In the realm of accounting and financial reporting, understanding the distinction between adjusting and non-adjusting events is crucial. These events have different characteristics and implications for the preparation and presentation of financial statements. This article aims to explore the concepts of adjusting and non-adjusting events, provide examples for better comprehension, and emphasize their significance in financial reporting.
Table of Contents:
- Background
- What are Adjusting events under IAS 10?
- Important Examples of Adjusting Events given in IAS 10
- What are Non Adjusting events under IAS 10?
- Important Examples of Non-Adjusting Events given in IAS 10:
- The key difference between Adjusting and Non Adjusting events
- Conclusion
- FAQs
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| Adjusting and Non-adjusting events: IAS 10 explanation with examples and implications |
Background:
You might have noticed there is always some time gap between "the end of the company's reporting period" and "the date when its financial statements are authorized for issuance". Hence, a lot can happen during this period. For example, let's say your company's reporting period ended on June 30, 2023, and the financial statements were authorized to be released on August 19, 2023. Now, during this time frame, a bunch of events would have taken place. Such events are known as "Events after the Reporting Period" under IAS 10. Hence, the big question is, do we include the impact of those events in our current financial statements or not? Well, it all boils down to whether those events are adjusting or non-adjusting and IAS 10 is the accounting standard that guides us regarding these two events.
What are Adjusting events under IAS 10?
Adjusting events are the events that occur during the above-mentioned period (after the end of the financial period but before the issuance of financial statements), however, their root cause or condition already existed at the end of the reporting period (i.e. June 30, 2023 in our example).
Let me give you an example to make things clearer. Picture this: someone slaps a lawsuit on your company for selling faulty products. However, the court's decision was still pending, when your company's financial year ended (June 30, 2023). You went ahead and closed your books, but then the court published its decision on August 07, 2023. Now, even though the court decision came after the end of the year, the reason for that decision (sale of the faulty products) was already present at the end of the reporting period. So, that's why we consider it an adjusting event, and its impact will be taken into account in the financial statements, even though the court decision itself was announced after the end of the year."
Examples of Adjusting Events given in IAS 10:
Most of us seem to be confused when it comes to whether a specific situation is an adjusting event or not. Well, at this crucial moment, IAS 10 comes to the rescue by giving us a whole bunch of examples of adjusting events that directly connect to real-life situations in our company. So, let's break it down and list out some of these examples for a better understanding.
- The resolution of a court case, as the result of which a provision needs to be recognized instead of disclosing it as a contingent liability,
- Evidence that an asset was impaired at the end of the reporting period,
- Bankruptcy of a major customer (as bankruptcy does not occur suddenly rather it confirms that customer was credit-impaired at year-end date.
- Subsequent sale of inventories at lower prices suggesting the need to reduce the figure in the Statement of Financial Position to the net value actually realized. (i.e. the cost of inventory is higher than its net realizable value (NRV). Thus it needs to be reduced),
- If an asset was purchased/sold before year end but its price couldn't be determined at that time. And that price is determined subsequently.
- Just like the above point, if an entity announced some kind of profit-sharing scheme or bonus scheme before/at year-end that could not be measured reliably at that time, but it can now be measured due to the availability of relevant data.
- Discovery of fraud or errors that show the financial statements were incorrect,
Keep in mind that the examples of adjusting events provided here are not set in stone. They're simply meant to give you a general idea of what adjusting events are. Using these examples as a reference, you can assess other events and determine whether they fall under the category of adjusting events or not. It's all about applying the concepts and principles to different scenarios and making informed judgments.
With that being said, let's proceed to the second part of the picture that is "Non adjusting events".
What are Non Adjusting events under IAS 10?
Non-adjusting events are the events that happen subsequent to the end of the financial year, and there's no condition or indication of these events existing at the financial year-end.
Let me paint a clearer picture for you. Imagine this: your company's year came to a close on June 30, 2023, and you're all set to issue your financial statements on August 19, 2023. Now, out of nowhere, on August 7, 2023, a fire breaks out in your factory and completely wipes out your entire stock. Now, here's the key question: was there any sign or condition of a fire existing at the end of the year? I mean, did you know at the year-end date (June 30, 2023) that a fire will break out in your factory on August 07, 2023? No, Absolutely not! It just happened suddenly. So, my friend, that's what we call a non-adjusting event. And such an event does not require any adjustment in the current financial statements.
Examples of Non-Adjusting Events given in IAS 10:
IAS 10 not only provides guidance on adjusting events but also sheds light on non-adjusting events. That's why we can refer to the original accounting standard "IAS 10: Events After the Reporting Period" to find some cool examples of non-adjusting events. So, whenever you come across any of the following events, remember that they are non-adjusting events, which means they won't affect the financial statements at all.
- A decline in the market value of investments,
- A major business combination after the reporting period (IFRS 3 Business Combinations requires specific disclosures in such cases),
- Sale of a major subsidiary,
- Commencing major litigation arising solely out of events that occurred after the reporting period,
- Announcing, or commencing the implementation of, a major restructuring,
- Announcement of a plan to discontinue an operation/CGU (Cash Generating Unit),
- Major purchase and sale of assets,
- Destruction of a major asset by fire,
- Abnormally large changes after the reporting period in asset prices or foreign exchange rates,
- Changes in tax rates or tax laws enacted or announced after the reporting period that have a significant effect on current and deferred tax assets and liabilities,
- Major dealings/transactions in the company's ordinary shares.
So, these are a few examples of non adjusting events that may assist you to determine whether a subsequent event occurring is an adjusting event or non adjusting event.
The key difference between Adjusting and Non Adjusting events:
Our discussion so far has enabled all of us to know that both adjusting and non adjusting events occur subsequent to the financial year end date, but before the issuance of financial statements. Thus, the main question arises as to what's the key difference between these two. Well, the major difference between the two lies in the implications of adjusting and non adjusting events.
Adjusting events require adjustment in the current financial statements, while non-adjusting events don't require any adjustment in the current financial statement, rather they may require a disclosure only.
Conclusion:
In conclusion, adjusting and non-adjusting events play significant roles in financial reporting. Adjusting events require adjustments to be made in the financial statements to ensure accurate reflection of a company's financial position and performance as of the reporting period. Non-adjusting events, while not impacting the financial statements, may require disclosure in the notes to provide relevant information about events occurring after the reporting period.
By correctly distinguishing between adjusting and non-adjusting events, companies can present reliable financial statements that reflect the true financial position and performance. This distinction contributes to the overall transparency and credibility of financial reporting, benefiting the users of financial statements.
FAQs about Adjusting and Non-Adjusting Events:
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What are adjusting and non adjusting events in accounting?
Adjusting and non-adjusting events, both occur after the financial year end but before the issuance of financial statements. However, adjusting events require adjustment in the current financial statements while non-adjusting events do not require any adjustment. These may require disclosure only. You may read the whole article above to get a clearer picture of these two events.
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Can you provide an example of a non-adjusting event?
Yes, an example of a non-adjusting event would be a natural disaster occurring after the financial statements are finalized, as it does not require adjustments to the financial statements but should be disclosed. You may find more examples of non-adjusting events here.
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When to disclose a Non-Adjusting event?
As per para 21 of IAS 10: Events after the reporting period, if non-adjusting events after the reporting period are material, an entity shall disclose "the nature of the event" and "an estimate of its financial effect, or a statement that such an estimate can not be made."
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Why is it important to distinguish between adjusting and non-adjusting events?
Distinguishing between these events ensures accurate financial reporting, helps users make informed decisions, and ensures compliance with accounting standards and regulations.
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Are adjusting events more significant than non-adjusting events?
Adjusting events have a direct impact on the financial statements of a reporting period, while non-adjusting events provide additional context or information for future periods. Thus, both of them are equally significant.
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Do all adjusting events require adjustments in financial statements?
Yes, all adjusting events require adjustments in financial statements to accurately represent the financial position, performance, and cash flows of a business.
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What happens if adjusting events are not properly recognized?
Failure to recognize adjusting events may result in misleading financial statements and inaccurate information for decision-making.
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Can non-adjusting events affect future financial periods?
Yes, non-adjusting events can provide information or context that may impact future financial periods, but they are not directly adjusted in the financial statements.
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Can adjusting events have an impact on a company's reputation?
Yes, adjusting events such as correcting errors in previously reported financial statements or changes in accounting estimates can impact a company's reputation if not properly addressed.
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Are non-adjusting events disclosed in financial statements?
Yes, many of the non-adjusting events are disclosed in the financial statements to provide additional information and transparency to users.
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Do adjusting events have an impact on future financial periods?
Adjusting events generally impact the financial statements of the reporting period in which they occur, rather than future periods. While Non Adjusting events affect the future financial periods.
