Interpretation and Application of UK GAAP by Steven Collings

This edition first published 2015. © 2015 Steven Collings

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9781118819272 • Paperback 546 pages • March 2015

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27 EVENTS AFTER THEREPORTING PERIOD

Introduction 443Adjusting Events 444Non-Adjusting Events 447Payment of Dividends 451

Going Concern 453Authorising the Financial Statements for Issue 454

Disclosure Requirements 455

INTRODUCTION

It is a generally accepted concept that financial statements for a specific period-/year-end are prepared and authorised for issue some time after the reporting date has elapsed. Certainly for private companies in the UK, Companies House allows a period of nine months from the company’s year-end to file their financial statements. One of the main issues that arises due to this time period is what happens in relation to trans-actions or events that take place between the reporting period (the period- or year-end) and the date that the financial statements are authorised for issue, which may have a direct (or indirect) impact on the financial statements in question.

Section 32 Events after the Reporting Period deals with such transactions and events and there is also a degree of interaction between Section 32 and that of Section 21 Provisions and Contingencies. This particular chapter will deal with the issues contained in Section 32.

Section 32 is aptly named ‘Events after the Reporting Period’ and this particu-lar Section takes its name from IFRS for SMEs, which is based on IAS 10 Eventsafter the Reporting Period. Accountants and practitioners in the UK and Republic of Ireland will be more familiar with terminology such as ‘post balance sheet events’ and ‘subsequent events’, which amount to the same thing.

The provisions in Section 32 are no different than in the previous UK GAAP at FRS 21 Events after the Balance Sheet Date.

Section 32 covers all events (both favourable and unfavourable) that lead up to the date that the financial statements are authorised for issue. Favourable and unfavour-able events are subdivided into two component parts between those events that require the financial statements to be amended and those that do not require the financial statements to be amended, but may require additional disclosure notes to be made within the notes to the financial statements to allow the user to gain a greater under-standing of transactions and events that have taken place in the intervening period. This is accentuated by the date of signing an auditor’s report because the date of an auditor’s report is taken to be the date at which the auditor has been satisfied that the financial statements take into consideration all transactions and events that require either adjustment or disclosure up to and including the date of the auditor’s report.

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444 Interpretation and Application of UK GAAP 2015


Such transactions and events are classified into ‘adjusting’ and ‘non-adjusting’ events and the classification as adjusting or non-adjusting will depend on whether the trans-action or event presents information relating to conditions that existed at the reporting date or that have arisen after the reporting date.

ADJUSTING EVENTS

An adjusting event is an event that requires changes to the amounts that have been included in the financial statements. Such events are classified as adjusting events because their conditions existed at the balance sheet date and hence require reflection in the amounts presented in the financial statements.

Example – Bankruptcy of a customer

Byrne Enterprises Limited is preparing its financial statements for the year ended 31 January 2016. Included within the trade debtors figure is an amount of £125,000 due to Byrne Enterprises by its customer, Humphries Co. Limited. The financial statements of Byrne Enterprises are due to be authorised for issue on 31 March 2016; on 28 Febru-ary 2016, Byrne Enterprises received notification from the insolvency practitioner that Humphries Co. Limited had gone into liquidation. The correspondence received from the insolvency practitioner indicated that after liquidation there would be no proceeds avail-able to pay off unsecured creditors.

The bankruptcy of a customer so soon after the reporting date is evidence that the debt will not be recovered at the reporting date. The general principle in financial reporting is that assets should not be carried in the balance sheet (statement of financial position) at any more than their recoverable amount and therefore the bad debt should be provided against in the financial statements for the year ended 31 January 2016.

Other examples that assets may be impaired and thus require writing down include:

The settlement of a court case after the reporting date, which confirms that the reporting entity had a liability at the reporting date.Receipt of information after the reporting date, which confirms an asset has suffered impairment.The sale of inventory after the reporting date, which may give evidence con-cerning their net realisable value.The cost of assets purchased after the reporting date or proceeds received from the sale of an asset sold prior to the reporting date.Determination of profit-sharing bonus payments after the reporting date.Discovery of fraud and/or errors in the financial statements.

The above would be adjusting events if their conditions existed at the reporting date.

Settlement of a court case

The settlement of a court case after the reporting date is an example of an adjusting event because this confirms that the reporting entity had an obligating event at that date. The settlement can either be by way of an ‘out of court’ settlement or by way of judgement.

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In either case, the financial statements of the reporting entity should be adjusted to take account of the settlement and to recognise the liability that had, in substance, arisen at the reporting date.

The settlement of a court case after the reporting date also confirms whether the provisions in Section 21 Provisions and Contingencies have been adequately applied in either the current or previous accounting periods. If the reporting entity had not created a provision at the year-end, then clearly the settlement of a court case would necessitate a provision being recognised because the recognition criteria have been met (by virtue of the fact that the entity has an obligating event at the reporting date). Conversely, it may well be that the reporting entity is the claimant in a court case and hence the recognition of an asset would be appropriate in these situations because Section 21 says that it must be ‘virtually certain’ that the asset will be realised and hence these ‘virtually certain’ criteria would be met if judgement is awarded in favour of the reporting entity. Care, however, must be taken by entities that are claimants in court cases because the mere fact that a court case is ongoing at the year-end, and indeed subsequent to the year-end, would not be just cause for the recognition of an asset – the ‘virtually certain’ criteria would only be met by judgement being awarded to the claimant entity.

Confirmation of asset impairment

The intervening period between the reporting date and the date that the finan-cial statements are authorised for issue can give rise to an indication that an asset is impaired. The classic illustration of this situation is the bankruptcy of a customer who owes money at the reporting date but who ceases trading and goes into liquidation in the period between the balance sheet date and the date that the financial statements are authorised for issue. Where this is the case, the bankruptcy of a customer will be an adjusting event and hence the debt will need writing down to recoverable amount (which will more than likely be nil).

Conversely, where an entity’s asset(s) are destroyed after the reporting date but before the financial statements are authorised for issue, this would give rise to a non-adjusting event and if it is a material event, then disclosure should be made in the financial statements of the event, together with its financial effects.

Sale of inventory and net realisable value

During the period between the reporting date and the date the financial statements are authorised for issue, the net realisable value of inventory held at the reporting date may become known. This can occur where (for example) slow-moving or obsolete inventory is sold on to a third party. Estimates of net realisable value are based on the most reliable evidence available at the time the estimates are being made (often at the year- or period-end). In cases where a third party purchases inventory for amounts less than the original estimation, the inventory should be written down in the financial statements to actual net realisable value.

Cost and sales proceeds of assets

This particular aspect can be illustrated with an example.

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Example – Sale of a property

A construction company has entered into negotiations with its customer to sell a property to its customer and then adapt that property to be bespoke to the customer’s requirements. The construction company has a year-end of 31 October 2016 and the com-mercial conveyancing transaction commenced on 1 July 2016. Planning permission had to be obtained from the local authority before any work can begin on the construction of the building and this was granted by the local authority on 1 November 2016. Comple-tion took place on 30 November 2016 and the financial controller is planning to recognise the sale proceeds in the financial statements to 31 October 2016 on the grounds that he believes this to be an adjusting event as planning permission was granted immediately after the year-end.

The financial controller is incorrect in recognising sales proceeds at the year-end date. This is because the receipt of the planning permission does not give rise to a condition that existed at the reporting date for which the granting of planning permission would give additional evidence. This is because no sale had taken place by the year-end and the sale was conditional on the basis of the customer being granted planning permission. The granting of the planning permission will determine whether, or not, there is an eventual sale; there is a new event that causes the sale.

Profit-sharing and bonus payments

The issue concerning profit-sharing and bonus payments needs to be carefully considered by entities because this can also have potential taxation implications on the company if the timing of the obligating event is not correct.

Many entities will offer profit-sharing and bonus payments to its employees based on year-end results. In the vast majority of cases, the actual year-end results may not be known until some time after the year-end because financial statements are often completed and authorised for issue some months after the year-end. Where an entity has an obligation at the year-end to make such payments (for example, by way of a board resolution and subsequent announcements to those who will receive the profit-share or bonus payment before the year-end) then this will give rise to an adjusting event and the financial statements should be adjusted to take account of the profit-share and bonus payments to be made.

The timing is critical because the entity must have a present legal or constructive obligation in order to make the payments and hence adjust the financial statements at the year-end. If the timing of this is incorrect and the financial statements are incor-rectly adjusted then there could well be problems with any tax relief obtained from HM Revenue and Customs.

Example – Reduction of bonus payments and interaction with Section 21 Provisions and Contingencies

Company B Limited has always paid bonuses to its two directors based on 5% of pre-tax profit. The draft management accounts as at 31 March 2016 include a gross bonus, plus employer’s national insurance amounting to £11,500 each following the resolution by the board to pay a bonus based on the draft figures as at 20 March 2016. This bonus

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is not paid until such time as the financial statements are approved because of various adjustments that are often incorporated into the finalised financial statements. The finan-cial statements are approved four months after the year-end and because of a large stock write-off due to damaged products, the profits have reduced to an extent that the gross bonus plus the employers’ national insurance should only be £4,500 each.

This is clearly an adjusting event and the bonuses will need to be reduced because the conditions to pay the bonus existed at the reporting date. In addition, the company had an ‘obligating event’ due to the resolution to pay the bonus to the directors and hence created an expectation in the mind-sets of the directors that they would receive a bonus. This is an example of how Section 32 interacts with Section 21 Provisions and Contingencies.

The above example relating to employment bonuses also ties in to the provisions in Section 28 Employee Benefits, which is dealt with in Chapter 10.

Discovery of fraud/error

Where the discovery of fraud or error occurs after the reporting date but the event itself took place prior to the year- or period-end, these are adjusting events. This issue should also be carefully considered because it is not uncommon for frauds to have taken place over more than one accounting period and this, therefore, could give rise to further prior-year adjustments having to be undertaken. In more serious cases, frauds can also bring into doubt the ability of the entity to continue as a going concern.

Example – External fraud

Company C Limited makes an investment in various marketable securities in an over-seas entity. The auditors are completing the work on these investments and it transpires that these securities have suffered a diminution in value (an impairment) due to fraud. The year-end is 31 December 2015 and the fraud was discovered on 4 April 2016. The ques-tion arises as to whether this gives rise to an adjusting event.

It has to be established whether, or not, the marketable securities actually existed at the reporting date. If the investment did exist then any post year-end loss would not be adjusted for on the grounds that Company C could have sold their investment in the mar-ketable securities at the reporting date.

Conversely, if the marketable securities never existed then Company C would not have been able to sell the investment at the balance sheet date, which would give rise to the loss becoming an adjusting event because the conditions existed at the reporting date (the conditions being the non-existence of the investment).

NON-ADJUSTING EVENTS

By definition, ‘non-adjusting’ events do not get adjusted within the financial state-ments. This is due to the fact that their conditions did not exist at the reporting date. Instead, disclosure of material non-adjusting events should be made within the finan-cial statements to enable users to understand the effect that transactions and/or events that have taken place between the date of the financial statements and the date they are authorised for issue have on the financial effect of the company. No guidance is provided in Section 32 relating to what is meant by the term ‘financial effect’ – for

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example, the effect non-adjusting events have on an entity’s profit or loss or financial position or cash flows. However, the overarching principle in Section 32 is for users to appreciate the impact that non-adjusting events have on the financial statements taken as a whole.

Example – Discontinued division

A supermarket operates four different classes of business division: groceries, mobile telephone providers, internet service providers and domestic appliances. Each division is considered to be material to the financial statements of the company. The financial year-end is 31 July 2016 and the financial statements have not yet been approved. On 30 Sep-tember 2016, the company’s directors decided that because of extremely difficult trading conditions, and a heavy loss, it would discontinue the domestic appliances division. This announcement was made on 1 October 2016.

This is a non-adjusting event because the decision to discontinue the division took place after the reporting date. However, because the division is considered to be material to the financial statements, the entity would need to make disclosure within the financial statements concerning the closure of this division.

Example – Bonus issue of shares

Lucas Lighting Limited has a year-end of 31 July 2016. On 4 August 2016 it offers a bonus issue to its shareholders of one share for every five shares held. The decision to issue this bonus issue was taken because the company has recently been experiencing a few cash flow difficulties and the issue of bonus shares would be undertaken rather than paying a dividend to its existing shareholders and thus enabling the company to preserve cash. The shareholders have agreed on the basis that the company has just recently secured a lucrative six-year contract to supply services, which is likely to be very profitable, and hence shareholder confidence in the company has not diminished. The question arises as to whether the bonus issue should be disclosed as a non-adjusting event in Lucas Light-ing’s 31 July 2016 financial statements.

Section 32 outlines the disclosure requirements concerning non-adjusting events at paragraph 32.11. Paragraph 32.11 at point (f) does require the issue or repurchase of an entity’s debt or equity instruments to be disclosed and hence the bonus issue of shares would fall to be disclosed within the financial statements as at 31 July 2016 as a non-adjusting event.

Some examples of additional non-adjusting events are:

A significant business combination or the disposal of a major subsidiary after the period-/year-end.Management’s announcement of a plan to discontinue an operation of the busi-ness or the announcement of a major restructuring of an entity.Major purchases of assets. The destruction of a major production facility by fire after the reporting date.Major ordinary and potential ordinary share transactions after the reporting date.Unusually large changes in asset prices or foreign exchange rates after the reporting date.

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A change in tax rates or tax laws that are enacted, or announced, after the reporting date and that have a significant effect on both current and deferred tax assets and liabilities.Entering into significant commitments or contingent liabilities.The commencement of litigation that arises out of events that occur after the reporting date.

Significant business combination/disposal of a major subsidiary

When an entity undertakes a business combination (as defined in Section 19 Busi-ness Combinations and Goodwill) after the reporting date but before the financial statements are authorised for issue this will be a non-adjusting event that would need disclosure within the financial statements. If, for whatever reason, this disclosure is deemed by management to be impracticable, then that fact should be disclosed together with the reasons why management consider disclosure to be impracticable. Ordinarily, the disclosures will involve describing:

The names and descriptions of the combining entities,The date of acquisition,The percentage of net assets acquired,Any areas of the acquiree’s operations that the acquirer has disposed of as a result of the combination,The cost of the business combination,Details of the identifiable assets, liabilities and contingent liabilities,Positive goodwill and negative goodwill arising as a result of a bargain pur-chase andPost-acquisition activities.

Management plans to discontinue an operation

This issue interacts with major restructuring of an organisation and the issue here is twofold. First, the restructuring may give rise to evidence of impairment at the reporting date, which would be an adjusting event. However, entities should not make any provisions for future restructuring costs because Section 21 Provisions and Contingencies at paragraph 21.11D says that an entity should only recognise a provi-sion for restructuring costs when the entity has a legal or constructive obligation.

The key to determining whether an entity has an obligation at the reporting date, and hence should adjust the financial statements, would be to determine if the entity has announced the restructuring plans before the year-end and hence if the restruc-turing plan did exist at the year-end. In cases where such plans did not exist at the year-end but were announced subsequent to the year-end and before the financial statements are authorised for issue, this would be a non-adjusting event.

Major asset purchases

Major assets that are purchased after the year-end and before the reporting date would fall to be classed as a non-adjusting event. Capital commitments that exist at the reporting date are also usually disclosed within the notes to the financial state-ments and recognised as and when the transaction takes place.

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There is no distinct section within FRS 102 that deals specifically with assets that are ‘held for sale’, unlike in IFRS 5 Non-Current Assets Held for Sale and Discon-tinued Operations, which outlines the criteria that should be met before an asset can be held for sale. However, paragraph 17.27 says that the entity derecognises items of property, plant and equipment when the entity disposes of the asset or when the entity does not expect any further economic benefits to be derived from the asset (includ-ing its disposal), and the same criteria apply to intangible assets accounted for under Section 18 Intangible Assets other than Goodwill.

Destruction of assets

The classic example in financial reporting is the destruction of a manufacturing plant by fire after the reporting date. This would fall to be classed as a non-adjusting event on the basis that the plant was still in existence at the reporting date and the destruction by fire took place during the intervening period. In this context, disclosure of the event and its financial effects should be made.

Major potential ordinary share transactions after the reporting date

An example of this situation would arise where the entity has convertible loans that are about to expire. These would be classified as a non-adjusting event and disclo-sure should be made to bring to users’ attention the effect that the loan note holders’ conversion of capital to ordinary shares would have on the entity (and the dilutive effect for existing shareholders).

Other situations that would give rise to a non-adjusting event would be the issu-ance of ordinary shares after the reporting date, bonus issues and rights issues of shares.

Unusually large changes in asset prices or foreign exchange transactions

Changes that arise in asset prices or foreign exchange rates that take place after the reporting date are not normally indicative of conditions that were in existence at the reporting date. Where an inordinate change in asset prices or foreign exchange rates takes place during the intervening period and are considered to be material (either in nature or monetary amount) that knowledge of them could influence the decisions of users taken on the basis of the financial statements as a whole, they should be quanti-fied and disclosed as a non-adjusting event.

Such unusually large changes in asset prices or foreign exchange transactions are not considered to be adjusting events because recoverable amounts are often driven by the market and do not normally reflect the conditions that existed at the reporting date.

Changes in tax rates

The Chancellor will normally announce tax rates in the Budget and therefore proposed changes in tax legislation and tax rates will not normally be recognised in the financial statements unless they have been enacted, or substantively enacted, by the reporting date. However, in the event that changes in tax laws and rates may have a significant impact on either current or deferred tax and that are announced or enacted after the reporting date, but before the financial statements are authorised for issue,

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then disclosure should be made to enable users to understand the financial effect that such changes in tax rates will have on the entity’s financial statements.

Entering into significant commitments or contingent liabilities

Commitments that are entered into after the reporting date but before the financial statements are authorised for issue are non-adjusting events because the commitment did not exist at the reporting date. Therefore where the entity enters into commitments with a third party, for which the effect is likely to be material, disclosures adequate for the purposes of users’ understanding of the financial effect of the commitments should be made in the year-end accounts. The commitments will not be adjusted as there was no liability in existence at the reporting date.

Contingent liabilities are not recognised in the financial statements regardless of whether they occur after or before the year-/period-end on the basis that they fail to meet the recognition criteria in Section 21 Provisions and Contingencies. However, where the entity enters into material contingent liabilities between the date of the bal-ance sheet and the date the financial statements are authorised for issue, disclosure should be made together with their estimated financial effect.

Litigation after the reporting date

Where a reporting entity is involved in litigation that commences after the year-/period-end, but before the financial statements are authorised for issue, disclosure should be made. There is no liability recognised because the litigation did not exist at the reporting date and therefore any amounts likely to be paid or received to settle the claim are not recognised in the year-/period-end financial statements.

The provisions in Section 21 concerning disclosures that are likely to seriously prejudice the outcome of a case may also need to be considered when dealing with litigation after the reporting date in the context of post balance sheet events.

PAYMENT OF DIVIDENDS

Dividends that are proposed after the reporting date cannot be recognised ret-rospectively in the financial statements at the reporting date. This requirement also applies where the financial statements have not yet been authorised for issue.

The reason for such a prohibition is down to the fact that at the reporting date no obligation existed. However, dividends proposed will be disclosed within the financial statements.

Dividends are recognised when they are declared and a dividend is declared when they are authorised by the directors and are therefore no longer at the discretion of the entity.

Example – Interim dividend

An entity has a year-end of 31 October 2016 and on 30 September 2016 declared an interim dividend to shareholders. Due to a restriction on the company’s cash flow on 30 September 2016, the shareholders unanimously agreed to receive only half of the

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dividend on 30 September 2016 with the remaining half being paid at a time when the company’s cash flow would permit. The directors do not have the ability to cancel divi-dends to shareholders.

In this scenario, the remaining half of the dividend due to the shareholders would be recognised as a liability because the directors do not have the ability to cancel them and hence the company has a legal obligation to the shareholders to pay the remaining half of the dividend when the cash flow permits.

Final dividends are recognised as a liability in the period in which they are declared. A dividend is declared when it is appropriately authorised and no longer at the discretion of the reporting entity and will remain a liability until such time as the dividend is actually paid. This principle also applies to dividends that are receivable – in other words, the receiving party will recognise a dividend debtor at the same time that the paying company recognises a dividend creditor, provided that the recognition criteria have been met.

Example – Approval of a dividend after the year-end date

A company has a year-end of 31 December 2015 and is in the process of preparing its financial statements for the year then ended. On 4 April 2016, the draft figures have been completed to the final draft stage and the annual general meeting is about to take place. In that meeting, the directors have decided to declare a dividend for the year ended 31 December 2015, amounting to £4 per share, and the finance director is proposing to include this dividend in the financial statements for the year then ended.

The directors have approved the paying of a dividend after the year-end. The issue the company has is that there was no constructive obligation at the year-end to pay the dividend (a constructive obligation would arise where the board resolved to pay the divi-dend before the year-end and this dividend is appropriately authorised). Therefore, in this example, as no constructive obligation arises, the company is not permitted to retrospec-tively recognise the dividend in the 31 December 2015 year-end financial statements. The dividend must be recognised in the 2015/16 financial statements.

Example – Approval of a dividend prior to the year-end date

A company has a year-end of 31 December 2015 and produces monthly management accounts, which are presented to the board and which are discussed in monthly meetings of the directors. The November 2015 management accounts show a healthy profit and on 10 December 2015, the directors decide that a dividend should be proposed in the year-end financial statements amounting to £5 per share because there would be more than sufficient profit available to meet the payment of this dividend to the shareholders.

In this scenario, the company has foreseen that profitability is more than sufficient in order to pay a dividend and they have passed the proposal in the board meeting on 10 December 2015 (which is well before the year-end of 31 December 2015). A constructive obligation arises because the passing of this resolution in the general meeting gives rise to a liability to the shareholders. As a result, the company is able to include the dividend in the financial statements as at 31 December 2015.

The key issue to establish in order to include dividends in the financial state-ments at, or after, the year-end will depend on whether a constructive obligation has

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been met. In other words, dividends declared after the reporting date (in the eyes of Section 32) are, in fact, non-adjusting events and are therefore disclosed, not adjusted for, in the financial statements.

GOING CONCERN

Going concern is a vital concept in the preparation of financial statements and Section 3 Financial Statement Presentation deals with such issues at paragraphs 3.8 and 3.9. It is usually the default presumption that a reporting entity will prepare finan-cial statements on the going concern basis; that is, that the directors consider the busi-ness to be in operation for the foreseeable future. In order for the directors to be able to make a conclusion as to whether, or not, the business will be in operation for the foreseeable future, FRS 102 requires management to consider all available informa-tion available relating to the future for a period of at least 12 months from the date at which the financial statements are authorised for issue.

A company will not be able to prepare financial statements on a going concern basis if management are planning to put the company into liquidation or cease trading or they consider that they have no realistic alternative but to cease trading and instigate liquidation proceedings. In such cases, management will usually prepare the financial statements on a ‘break-up’ basis, where assets are restated at the amount that could be realistically obtained in a sale and will reclassify all long-term liabilities to current liabilities.

Management must also take into consideration any material uncertainties that may give rise to the going concern basis being inappropriate. In this context, ‘material uncertainties’ are significant events that may occur in the future and may result in the company being forced into liquidation or having to cease trading. This could occur, for example, where the organisation is dependent on a large contract being renewed and the renewal date is some months after the financial statements are approved. When this is the case, the notes to the financial statements must include adequate disclosures relating to these material uncertainties.

The going concern presumption is an assertion made by management that the com-pany is to continue in business for the foreseeable future. In assessing the company’s ability to continue as a going concern, management must take into consideration:

The economic conditions the organisation is operating in,The state of the company’s cash flow,Whether borrowing facilities are going to be renewed andWhether external factors such as interest rates or customers’ abilities to pay are likely to affect the company as a going concern.

If the directors consider that the company is NOT a going concern, then they must disclose:

The fact that the company’s financial statements have not been prepared on the going concern basis,Details of the basis that the directors have adopted in preparing the financial statements (for example, the ‘break-up’ basis) andThe reason why the company is not considered to be a going concern.

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There are various conditions that may indicate that a company is not a going con-cern and the following gives some examples of these conditions (note, however, that this list is NOT exhaustive and there may be additional reasons why the going concern ability of a business may be called into question):

A net liability or net current liability position on the balance sheet,Adverse key financial ratios,Arrears or discontinued dividends,A deteriorating relationship with suppliers,An inability to comply with the terms of loan/finance agreements,A loss of major market share, franchise, licence or principal supplier,Major debt repayments falling due where refinancing is necessary to the organ-isation’s continued existence,Major restructuring of debt,Significant operating losses or significant deterioration in the value of assets used to generate cash flows andFinanciers/banks refusing to renew borrowing facilities or ‘calling in’ debts (such as overdrafts) on demand.

Example – Going concern presumption not appropriate

Cahill Caravans has been in business for over 40 years; however, over the last few years demand for caravans has fallen because of the economic climate. The financial state-ments for the year ended 30 April 2016 are about to be prepared. On 4 April 2016, Cahill Caravans received notification from its major customer that it had ceased trading because of severe cash flow difficulties and the receivers had been called in. The receiver has con-firmed that even after selling off assets, the company will not be in a position to pay off any of its debts to unsecured creditors. Cahill Caravans is one of those unsecured credi-tors. The customer owes £175,000 and the directors have therefore concluded that they have no realistic alternative but to close down.

In this example, the financial statements must not be prepared on the going concern basis on the grounds that the company will not be in business for the foreseeable future. An alternative basis must be used, which may be the ‘break-up’ basis (or realisable value basis). All fixed assets would be reclassified as current as they will be sold off to generate some cash. All creditors falling due after more than one year will be reclassified as current liabilities and the financial statements will also contain disclosure that the going concern basis of preparing the financial statements is not appropriate as well as disclosing the basis on which the financial statements have been prepared.

AUTHORISING THE FINANCIAL STATEMENTS FOR ISSUE

In the UK, the financial statements of a company are not formally approved by the shareholders but they are instead ‘laid’ before the members. FRS 102 requires an organisation to disclose the date on which the financial statements were authorised for issue together with details as to who gave that authorisation. Where the owners of a company have the powers to amend the financial statements after they have been issued, that fact must also be disclosed.

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In practice, the financial statements will normally be approved by the board of directors and once they are approved by the board, they will be authorised for issue. Therefore, it follows that it will be the board of directors who authorised the financial statements for issue and, ordinarily, the entity’s owners or any other third party do not have the power to amend the financial statements once they have been issued, so this part of paragraph 32.9 will be unlikely to apply.

The reason why these disclosures need to be made is so that users of the financial statements can understand that the financial statements will not reflect events after the date of authorisation.

Example – Executive and non-executive directors

A company has a unitary board that comprises both executive and non-executive directors. The audit committee is also involved in the oversight of the financial statements.

Where a company’s board comprises both executive and non-executive directors, the non-executive directors will be heavily involved in reviewing and monitoring financial information, which will more than likely be achieved through an audit committee. In addi-tion, both executive and non-executive directors have equal responsibility for the financial statements. Therefore, financial statements will not be authorised for issue unless they have been seen by the non-executive directors.

DISCLOSURE REQUIREMENTS

The disclosure requirements where events after the reporting period are concerned are dealt with in paragraphs 32.9 to 32.11. Paragraph 32.11 outlines various examples of non-adjusting events, which would normally give rise to disclosures within the financial statements.

In relation to each non-adjusting event, a reporting entity should disclose:

(a) An outline of the non-adjusting event and(b) An approximation of the event’s financial effect. Where the entity is unable

to arrive at an approximate estimate of the event’s financial effect, disclosure should be made that such an estimate cannot be made.

Interpretation and Application of UK GAAP by Steven Collings

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