IAS 10
Question 5
QUESTION 5 – IAS 10 Events after the end of reporting period (ICAP C6 A05)
Finance Manager of RR Limited approached you to discuss implications of following events on the
financial statements of the company for the year ended June 30, 2005, which are to be placed
before the Board of Directors for approval on August 28, 2005:
(a)
Trade debts as at June 30, 2005 include a debt of Rs. 500,000 recoverable from Mr. P, who
was declared insolvent on August 05, 2005.
(b)
A computer software having carrying value of Rs. 1.5 million had been giving operational
problems since May, 2005. It became totally inoperative in July, 2005. It took 25 days and a
cost of Rs. 31,000 for rectification.
(c)
Investments of the company amounting to Rs.10 million at the year-end were disposed of
for Rs. 6 million in response to a market crash on July 27, 2005.
(d)
At the year end, the company had 950 laptops of a good brand each costing Rs. 65,000.
There was rising trend of prices in the market, which influenced the company’s sale policy
and these computers were retained in stock till July 25, 2005 when market price started
falling and within one week’s time declined to Rs. 68,000. This situation forced the
management to start selling. However, the whole stock could be sold till August 22, 2005
and fetched total sale proceeds of Rs.40.85 million.
(e)
On May 28, 2005, the head of sales department had placed his suggestion to the Chief
Executive Officer (CEO) for a free after-sale-service offer for two years to customers,
effective April 15, 2005. However, the CEO approved the scheme on July 15, 2005 and it
was announced by the company on the same date. It is expected that service cost
attributable to sales made during April15, 2005 to June 30, 2005 would be Rs. 150,000.
Required:
Suggest appropriate accounting treatment in each case with proper reasoning.
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IAS 10
Question 5
ANSWER 5 – IAS 10 Events after the end of reporting period (ICAP C6 A05)
(a)
The bankruptcy of a customer that occurs after the end of reporting period usually confirms
that the loss existed at the end of reporting period. Assuming that the MR. P was doubtful at
the end of reporting period, the carrying amount of trade debts should be adjusted and a
provision should be recognised.
Date
Particulars
Dr. Rs
Cr. Rs
30.06.2005 Doubtful debt expense (P&L)
500,000
Provision for doubtful debts
500,000
(b)
It is a non adjusting event as there was no obligation to rectify the problems at the end of
reporting period. Impairment test should also consider whether the software was impaired
or not at the end of reporting period. The following disclosures may be made:
Nature:
Rectification of computer software
Financial effect:
Rs. 31,000
(c)
The event of market crash occurred after the end of reporting period; therefore, it is a non
adjusting event. However, the following disclosures may be made:
Nature:
Decline in market value of investments
Financial effect:
Rs. 4,000,000
(d)
The price of laptops started falling after the end of the reporting period which indicates a
new condition of stock obsolescence. Therefore, it is a non adjusting event. However, the
following disclosure may be made:
Nature:
Decline in prices of inventories
Financial effect:
Rs. 20,900,000 i.e. (Rs. 65,000 x 950 units) – Rs. 40,850,000
(e)
The company had no obligation to provide warranty services at the end of reporting period
but the company had sold the items by then. In accordance with accrual basis, warranty
cost of Rs. 150,000 (which relates to the year end June 30, 2005) should be accounted for:
Date
Particulars
Dr. Rs
Cr. Rs
30.06.2005 Warranty expenses (P&L)
150,000
Provision for warranty
150,000
Examiner Comments
Treatments of events occurring after balance sheet date are being asked frequently in accounting
papers in recent attempts. A sizeable number of students were well prepared and accordingly
gave satisfactory answers with varying quality of reasoning. However there was a vast majority
who were not very clear as to which situations are an evidence of conditions existing at the
balance sheet date and those which reflect condition arising after the balance sheet date. Most
common mistakes was that decline in value of stocks as was the case in item (d), after the
balance sheet and sale thereof at a price less than cost was incorrectly treated as an adjusting
event although the condition arose after the balance sheet date.
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