MFRS 110

CHAPTER 5CHAPTER 5

EVENTS AFTER THE EVENTS AFTER THE REPORTING PERIODREPORTING PERIOD

Definition

MFRS 110 defines events after the reporting date as ‘those events, both MFRS 110 defines events after the reporting date as ‘those events, both favourable and unfavourable, that occur between the end of the favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are reporting period and the date when the financial statements are authorised for issue’. authorised for issue’.

The standard has identified two types of events. The standard has identified two types of events.

They are:They are:

a.a. Those events that provide further evidence of conditions that existed Those events that provide further evidence of conditions that existed at the end of the reporting period (adjusting events)- material event, at the end of the reporting period (adjusting events)- material event, andand

b. Those that are indicative of conditions that arose after the end of the b. Those that are indicative of conditions that arose after the end of the reporting period (non-adjusting events) non-material but significant.reporting period (non-adjusting events) non-material but significant.

Date When The Financial Statements Are Authorised For Issue

The date on which the financial statements are The date on which the financial statements are authorisedauthorised for for issue depends on the management structure, statutory issue depends on the management structure, statutory requirements and procedures followed by each entity in preparing requirements and procedures followed by each entity in preparing and finalizing the financial statements.and finalizing the financial statements.

ExampleExample Company A’s draft financial statements for the year Company A’s draft financial statements for the year

ended 31 December 2005 was completed on 28/2/2006. ended 31 December 2005 was completed on 28/2/2006. The board of directors reviewed the financial statements The board of directors reviewed the financial statements on 20/3/2006 and on 20/3/2006 and authorizedauthorized them for issue. Company them for issue. Company A A releasedreleased its profits and other selected financial its profits and other selected financial information to the public on 21/3/2006. information to the public on 21/3/2006.

However, the financial statements were only made However, the financial statements were only made available to the shareholders 30/3/2006. The available to the shareholders 30/3/2006. The shareholders approved the financial statements at the shareholders approved the financial statements at the annual meeting on 10/5/2006.annual meeting on 10/5/2006.

The post reporting period is between the year-end date, The post reporting period is between the year-end date, 31 December 2006 and 20/3/2006, the 31 December 2006 and 20/3/2006, the date the date the directors authorizeddirectors authorized the financial statements. the financial statements.

Adjusting Events

Adjusting events affect the financial position and performance measurement of the entity even though they occurred between the reporting date and the date the financial statements were authorized for issue. Are the events that provide evidence of conditions which existed at the end of reporting period.

The accounting treatment is to adjust the elements of financial statements affected by these events. Measurement of bad and doubtful debtsMeasurement of bad and doubtful debts Determining the net realizable value of inventoryDetermining the net realizable value of inventory Court case Court case Impairment of assets Impairment of assets Cost of assets purchased or proceeds from disposal of assets Cost of assets purchased or proceeds from disposal of assets Profit sharing or bonusProfit sharing or bonus FraudFraud

Measurement of Bad and Measurement of Bad and Doubtful DebtsDoubtful Debts

The entity normally provides for doubtful The entity normally provides for doubtful debts from the past experience. Events debts from the past experience. Events after the reporting period may indicate after the reporting period may indicate that the amount has to be adjusted. The that the amount has to be adjusted. The bankruptcy of a customer after the bankruptcy of a customer after the reporting period gives further evidence of reporting period gives further evidence of the loss already existing on the reporting the loss already existing on the reporting period on a trade receivable. Therefore, period on a trade receivable. Therefore, the entity needs to adjust the carrying the entity needs to adjust the carrying amount of the trade receivable.amount of the trade receivable.

Example 1Example 1

The entity makes a provision for doubtful The entity makes a provision for doubtful debts of 10% on all its trade receivables. debts of 10% on all its trade receivables. After the end of the financial year, a After the end of the financial year, a customer who owed the entity RM2million customer who owed the entity RM2million was declared a bankrupt.was declared a bankrupt.

Accounting treatment?Accounting treatment?

AnswerAnswer

At the reporting period the customer may At the reporting period the customer may have been solvent but events after that have been solvent but events after that date indicate that the estimated provision date indicate that the estimated provision has to revised. The 10% provision on the has to revised. The 10% provision on the debts has to revised. If the entity debts has to revised. If the entity determines that the customer would not determines that the customer would not be able to pay any amount, then the be able to pay any amount, then the fullfull amount of the debt has to be written off. amount of the debt has to be written off. The additional loss of RM1.8 million has to The additional loss of RM1.8 million has to recognised. It is an adjusting event.recognised. It is an adjusting event.

Determining the net realisable Determining the net realisable value of inventoryvalue of inventory

At the end of the financial year, the At the end of the financial year, the carrying value of inventory is compared carrying value of inventory is compared with its net realisable value. Net realisable with its net realisable value. Net realisable value is the estimated selling price less value is the estimated selling price less costs necessary to make the sale. The costs necessary to make the sale. The measurement of net realisable value is measurement of net realisable value is estimate. The sale of the inventory after estimate. The sale of the inventory after the reporting period gives further evidence the reporting period gives further evidence of the selling price of the inventory at the of the selling price of the inventory at the reporting period.reporting period.

Example 2Example 2

At the reporting period, the carrying value At the reporting period, the carrying value of inventory of ROY was RM43,000 and of inventory of ROY was RM43,000 and the net realizable value was RM52,000. the net realizable value was RM52,000. The inventory was sold after the year-end The inventory was sold after the year-end but before the financial statements were but before the financial statements were authorized for issue, at RM 42,000.authorized for issue, at RM 42,000.

Accounting treatment?Accounting treatment?

AnswerAnswer

The actual sale price gives evidence that The actual sale price gives evidence that the carrying value has to be adjusted to the carrying value has to be adjusted to RM42,000. The loss of RM1,000 is RM42,000. The loss of RM1,000 is recognised in the current year.recognised in the current year.

Court caseCourt case

There is a litigation, if the amount of There is a litigation, if the amount of payment cannot be determined the entity payment cannot be determined the entity has to disclose the fact that there is a has to disclose the fact that there is a contingent liability.contingent liability.

If the amount can be measured it has to If the amount can be measured it has to recognised and the measurement has to recognised and the measurement has to be based on the best estimate.be based on the best estimate.

Example 3Example 3

Client sue the entity for RM500,000 for pain and Client sue the entity for RM500,000 for pain and agony caused by consuming the product sold by agony caused by consuming the product sold by the entity. The entity made a provision for liability the entity. The entity made a provision for liability of RM100,000. The court case pending at the of RM100,000. The court case pending at the end of the year. A month after the financial year-end of the year. A month after the financial year-end but before the financial statement end but before the financial statement authorized for issue, the case came to court and authorized for issue, the case came to court and the judgment was in favor of the client awarding the judgment was in favor of the client awarding RM400,000.RM400,000.

AnswerAnswer

This is an adjusting event after the This is an adjusting event after the financial reporting period. The additional financial reporting period. The additional loss and a corresponding liability of loss and a corresponding liability of RM300,000 have to be recognized.RM300,000 have to be recognized.

Impairment of assetsImpairment of assetsAssets are reviewed for impairment at the Assets are reviewed for impairment at the

reporting period. There could be indications reporting period. There could be indications of impairment or of no impairment. If the of impairment or of no impairment. If the entity obtains information after the reporting entity obtains information after the reporting period indicating that an asset is impaired period indicating that an asset is impaired at the reporting period, or that the amount at the reporting period, or that the amount of a previously recognised impairment loss of a previously recognised impairment loss for that asset needs to be adjusted, then for that asset needs to be adjusted, then the entity is required to make the the entity is required to make the appropriate adjustments.appropriate adjustments.

Acquisition cost or proceeds on Acquisition cost or proceeds on disposal of assetsdisposal of assets

The determination after the reporting The determination after the reporting period of the cost of assets purchased, or period of the cost of assets purchased, or the proceeds from the assets sold, before the proceeds from the assets sold, before the reporting period are adjusting events.the reporting period are adjusting events.

Profit sharing or bonusProfit sharing or bonus

If the entity had a present legal or If the entity had a present legal or constructive obligation at the reporting constructive obligation at the reporting period to make such payments as a result period to make such payments as a result of events before that date and the amount of events before that date and the amount was determined after the reporting period, was determined after the reporting period, the amount of profit sharing or bonus is to the amount of profit sharing or bonus is to be recognised for the year. The accounts be recognised for the year. The accounts have to be adjusted. have to be adjusted.

Non-Adjusting Events

Events that are indicative of conditions that arise after the reporting Events that are indicative of conditions that arise after the reporting period which no adjustments are made but the following disclosure period which no adjustments are made but the following disclosure should be provided : (Do not affect the financial performance or should be provided : (Do not affect the financial performance or position)position)

the nature of the event, and the nature of the event, and the estimate of the financial effect, or a statement that such an the estimate of the financial effect, or a statement that such an

estimate cannot be made.estimate cannot be made.

The accounting treatment is not to adjust the elements of financial The accounting treatment is not to adjust the elements of financial statements.statements.

Examples of non-adjusting events:Examples of non-adjusting events:

Decline in the market value of investments after the reporting Decline in the market value of investments after the reporting date,date,

A major business combination after the reporting date A major business combination after the reporting date Announcing a plan to discontinue an operation, disposing of Announcing a plan to discontinue an operation, disposing of

assets etc.assets etc. Major purchases and disposals of assets or expropriation of Major purchases and disposals of assets or expropriation of

major assets by government.major assets by government.

destruction of a major production plant by a fire after the balance destruction of a major production plant by a fire after the balance sheet date. sheet date.

a major restructuringa major restructuring Major ordinary share transactions Major ordinary share transactions Abnormally large changes after the reporting period in asset prices Abnormally large changes after the reporting period in asset prices

or foreign exchange ratesor foreign exchange rates Changes in tax rates or tax laws Changes in tax rates or tax laws Entering into significant commitments or contingent liabilities Entering into significant commitments or contingent liabilities Commencing major litigation arising solely out of events that Commencing major litigation arising solely out of events that

occurred after the reporting date.occurred after the reporting date.

In each of the above examples, an entity is In each of the above examples, an entity is required to disclose the following required to disclose the following information:information:The nature of the eventsThe nature of the eventsAn estimate of its financial effects, or a An estimate of its financial effects, or a statement that such an estimate cannot be statement that such an estimate cannot be mademade

Example 1Example 1

Super Bhd’s current year financial Super Bhd’s current year financial statements end 31 March 2005. On 16 statements end 31 March 2005. On 16 April 2005, the board of directors agreed April 2005, the board of directors agreed to sell a subsidiary called Lemon Bhd. The to sell a subsidiary called Lemon Bhd. The directors authorized the financial directors authorized the financial statements for issue on 30 August 2005.statements for issue on 30 August 2005.

Identify and explain the nature of the Identify and explain the nature of the above event and the appropriate above event and the appropriate accounting treatment.accounting treatment.

AnswerAnswer

The event on 16 April 2005 occurred The event on 16 April 2005 occurred between the reporting period and the date between the reporting period and the date the financial statements were authorized the financial statements were authorized for issue. The event was indicative of for issue. The event was indicative of conditions that arouse after the reporting conditions that arouse after the reporting period. Therefore, it is a non-adjusting period. Therefore, it is a non-adjusting post-balance event of RM2.5 million.post-balance event of RM2.5 million.

Notes to Financial StatementsNotes to Financial Statements

Subsequent to the reporting period, the Subsequent to the reporting period, the company decided to sell Lemon Bhd for a company decided to sell Lemon Bhd for a cash consideration of RM2.5 milion. cash consideration of RM2.5 milion.

Dividends and Going Concern Status

DividendsDividends

Proposed dividends are not present obligations and are not to be Proposed dividends are not present obligations and are not to be recognised as liabilities. A disclosure is required.recognised as liabilities. A disclosure is required.

Going Concern StatusGoing Concern Status

Where the management determines after the reporting date that it Where the management determines after the reporting date that it intends to liquidate the entity or to cease trading, or that it has no intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so, then the going concern assumption realistic alternative but to do so, then the going concern assumption used in preparing the financial statements may no longer be used in preparing the financial statements may no longer be appropriate. Financial statements are to be prepared appropriate. Financial statements are to be prepared on a on a liquidation basisliquidation basis..

DisclosureDisclosure

1.1. The date when the financial statements The date when the financial statements were authorised for issue and who gave were authorised for issue and who gave that authorisation. If entity’s owners or that authorisation. If entity’s owners or others have the power to amend the others have the power to amend the financial statements after issue, the entity financial statements after issue, the entity shall disclose that fact.shall disclose that fact.

DisclosureDisclosure

2. The information received after the 2. The information received after the reporting period about conditions that reporting period about conditions that existed at the reporting period. This existed at the reporting period. This information needs to be disclosed even if its information needs to be disclosed even if its does not affect the amounts recognised in does not affect the amounts recognised in the financial statements.the financial statements.