IAS10: Question Bank

QUESTION Unit 20.1 (25 MARKS)

You are the financial manager of Noka Ltd, a listed company whose reporting period ends on
31 March 2003. You are currently finalising the financial statements and the accounting records are
currently being audited. The operating profit of the company for the reporting period is R542 800.
The following case are presented to you:

Case 1

On 3 May 2003 the storeroom of the company's branch in Pretoria burnt down after it was struck by
lightning. Fortunately, the storeroom was not too full and only inventories to the value of R80 000 was
destroyed in the incident. On closer investigation it was discovered that the inventories were not insured
at the time and that the company will have to bear the full loss. The damage to the building amounts to
R320 000. In the past the company received a wear and tear allowance on the storeroom.

Case 2

During the debtor circulation the following information came to your attention on debtors (Case 2 and 3):
(Ignore VAT implications)

Debtor A
As this debtor is in the IT-industry, it suffered a lot of problems during the past 3 years. During the past
reporting period the debtor suffered a large operating loss. It now seems inevitable that the debtor will
be liquidated. Your enquiries also indicate that the chances of a liquidation dividend is negligible.
Debtor A owed the company R182 000 at the end of the reporting period. No provision has as yet been
provided in this regard.

Case 3

The debtor circulation also brought the following to light:

Debtor B
Debtor B farms in the vicinity of Montagu. On 24 April the whole farm was flooded. It seems that the
farmer was not insured properly, and that Noka Ltd will loose the money owing to it. On 31 March 2003
Debtor B owed R4 000 to Noka Limited.

Case 4

Noka Ltd has been involved in a legal dispute for the past eight months with a client implying that Noka
Limited breached a contract. The case will only come up for hearing on 28 June 2003 and no estimate
can currently be made of the possible costs.

REQUIRED:

a) Define events after the reporting period. (5)

b) In each of the cases above:

- Identify the case correctly in terms of IAS 10 Events after the reporting period
- Discuss the accounting treatment and disclosure and
- Supply the relevant journal entries for the reporting period ended 31 March 2003 if
necessary.
(20)

(Source: Assessment opportunity 2 Accounting 2C 2003)

QUESTION 20.1 (SUGGESTED SOLUTION)

a) Events after the reporting period are those events, both favourable and unfavourable, that occur
between the reporting period and the date when the financial statements are authorised for
issue. Two types of events can be identified:

- those that provide further evidence of conditions that existed at the end of the reporting period
(adjusting events after the reporting period) and

- those that are indicative of conditions that arose after the reporting period (non-adjusting
events after the reporting period). (5)

b) CASE 1
Identification

Non-adjusting event after the reporting period 

Accounting treatment and disclosure

The accounting records will not be adjusted. 

The event will be treated as a disclosable item in the next reporting period. 

The loss of inventories and the damage to the building shall be disclosed by way of a note to the
financial statements for the year ended 31 March 2003. 

The nature as well as the amount of the loss shall be stated in the note. 

The note shall appear in the directors' report in terms of the Fourth schedule. 

CASE 2
Identification

Adjusting event after the reporting period 

Accounting treatment and disclosure

The accounting records should be adjusted. 

Due to the extent of the amount the bad debts should be treated as an item requiring separate
disclosure. 

Other expenses (or bad debts) should be debited by R182 000. Debtors should be reduced 
accordingly with this amount. The tax expense and provision for tax will be reduced by R54 600. 

Journal entry

Other expenses/bad debts dr 182 000 

Debtors/Provision for bad debts cr 182 000 
Write-off of bad debts of Debtor A
QUESTION 20.1 (SUGGESTED SOLUTION - CONTINUED)

CASE 3
Identification

Non-adjusting events after the reporting period. 

Accounting treatment and disclosure

No adjustment is required (due to immaterial amount) 

CASE 4
Identification

This item does not qualify as an event after the reporting period in terms of IAS 10. 

It is a contingent liability. 

Accounting treatment and disclosure

The fact that the company is involved in a legal battle and 

the fact that the costs can not be estimated should be disclosed 

by way of a note to the financial statements. 

(Limited to 20)

(25)
QUESTION 20.2 (20 MARKS)

During the finalisation of the financial statements of E Ltd for the year ended 31 December 2003, you
obtained the following information.

1. On 20 February 2004 the store room was destroyed in a fire. The fire was caused by a
lightning bolt and as the company was not insured against such an event, no compensation
could be claimed from the insurers.

Details of the store room were as follows:

Cost price 3 500 000

Accumulated depreciation - 31/12/2003 1 000 000

2. E Ltd's list of outstanding debtors on 31 December 2003 includes two debtors who have now
indicated that they would not be able to redeem their obligations:

Debtor A

The operating activities of this debtor was seriously affected by the low economic trade cycle
of 2003. The debtor has suffered a great operating loss during 2003 as a result thereof and
will possibly be liquidated. The debtor owes R360 000 and the possibility of a liquidation
dividend is remote. The provision for doubtful debts currently includes R60 000 in respect of
debtor A.

Debtor B

Debtor B operated profitably until the company's factory was destroyed in a fire on
29 January 2004. The loss was not covered by insurance. As a result thereof, the debtor is
suffering serious cash problems. Debtor B owes R550 000 of which R50 000 originated
during January 2004.

3. E Ltd is involved in a legal action with one of its clients. As part of the normal procedures at
the end of the reporting period of the company, you have contacted the attorneys of E Ltd,
who have indicated that at this stage E Ltd will not sustain any losses or costs. The lawsuit
which currently awaits trial, deals with certain work performed on behalf of the client by E Ltd.

The attorneys of E Ltd have since informed the financial director that, as a result of certain
developments, E Ltd is going to loose the lawsuit. The total cost to E Ltd cannot be
determined at this stage, but is estimated at R400 000. No provision was made for the loss
in the draft financial statements. This is the first lawsuit of this nature that E Ltd is involved
in.

YOU ARE REQUIRED TO:

Discuss the matters above with reference to IAS 10 Events after the reporting period:

 identification,
 accounting treatment, and
 disclosure
QUESTION 20.2 (SUGGESTED SOLUTION)

1. Fire loss of storeroom

Identification

The destruction of the storeroom represents a non-adjusting event after the reporting
period as. 

Reason: It did not relate to conditions that existed at the end of the reporting period. 

Accounting treatment

Therefore no recording is required in the records for the reporting period ended
31 December 2003. 

Disclosure

In the directors' report under the heading 'Events between the reporting period and the
date of the report' the following information is supplied: 

 the nature of the event 

 the financial effect: Loss of R2 500 000 (3 500 000 - 1 000 000) before and after 
tax.

2. Bad debts

Debtor A

Identification

The liquidation of debtor A represents an adjusting event after the reporting period. 

Reason: He was already in financial difficulties at the end of the reporting period. 

Accounting treatment

Record as follows at 31 December 2003

Bad debts Dr 300 000 

Provision for bad debts Dr 60 000 
Debtor Cr 360 000 
Write-off of bad debts

Disclosure

The bad debt write-off can possibly be disclosed as an item requiring separate
disclosure due to its materiality.
QUESTION 20.2 (SUGGESTED SOLUTION - CONTINUED)

Debtor B

Identification

The possible liquidation of debtor B represents a non-adjusting event after the reporting
period. 

Reason: The fire that destroyed the factory did not relate to conditions that existed at the
end of the reporting period. 

Accounting treatment

No recording is required on 31 December 2003 

Disclosure

Where non-adjusting events after the reporting period are of such importance (material)
that non-disclosure would affect the ability of the users of the financial statements to make
proper evaluations and decisions, 

an entity shall disclose the following information for each significant category of non-
adjusting event after the reporting period (par .21):

(a) the nature of the event, and 

(b) an estimate of its financial effect, or a statement that such an estimate cannot be 
made.

3. Claim by client

Identification

Represents an adjusting event after the reporting period (also a provision in terms of 
IAS 37).

Reason: E Ltd was already involved in the court case at the end of the reporting period. 

Accounting treatment

It is probable that the claim will succeed. The amount can also be estimated reliably.
The following adjustment should be done: 

Loss from defective work Dr 400 000 

Provision for loss from defective work Cr 400 000 

Disclosure

The loss is disclosable - at most as an item requiring separate disclosure.

The provision is a disclosable item under current liabilities.

QUESTION 20.3 (25 MARKS)

On 25 May 2006, whilst the accountant was finalising the financial statements of Aqua Products Ltd for
the reporting period ended 31 March 2006, management became aware of rumours circulated by the
local community regarding the company’s factory. They claimed that the company was polluting the
local water source with chemical waste material that originated from the company’s manufacturing
factory. Management immediately consulted their legal team. They were of the opinion that a ‘wait-and-
see’ approach should be adopted. On 30 June 2006 the financial statements were approved by the
board of directors for publication.

During August 2006 the local community organised themselves into a pressure group and started
publishing letters in the local press about the alledged pollution of the water source. A young ambitious
journalist of the local paper took it upon herself to generate sympathy for the residents’ cause. She
eventually succeeded in getting the TV-programme Carte Blanche to further investigate ‘their problem’.
During January 2007 a very negative programme on the pollution of the water was aired. On
15 January 2007 management was forced to make a statement in a national newspaper in which they
accepted responsibility to restore the damaged area. The company’s engineers estimated that the
clean-up costs would amount to R800 000. Unfortunately the pressure group decided to proceed with a
civil claim for the damages suffered by them and on 1 April 2007 Aqua Products Ltd was served with a
summons. At that stage the legal team was of the opinion that it is more likely than not that the company
would be found guilty, but they were unable to estimate the amounts involved. At year-end the water
source had not been cleaned up, but this process was concluded during May 2007.

During February 2008 the case served in court and on 27 February 2008 the company was found guilty
and fined R500 000 for damages, payable to the local community (represented by the pressure group).
The legal fees amounted to R220 000. By 31 March 2008 both amounts had not been paid yet, but both
amounts were paid on 30 April 2008. The journalist has now agreed to write a positive article on the
whole matter in the local paper. The company and local community have agreed to form an
environmental forum that will address ‘green’ issues in future.

REQUIRED:

Discuss the recognition, measurement and disclosure of the matters set out above in terms of IAS 10
Events after the reporting period and IAS 37 Provisions, contingent liabilities and contingent
assets for the reporting periods ended 31 March 2006, 2007 and 2008.

(Source: Assessment opportunity 2 Accounting 2C 2008)

QUESTION 20.3 (SUGGESTED SOLUTION)

Year ended 31 March 2006

Events after the reporting period

Those events, favourable and unfavourable, that occur between 

the end of the reporting period and the date when the financial statements are authorised for
issue. 

Two types of events can be identified:

- those that provide evidence of conditions that existed at the end of the reporting period
(adjusting events) and 
- those that are indicative of conditions that arose after the reporting period (par 10). 

The authorisation date is the date when the financial statements are authorised for issue, in this
case 30 June 2006. 

In this instance the events are indicative of conditions (alledged pollution) that arose after the
reporting date. 

Nothing will be disclosed as it constitutes only rumours at this stage, the chances of an outflow is
remote. 

Year ended 31 March 2007

A past event leading to a present obligation is called an obligating event. 

An obligating event is an event that creates a legal or constructive obligation that results in an
entity having no realistic alternative to settling the obligation. 

A constructive obligation is an obligation that derives from an entity’s actions where: 

- by an established pattern of past practice, published policies or a sufficiently specific

current statement, the entity has indicated to the other parties that it will accept certain
responsibilities, and 

- as a result, the entity has created a valid expectation on the part of these parties that it will
discharge those responsibilities. 

In this case a valid expectation was created by the press release on 15 January 2007 and it
constitutes a constructive obligation. 

A provision is a liability of uncertain timing or amount. 

A provision should be recognised for R800 000 as: 

- there is a present obligation (constructive) 

- as a result of a past event (happened before year end) 
- it is probable that an outflow of resources embodying economic benefits will be required to
settle the obligation, and 
- a reliable estimate can be made of the amount of the obligation (R800 000). 

A loss is recognised in profit or loss for clean-up costs. 

A provision must be presented in the statement of financial position according to the requirements
of IAS 37 and disclosed in the notes to the financial statement. 
QUESTION 20.3 (SUGGESTED SOLUTION - CONTINUED)

The summons received on 1 April is an event after the reporting period relating to circumstances
that existed at the reporting date (adjusting event). 

A contingent liability is 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 

A present obligation that arises from past events but is not recognised 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. 

Although the legal advisors are of the opinion that it is more likely than not that the claim will
succeed, the amount cannot be estimated reliably. 

It should be treated as a contingent liability. 

The contingent liability should be disclosed as follows:

- Nature - description of the claim for damages 

- Fact that the amount cannot be estimated reliably 
- Disclose in the directors’ report. 

Year ended 31 March 2008

The two amounts, R500 000 damages and R220 000 legal costs are both liabilities. 

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. 

A liability is recognised when:

- it is probable that an outflow of resources embodying economic benefits will be required to

settle the obligation, and 
- a reliable estimate can be made of the amount of the obligation. 

As both amounts comply with both the definition and recognition criteria, a liability should be
recognised. 

The liability must be presented in the statement of financial position as a current liability.

Limited to (25)