CHAPTER 5

ISSUES IN FINANCIAL ACCOUNTING AND REPORTING

History MFRS 110 (IAS 10)

In November 2011 the Malaysian Accounting Standards Board (MASB) issued MFRS 110 Events
after the Reporting Period. The Standard is applicable for annual periods beginning on or after
1 January 2012. MFRS 110 is equivalent to IAS 10 Events after the Reporting Period as issued
and amended by the International Accounting Standards Board (IASB).

In April 2001 the IASB adopted IAS 10 Events After the Balance Sheet Date, which had
originally been issued by the International Accounting Standards Committee in May 1999. IAS
10 Events After the Balance Sheet Date replaced parts of IAS 10 Contingencies and Events
Occurring After the Balance Sheet Date (issued in June 1978) that were not replaced by IAS 37
Provisions and Contingent Assets and Contingent Liabilities (issued in 1998). In December 2003
the IASB issued a revised IAS 10 with a modified title—Events after the Balance Sheet Date.
This revised IAS 10 was part of the IASB’s initial agenda of technical projects. As a result of
the changes in terminology made by IAS 1 Presentation of Financial Statements in 2007, the
title of IAS 10 was changed to Events after the Reporting Period. Other Standards have made
minor consequential amendments to IAS 10. They include IFRS 13 Fair Value Measurement
(issued May 2011) and IFRS 9 Financial Instruments (issued July 2014).

MFRS 110 (para 1)

The objective of this Standard is to prescribe:
(a) when an entity should adjust its financial statements for events after the reporting period;
and
b) the disclosures that an entity should give about the date when the financial statements
were authorized for issue and about events after the reporting period.
The Standard also requires that an entity should not prepare its financial statements on a going
concern basis if events after the reporting period indicate that the going concern assumption
is not appropriate.
5.1 Determine measurement and disclosure of Events after the Reporting Period (MFRS
110)
5.1.1 Define Events after the Reporting Period

MFRS 110 (para 3) definite this standard with the meanings specified:

Events after the reporting period are those events, favorable and unfavorable, that occur
between the end of the reporting period and the date when the financial statements are
authorized for issue. Two types of events can be identified:
(a) those that provide evidence of conditions that existed at the end of the reporting
period (adjusting events after the reporting period); and
(b) those that are indicative of conditions that arose after the reporting period (non-
adjusting events after the reporting period).

MFRS 110 (para 4)

The process involved in authorizing the financial statements for issue will vary depending upon
the management structure, statutory requirements and procedures followed in preparing and
finalizing the financial statements.

MFRS 110 (para 5)

In some cases, an entity is required to submit its financial statements to its shareholders for
approval after the financial statements have been issued. In such cases, the financial
statements are authorized for issue on the date of issue, not the date when shareholders
approve the financial statements.

Example 1
The management of an entity completes draft financial statements for the year to 31
December 20X1 on 28 February 20X2. On 18 March 20X2, the board of directors reviews the
financial statements and authorizes them for issue. The entity announces its profit and
selected other financial information on 19 March 20X2. The financial statements are made
available to shareholders and others on 1 April 20X2. The shareholders approve the financial
statements at their annual meeting on 15 May 20X2 and the approved financial statements are
then filed with a regulatory body on 17 May 20X2. The financial statements are authorized for
issue on 18 March 20X2 (date of board authorization for issue).

MFRS 110 (para 6)

In some cases, the management of an entity is required to issue its financial statements to a
supervisory board (made up solely of non-executives) for approval. In such cases, the financial
statements are authorized for issue when the management authorizes them for issue to the
supervisory board.
Example 2
On 18 March 20X2, the management of an entity authorizes financial statements for issue to
its supervisory board. The supervisory board is made up solely of non-executives and may
include representatives of employees and other outside interests. The supervisory board
approves the financial statements on 26 March 20X2. The financial statements are made
available to shareholders and others on 1 April 20X2. The shareholders approve the financial
statements at their annual meeting on 15 May 20X2 and the financial statements are then filed
with a regulatory body on 17 May 20X2. The financial statements are authorized for issue on
18 March 20X2 (date of management authorization for issue to the supervisory board)

MFRS 110 (para 7)

Events after the reporting period include all events up to the date when the financial
statements are authorized for issue, even if those events occur after the public announcement
of profit or of other selected financial information.

5.1.2 Discuss the accounting treatments and required disclosures for Adjusting Events
after the Reporting Period:
MFRS 110 (para 8)
An entity shall adjust the amounts recognized in its financial statements to reflect adjusting
events after the reporting period.

MFRS 110 (para 9)

The following are examples of adjusting events after the reporting period that require an
entity to adjust the amounts recognized in its financial statements, or to recognize items that
were not previously recognized:

a. Court case
The settlement after the reporting period of a court case that confirms that the entity
had a present obligation at the end of the reporting period. The entity adjusts any
previously recognized provision related to this court case in accordance with MFRS
137 Provisions, Contingent Liabilities and Contingent Assets or recognizes a new
provision. The entity does not merely disclose a contingent liability because the
settlement provides additional evidence that would be considered in accordance with
paragraph 16 of MFRS 137.

b. Impairment of Assets
The receipt of information after the reporting period indicating that an asset was
impaired at the end of the reporting period, or that the amount of a previously
recognized impairment loss for that asset needs to be adjusted. For example:
(i) the bankruptcy of a customer that occurs after the reporting period usually
confirms that the customer was credit-impaired at the end of the reporting period;
(ii) the sale of inventories after the reporting period may give evidence about their
net realizable value at the end of the reporting period.
 c. Acquisition cost or proceeds on disposal of assets
The determination after the reporting period of the cost of assets purchased, or the
proceeds from assets sold, before the end of the reporting period.

d. Profit sharing or bonus

The determination after the reporting period of the amount of profit sharing or bonus
payments, if the entity had a present legal or constructive obligation at the end of
the reporting period to make such payments as a result of events before that date
(see MFRS 119 Employee Benefits).

e. Fraud
The discovery of fraud or errors that show that the financial statements are incorrect

f. Measurement of bad and doubtful debts

g. Net realizable value of inventory

5.1.3 Discuss the accounting treatments and required disclosures for Non-adjusting
Events after the Reporting Period;
An entity shall not adjust the amounts recognized in its financial statements to reflect non-
adjusting events after the reporting period. (MFRS 110, para 10)

MFRS 110 (para 11)

11 An example of a non-adjusting event after the reporting period is a decline in fair value of
investments between the end of the reporting period and the date when the financial
statements are authorized for issue. The decline in fair 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, an entity does not adjust the amounts recognized
in its financial statements for the investments. Similarly, the entity does not update the
amounts disclosed for the investments as at the end of the reporting period, although it may
need to give additional disclosure under paragraph 21.

MFRS 110 (para 21)

If non-adjusting events after the reporting period are material, nondisclosure could influence
the economic decisions that users make on the basis of the financial statements. Accordingly,
an entity shall disclose the following for each material category of non-adjusting event after
the reporting period:
(a) the nature of the event; and
(b) an estimate of its financial effect, or a statement that such an estimate cannot be made.
MFRS 110 (para 22)
The following are examples of non-adjusting events after the reporting period that would
generally result in disclosure:

Description
a. a major business combination after the reporting period (MFRS 3 Business
Combinations requires specific disclosures in such cases) or disposing of a
major subsidiary
b. announcing a plan to discontinue an operation
c. major purchases of assets, classification of assets as held for sale in accordance
with MFRS 5 Non-current Assets Held for Sale and Discontinued Operations,
other disposals of assets, or expropriation of major assets by government
d. the destruction of a major production plant by a fire after the reporting period;
e. announcing, or commencing the implementation of, a major restructuring (see
MFRS 137)
f. major ordinary share transactions and potential ordinary share transactions
after the reporting period (MFRS 133 Earnings per Share requires an entity to
disclose a description of such transactions, other than when such transactions
involve capitalization or bonus issues, share splits or reverse share splits all of
which are required to be adjusted under MFRS 133)
g. abnormally large changes after the reporting period in asset prices or foreign
exchange rates
h. 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 (see MFRS 112 Income Taxes);
i. entering into significant commitments or contingent liabilities, for example,
by issuing significant guarantees
j. commencing major litigation arising solely out of events that occurred after
the reporting period.

5.1.4 Explain the consideration the following two events:

a. Dividends
MFRS 110 (para 12)
Dividends 12 If an entity declares dividends to holders of equity instruments (as defined
in MFRS 132 Financial Instruments: Presentation) after the reporting period, the entity
shall not recognize those dividends as a liability at the end of the reporting period.
If dividends are declared after the reporting period but before the financial
statements are authorized for issue, the dividends are not recognized as a liability at
the end of the reporting period because no obligation exists at that time. Such
dividends are disclosed in the notes in accordance with MFRS 101 Presentation of
Financial Statements. (MFRS 110, para 13)
b. Going Concern Status
MFRS 110 (para 14)
An entity shall not prepare its financial statements on a going concern basis if
management determines after the reporting period either that it intends to liquidate
the entity or to cease trading, or that it has no realistic alternative but to do so.

MFRS 110 (para 15)

Deterioration in operating results and financial position after the reporting period may
indicate a need to consider whether the going concern assumption is still appropriate.
If the going concern assumption is no longer appropriate, the effect is so pervasive that
this Standard requires a fundamental change in the basis of accounting, rather than an
adjustment to the amounts recognized within the original basis of accounting.

MFRS 110 (para 16)

MFRS 101 specifies required disclosures if:
(a) the financial statements are not prepared on a going concern basis; or
(b) management is aware of material uncertainties related to events or conditions that
may cast significant doubt upon the entity’s ability to continue as a going concern. The
events or conditions requiring disclosure may arise after the reporting period.

It is assumed that the enterprise is a “permanent” venture and will be I existence in

the foreseeable future. It is also assumed that the enterprise will not be wound up or
its size of operations reduced substantially in the foreseeable future. These
assumptions are important to the adoption of the historical cost concept in the
preparation of financial statement and more so in the values to be adopted for assets.
By assuming a going concern status, an enterprise will be able to record the
assets at cost and depreciate or amortize them over the economic life of the assets.
The enterprise may own specialized assets which may have very low or no sale value.
Despite the low resale value, the going concern concepts allows accountants to ignore
the low resale value and write off the cost (depreciate) the asets over their useful life
to the enterprise.
The going concept recognizes prepaid expenses and unsold inventory to be
carried forward and become realizable in the foreseeable future. However, the going
concern concept will dropped if there is evidence that the enterprise will be liquidated
or a major part of its operations closed in the foreseeable future. There is no specified
time frame to qualify as “foreseeable future”. It may be one year, two years etc. As
shown n figure 5.1, a business assumes that it will keep going on forever.

Date of incorporation infinity

1/12015 1/1/2016 1/1/2017 etc.