usually a program of work that is carried out in this area. This includes:
i. A routine examination of such events such as collection of debts, sale of stocks, payment of creditors, resolution of pending litigation;
ii. A comparison of significant ratios before and after the year end, seeking explanations for any material differences as they may indicate the presence of adjusting or non-adjusting events or have going concern implications.
iii. Examination of all material provisions and contingent liabilities at the latest feasible date prior to signing of the accounts to determine whether any additional evidence exists that may affect original estimates used.
iv. Review of director’s minutes looking for any major new contract or losses of customers or losses of major contracts, capital expenditure commitments, and changes in accounting policy, new borrowing or share issues, extra-ordinary or abnormal transactions, changes in market conditions or products.
v. Discussions with the management, a review of management accounts, review of profit forecasts and cash flow projections, review of non-risk areas and
vi. Review of relevant external information e.g. reports in newspapers. This review must be as near as possible to the date of signing the audit report.
It should be noted that
i. The auditor must always date his audit report. This date should be as close as possible to the date of approval of the financial statement by the directors but must be after that date. ISA 700 requires that the date the directors approve their accounts must be disclosed.
ii. Special situation. These are relatively rare circumstances but possible:
a) If the auditor becomes aware between the date of his report and the AGM when the accounts will be presented, of information which would change his report then he should:
1. Discuss the matter with the directors who may wish to amend the accounts
2. Consider taking legal advice
3. Consider making a statement at the AGM as he is allowed to by the Companies Act.
b) If the directors wish to amend the accounts between the date of the report and the posting to the members, the auditor should
1. Consider if the proposed amendment requires a change in his report
2. Re date his report
3. Review post balance sheet events up to the re dating.