ACC1026

REGULATORY FRAMEWORK OF ACCOUNTING

Topic 8
Events after Reporting Date
SFRS(I) 1-10

Provisions, Contingent Liabilities and

Contingent Assets
SFRS(I) 1-37
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Learning Objectives

Upon completing this topic you shall be able to:

1. Understand the applicable standards and scope
2. Explain what are events after the balance sheet date
3. Understand and account for adjusting events/non-
adjusting events
4. Explain what is liabilities, contingent liabilities and
contingent assets
5. Understand the differences between provisions and
contingent liabilities

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Applicable Standard and Scope

SFRS(I) 1-10 Events after the reporting period prescribes the

accounting treatment for, and disclosure of, events after the
balance sheet date

IFRIC 17 Distributions of Non-cash Assets to Owners provides

guidance on the disclosure requirements if an entity declares a
dividend to distribute a non-cash asset to owners after the
balance sheet date

Events after the Balance Sheet date are those events, favourable
and unfavourable, that occur between the balance sheet date
and the date when the financial statements are authorized for
issue

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Events after Balance Sheet Date

When are financial statements authorised for issue?

• Different entities may have different authorization process
for issuing the financial statements

• It could be on the date of issue, not the date when

shareholders approve the financial statements

• It could be when the management authorizes them for issue to

the supervisory board

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Events after the reporting period - Example
On 6 March 2012, the management of an entity completed draft financial
statements for the year ended 31 December 2011.

• On 12 March 2012, the board of directors reviewed the financial statements

and authorized them for issue.
• The entity announced its profit and selected other financial information on
13 March 2012.
• The financial statements were made available to shareholders and others on
20 March 2012.
• The shareholders approved the financial statements at their annual meeting
on 10 April 2012 and the approved financial statements were then filed with
a regulatory body on 12 April 2012.

When were the financial statements authorized for issue?

The financial statements were authorized for issue on 12 March 2012 (date of
board authorization for issue)
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Events after the reporting period
Events after the reporting period are different from subsequent events:

“Events after the reporting period” is an accounting concept, while “subsequent

events” is an auditing concept.

The date of the auditors’ report is not necessary the same as the date when the
financial statements are authorized for issue.

Subsequent events cover facts discovered after the date of the auditors’ report
which could be many years after the date of the auditors’ report.

Types of Events After the reporting period:

• Adjusting events
those that provide evidence of conditions that existed at the end of the
reporting period

• Non-adjusting events
those that are indicative of conditions that arose after the reporting period6
Events after the reporting period

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Adjusting Events

• An entity adjusts the amounts recognized in its financial statements to

reflect adjusting events after the BS date.

• Either adjust the amounts recognized in its financial statements, or to

recognize items that were not previously recognized.

Examples of Adjusting Events:

• Settlement of a court case after BS date

• Newly received information after BS date

• Determination after reporting date of the cost of assets purchased, or the

proceeds from assets sold, before BS date

• Determination of profit sharing or bonus payments if the entity had a

present legal or constructive obligation at reporting date to make such
payments as a result of events before BS date 8
Adjusting Events Example

Discovery of Fraud or Errors

A few days before the directors of DEF Limited approve the financial
statements for the year ended 31 December 2012, Mr. Chan, DEF
Limited’s managing director, has discovered that the general
manager of one of the subsidiaries in DEF Limited has
misappropriated cash of $10 million, which represents a material
amount of assets of DEF Limited.

Further investigation of the matter indicates that the money was

stolen in December 2012.

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Adjusting Events Example

Discovery of Fraud or Errors

Determine whether the above is an adjusting or non-adjusting event?

Explain your answer.

What, if any, is the impact on DEF Limited’s financial statements for

the year ended 31 December 2012?

This is an adjusting event because the misappropriation of $10 million

occurred before the balance sheet date.
Since the amount of $10 million is material, DEF Limited is required to
adjust the appropriated amount in its financial statements for the
year ended 31 December 2012.

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Non-Adjusting Events

An entity does not adjust the amounts recognised in its

current period’s financial statements to reflect non-adjusting
events.

An entity discloses the nature of the event and an estimate of

its financial effect, or a statement that such an estimate cannot
be made for each material category of non-adjusting events.

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Non-Adjusting Events

Non-adjusting events examples

• A decline in market value of investments
• Destruction of a major production plant/ inventories by a fire or other
natural disasters after reporting date
• Discontinuing operations.
• Purchases, disposals and expropriation of major assets
• Major ordinary share transactions and potential ordinary share
transactions after reporting date
• Business combination after reporting date or dispose of a major
subsidiary
• Significant commitments or contingent liabilities after BS date for
example, by signing an agreement to acquire some significant assets
• Dividends declared to holders of equity instruments after BS date
• Commencing major litigation arising solely out of events that occurred
after BS date
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Non-Adjusting Events

A Decline in Market Value of Investments

• Flowers Company’s financial assets include 1,000,000 ordinary shares of

HighTech Company Ltd, which is categorised under “Financial assets at fair
value through profit or loss”.

• HighTech is a high technology company listed on the Stock Exchange and

was trading actively in the range of $10 and $10.5 per share on 31
December 2011, Flowers Company’s BS date.

• Subsequently on 3 January 2012, HighTech’s shares dropped significantly to

about $5 per share due to a competitor’s launching of a technological
break-through product that makes the company’s major product obsolete
immediately.

• Determine whether it is necessary to adjust Flowers Company’s financial

statements for the year ended 31 December 2011? 13
Non-Adjusting Events

This is a non-adjusting event because the significant decline in market

value of Flowers Company’s investment in HighTech shares was due to
circumstances that have occurred after BS date and does not relate to
the condition of the investments at BS date.

Flowers Company should not adjust the amounts recognised for the
investments in shares in its financial statements.

Flowers Company needs not update the amounts disclosed for the
investment as at the 31 December 2011, although it may need to give
additional disclosure of the decline in value under the disclosure
requirements of SFRS(I) 1-10.

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Non-Adjusting Events

An entity does not recognise dividends declared after Balance

Sheet date as a liability at Balance Sheet date

No recognition even if an entity maintains a good record of

ordinary dividend payments and adopts a stable dividend
strategy because the existence of a good record of dividend
payments and an established dividend policy does not create
a valid expectation or an obligation.

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Disclosure

For date of authorisation for issue, disclose the date when the financial
statements were authorized for issue and who gave that authorization

• Update disclosure about conditions at BS date

• For non-adjusting events, disclose the nature of the event and an estimate
of its financial effect, or a statement that such an estimate cannot be made
for each material category of non-adjusting event

For declaration of a dividend to distribute a noncash asset, IFRIC 17

Distributions of Non-cash
Assets to Owners requires the entity to disclose the nature of the asset to be
distributed the carrying amount of the asset to be distributed as of the
balance sheet date; and

the estimated fair value of the asset to be distributed as of the balance sheet
date, if it is different from its carrying amount, and the information about the
method used to determine that fair value 16
Characteristics of Liabilities

. . . Result in an
. . . Arising
Present outflow of
from past
Obligation . . . resources in
events . . .
the future.

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Characteristics of Liabilities

Future sacrifices of
economic benefits

Arise from present

Characteristics obligations

Result from past

transactions or events

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Current Liabilities

LIABILITIES

Current Liabilities Long-term Liabilities

Obligations payable within one

year or one operating cycle,
whichever is longer.

Other situations (classify as current) :

1) Hold the L for trading purposes, or
2) does not have the right to defer
settlement of the L for at least 12
months after the reporting period
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Characteristics of Current Liabilities

Obligation payable within one

year or firm’s operating cycle

Characteristics Satisfied from current assets

Satisfied by creation of other

current liabilities

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Recording Current Liabilities

• Liabilities should be recorded at their present values

– Except liabilities payable within one year which are
ordinarily recorded at maturity amounts

Most common examples:

Accounts Cash dividends
payable payable

Taxes Current Accrued

payable Liabilities expenses

Unearned Short-term
revenues notes payable 21
Accounts Payable and Trade Notes Payable

• Obligations to suppliers of merchandise or of services

• Key accounting considerations are:
– Determining existence
– Recording in the appropriate accounting period

Accounts Payable Trade Notes Payable

• Payable on open account • Credit instrument:
• Credit instrument: invoice written promissory note
• Short duration • Longer duration
• Noninterest-bearing and • Bear interest
reported at face amounts

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Interest

Interest on notes is calculated as follows:

Principal Annual Time To

Amount × Rate × Maturity

Amount Interest rate is Interest owed is

borrowed always stated adjusted for the
as an annual portion of the year
rate. that the face amount
is outstanding.

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Interest

On September 1, Eagle Boats borrows $80,000 from Cooke Bank.

The note is due in 6 months and has a stated interest rate of 9%.
Record the borrowing on September 1.

GENERAL JOURNAL
Page: 56
Date Description PR Debit Credit
Sept. 1 Cash 80,000
Notes Payable 80,000
To record receipt of short-term
loan proceeds from Cooke
Bank

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Interest

How much interest is due to Cooke Bank at

year-end, on December 31?

a. $2,400 Interest is calculated as:

b. $3,600
Principal Annual Time to
c. $7,200 × × maturity
Amount Rate
d. $87,200
= $80,000 × 9% × 4/12

= $2,400 interest due to Cooke Bank.

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Interest

Assume Eagle Boats’ year-end is December 31.

Record the necessary adjustment at year-end.

GENERAL JOURNAL
Page: 28
Date Description PR Debit Credit
Dec. 31 Interest Expense 2,400
Interest Payable 2,400
to accrue interest on note due
to Cooke Bank

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Accrued Liabilities

• Represent expenses already incurred but not yet paid

(accrued expenses)
• Recorded by adjusting entries
• Usually combined and reported under a single caption in the
balance sheet

Common examples:
– Salaries and wages payable
– Income taxes payable
– Interest payable

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Accrued Liabilities
• Accrued liabilities arise in connection with compensation
expense when employees have provided services but have
not yet been paid as of a financial statement date.

VACATIONS, SICK DAYS, AND OTHER PAID FUTURE ABSENCES

Four conditions for accrual of paid future absences:

1. The obligation is attributable to employees’ services already
performed.
2. The paid absence can be taken in a later year—the benefit
vests or the benefit can be accumulated over time.
3. Payment is probable.
4. The amount can be reasonably estimated.

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A Closer Look at the Current &
Noncurrent Classification

The classification of financial liabilities requires the consideration of

 The terms of contract including the date of settlement,

 The right of the creditor to call back the loan,

 The right of the borrower to reschedule the loan repayment, and

 The provision of a grace period in the event that the borrower

breaches a covenant in the debt agreement etc.

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A Closer Look at the Current &
Noncurrent Classification

Current maturities of long-term obligations are usually

reclassified and reported as current liabilities if they are
payable within the upcoming year (or operating cycle, if
longer than a year).

Debt that is callable (due on demand) by the lender in the

coming year, (or operating cycle, if longer than a year)
should be classified as a current liability, even if the debt is
not expected to be called.

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A Closer Look at the Current &
Noncurrent Classification

Conversely, even if the obligation is due within a shorter period,

the long-term classification applies if the borrowing entity expects
and has the discretion to refinance or roll over an obligation for at
least 12 months after the reporting period.

If the debt becomes callable due to a default (i.e. by violation of

contract covenant), and the creditor extends a grace period, the long-
term classification would still apply if the following conditions are met
The grace period ends at It is probable that
The lender agrees to least twelve months after the borrower can
the grace period on or the reporting period, make rectification of
before the end of the during which the lender the violation within
reporting period cannot demand the extended grace
immediate repayment period
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Definitions per SFRS(I) 1-37

A contingent liability is:

(a) a possible obligation that arises from past events and whose existence will
be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity;
or

(b) a present obligation that arises from past events but is not recognized
because:
• it is not probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; or
• the amount of the obligation cannot be measured with sufficient reliability.

A contingent asset is a possible asset that arises from past events and whose
existence will be confirmed only by the occurrence or non-occurrence of one
or more uncertain future events not wholly within the control of the entity.

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Contingent Liabilities

The uncertainties relate to:

1. The existence of the obligation or
2. The probability/amount of outflow

A contingent liability
is recorded for (1) a possible obligation;
or (2) a present obligation with future
outflows that are not probable or cannot
be reliably measured.

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Contingencies

A contingent liability is never accrued, but is only disclosed in the

footnotes to the financial statements:
1. The reporting entity must:
• Describe the nature of the contingent liability, and
• Provide an estimate of the financial effect,
2. And if practicable
• Indicate the uncertainties relating to the amount and timing of
the outflows, and
• State the possibility of any reimbursement.
3. Note that the cause of the uncertainty must occur before the
financial statement date.

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Provisions

A provision is a liability as it has all the three characteristics

of a one.
(1) past obligating event has occurred
(2) present obligation that leads to a
(3) future outflow of benefits.

The only Different from a

uncertainties are: contingent liability
• Timing, and • No uncertainty in the
• Amount of the future existence of the
obligation
outflow of benefits
• There is a probable
outflow

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Provisions

Provisions are not “off balance sheet”

They are recognized if the three conditions below are met

An entity has present It is probable that an outflow A reliable estimate can be

obligation that arises as a of resources will be required made of the amount of the
result of a past event the settle the obligation obligation

Present Can be either legal or contractual

Obligation Legal obligations arise from contracts or laws

Constructive obligations arise from “valid expectations” that arise

from an entity’s actions and representations (past practices,
published policies or sufficiently specific statement entity
indicated to other parties that it accepts responsibilities)

For a contractual or legal obligation to exist, an obligating event

must have occurred

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Provisions

Probable Probable” in SFRS(I) 1-37 means “more likely than not”

outflow
“More likely than not” is not explicitly defined, but..
May assume a lower probability threshold than what is
implied by the term “probable”.

Reliable “Best estimate of the expenditure to settle the present

estimate obligation at the end of the reporting period.”
Which is the also the “amount that an entity would rationally
pay to settle or transfer”
An exception to this test is deemed to be extremely rare
Discounting required if the time value is material
An Expected Value Approach may be used when there is (1) a
large population of items or, (2) a large number of possible
outcomes.
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Provisions and Other Liabilities

Definitions
• A provision is a liability of uncertain timing or amount.

• A liability is a present obligation of the entity arising from past

events, the settlement of which is expected to result in an outflow
from the entity of resources embodying economic benefits.

• An obligating event is an event that creates a legal or constructive

obligation that results in an entity having no realistic alternative to
settling that obligation.

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Provisions and Other Liabilities

A legal obligation is an obligation that derives from:

(a) a contract (through its explicit or implicit terms);
(b) legislation; or
(c) other operation of law.

A constructive obligation is an obligation that derives from an entity’s

actions where:
(a) by an established pattern of past practice, published policies or a
sufficiently specific current statement, the entity has indicated to
other parties that it will accept certain responsibilities; and

(b) as a result, the entity has created a valid expectation on the part of
those other parties that it will discharge those responsibilities.

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Recognition of Provisions

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Recognition of Provisions

41
Recognition of Provisions

42
Recognition of Provisions

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Recognition of Provisions

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Product Warranties and Guarantees

• Most consumer products are accompanied by a guarantee,

such as a quality-assurance warranty.
• Costs of satisfying guarantees should be estimated and
recorded as expenses in the same accounting period the
products are sold.
– This is a loss provision.
• The criteria for accruing a contingent loss almost always are
met for product warranties or guarantees.
– While we usually can’t predict the liability associated with
an individual sale, prior experience makes it possible to
predict reasonably accurate estimates of the total liability
for a period.
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Extended Warranty Contracts
An extended warranty provides warranty protection beyond
manufacturer’s original warranty.

Revenue recognition
Priced and sold A separate • Recorded as a deferred
separately from performance revenue liability at the
the warranteed obligation time of sale and
product • Recognized as revenue
over the contract period

Straight-line basis

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Product Warranties

• Product warranties inevitably entail costs.

• Like other provisions, the amount of those costs can be
reasonably estimated using commonly available estimation
techniques.
• The estimate requires the following entry:

GENERAL JOURNAL
Page: 15
Date Description Debit Credit
Warranty Expense $$$
Estimated Warranty Liability $$$

47 47
Product Warranties

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Contingent Liabilities

• A contingent liability is an existing, uncertain situation involving

potential loss depending on a future event

• Whether a contingency is accrued and reported as a liability depends on

1. The likelihood that the confirming event will occur
2. What can be determined about the amount of loss

• IFRS requires that the likelihood that the future event be categorized as
probable, reasonably possible, or remote.

Probable Event is likely to occur.

Reasonably possible The chance the event will occur is more
than remote but less than likely.
Remote The chance the event will occur is slight.
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Disclosure of Litigation Contingencies

• Pending litigation is not unusual.

• Accrual of a loss from pending or ongoing litigation is rare.

– Outcome of litigation is highly uncertain.
– Loss is usually not recorded until after ultimate
settlement.

• While companies should provide extensive disclosure of

these contingent liabilities, they do not always do so.

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Events after the reporting period

When the cause of a loss contingency occurs before the year-end, an

adjusting event before financial statements are issued can be used
to determine how the contingency is reported.

If an event giving Occur in the period between the end of a

rise to a loss company’s financial year and the financial
Adjusting statements authorization date
contingency occurs Events
after the year-end, Provide evidence of conditions that existed
a liability should at the end of the reporting period
not be accrued.
Instead, a
disclosure note
should be made

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Example

A Co. is in the oil industry and causes contamination, and it operates

in a country where there is no environmental legislation. However,
A Co. has a widely published environmental policy in which it
undertakes to clean up all contamination that it causes. It has a
record of honouring this published policy.

Required:
Should A Co. recognise any provisions or disclose any contingencies
for the current period?

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Example

• Present obligation as a result of a past obligating event — The

obligating event is the contamination of the land, which gives rise
to a constructive obligation because the conduct of the entity has
created a valid expectation on the part of those affected by it that
the entity will clean up contamination.

• An outflow of resources embodying economic benefits in

settlement — Probable.

• Conclusion — A Co. should recognise a provision for the best

estimate of the costs of clean-up.

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Contingent Assets

Note that we have to record liabilities even if the

likelihood is “probable” and not certain.

As a general principle, we
never record contingent
assets.

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 Contingent Assets

• Contingent assets usually arise from unplanned or other unexpected events that
give rise to the possibility of an inflow of economic benefits to the entity. E.g. A
claim that an entity is pursuing through legal processes, where the outcome is
uncertain.

• Contingent assets are not recognized in FS since this may result in the
recognition of income that may never be realized. However, when the realization
of income is virtually certain, then the related asset is not a contingent asset and
its recognition is appropriate.

• A contingent asset is disclosed, where an inflow of economic benefits is

probable.

• Contingent assets are assessed continually to ensure that developments are

appropriately reflected in the financial statements. If it has become virtually
certain that an inflow of economic benefits will arise, the asset and the related
income are recognized in the FS of the period in which the change occurs
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Summary per SFRS(I) 1-37 IG

Decision Tree for

Provisions and
Contingent
Liabilities:

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Summary per SFRS(I) 1-37 IG

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Summary per SFRS(I) 1-37 IG

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Disclosure (Provision)
For each class of provision, an entity shall disclose:

(a) the carrying amount at the beginning and end of the period;
(b) additional provisions made in the period, including increases to existing provisions;
(c) amounts used (ie incurred and charged against the provision) during the period;
(d) unused amounts reversed during the period; and
(e) the increase during the period in the discounted amount arising from the passage
of time and the effect of any change in the discount rate.

Comparative information is not required.

An entity shall disclose the following for each class of provision:

(a) a brief description of the nature of the obligation and the expected timing of any
resulting outflows of economic benefits;
(b) an indication of the uncertainties about the amount or timing of those outflows.
Where necessary to provide adequate information, an entity shall disclose the major
assumptions made concerning future events; and
(c) the amount of any expected reimbursement, stating the amount of any asset that
has been recognised for that expected reimbursement. 59
Disclosure (Contingencies)

Unless the possibility of any outflow in settlement is remote, an entity shall disclose for
each class of contingent liability at the end of the reporting period a brief description of
the nature of the contingent liability and, where practicable:
(a) an estimate of its financial effect;
(b) an indication of the uncertainties relating to the amount or timing of any outflow; and
(c) the possibility of any reimbursement.

Where an inflow of economic benefits is probable, an entity shall disclose a brief

description of the nature of the contingent assets at the end of the reporting period, and,
where practicable, an estimate of their financial effect.

In extremely rare cases, disclosure of some or all of the information can be expected to
prejudice seriously the position of the entity in a dispute with other parties on the subject
matter of the provision, contingent liability or contingent asset. In such cases, an entity
need not disclose the information, but shall disclose the general nature of the dispute,
together with the fact that, and reason why, the information has not been disclosed.

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 Summary

SFRS(I) 1-37
Contingent
Objective: To prescribe the criteria & acct Liabilities
treatment of
Provision
Present
Possible
obligation
obligation
Liability of uncertain timing/amount +
Contingent Outflow possible (not
Present obligation from past event outflow of benefits
Assets probable) or not reliably
measureable
legal obligation create constructive
obligation
When to recognize a provision? Disclosure
required

Present obligation Probable Reliable

outflow estimate
Are all conditions met? Question: Can you avoid the obligation?

✓ ?✓ ?✓ ? YES NO ✓ ✓
? ?X YES NO
Do not recognize a Recognize a provision
Provision Contingent liability or provision e.g. training e.g. Warranty repairs
nothing

Expected value
How to measure a provision? Best estimate
Individual most likely outcome 61
Tutorial Questions

Tutorial 8
Spiceland et al. Chapter 9

Q1. Q 9-13 Q8. BE 9-11

Q2. Q 9-14 Q9. BE 9-14
Q3. Q 9-15 Q10. E 9-11
Q4. Q 9-16 Q11. E 9-15
Q5. Q 9-22 Q12. P 9-6
Q6. BE 9-9 Q13. P 9-8
Q7. BE 9-10 Q14. Refer to the next slide

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Tutorial Questions – Q14

On 31 Dec 2022, HighTech Company has assets of $1,800,000 and liabilities of

$1,200,000. During 2022, the company’s revenue from ordinary activities was
$360,000 and the net profit is $80,000. The financial year end for HighTech is
31 December.
After the reporting period ended 31 Dec 2022, on 15 Jan 2023, one of the 2
outlets of HighTech was destroyed by fire. The estimated damage was $30,000
and HighTeh did not insure for fire damage.
On 23 December 2022, HighTech purchased an equipment on credit for
$3,000. An external auditor performed the routine check on 20 Jan 2023 and
revealed that the equipment purchased on 23 Dec 2022 had been incorrectly
recorded as $300 due to an error.
From the above information, explain how the events on 15 Jan and 20 Jan
2023 would be accounted for in accordance with SFRS(I) 1-10 Events after the
Reporting Period, provide adjusting entries where necessary.
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Thank you ☺

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