IAS 10 Events after the Reporting Period is the international standard that deals with the reporting of subsequent events. First issued in 1978 this standard has been through a number of major revisions, in particular in 2003 and 2005.
IAS 10 Objectives
IAS 10 has two main objectives.
The first objective is to prescribe when an entity should adjust its financial statements for the effects of the events that happened after the reporting period.
And the second objective is to set out what disclosures in its financial statements an entity should make in relation to these events.
Going Concern Assumption
IAS 10 assumes that in meeting these objectives the reporting entity continues to meet the going concern assumption. If it does not then an entity should not prepare its financial statements on a going concern basis. This of course would then have a significant impact on the subsequent event disclosures it would make in its accounts.
So for example if we look at the current economic turmoil so many businesses are facing. If the economic contractions had begun after balance date, due to its severity and uncertainty, this may cause a firm to do longer be a viable business and so would no longer be a going concern.
Reporting of Subsequent Events
The standard requires the reporting of all favourable and unfavorable events occurring between the end of the reporting period and the date when the financial statements are authorised for issue.
Date of Event
First of all we need to determine when the event happened in order to say if IAS 10 applies or not. For example let us say there is a reporting period ending 31st March, with the accounts completed on 31 May. The accounts are then submitted and approved by the Board on 10 June. Final submission and approval by the shareholders takes place at their AGM on 30 June.
In our little example any event happening up until Board approval on 10 June would come within the scope of IAS 10. After this date the requirements of IAS are not met and so its disclosure requirements are to be applied.
Adjusting Subsequent Events
Adjusting events are those events that provide evidence of the conditions that existed at the end of the reporting period. In other words, these events might have happened after the end of the reporting period, but they were a result, or a consequence of something already in existence.
In these cases the financial statements will need to be adjusted for the financial impact of the event as if it fell with the reporting period, in our case 31 March. The classic example provided in this scenario is the out come of a court case. In this example the court’s decision results in the firm having to pay a financial penalty and so this liability, if it meets the definition, along with the expense would be recognised in the reporting entity’s accounts.
Note this would probably mean a change to a provision or contingent liability that the firm had made in line with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
Non-Adjusting Subsequent Events
The second type of subsequent events for reporting are non-adjusting. This covers events for-which the conditions did not exist at balance date. And so in this situation the financial statements are adjusted to recognise any changes in financial data. However, if the events are material a disclosure will need to be made in the financial statements about the nature of that event and an estimate of its financial effect.
Examples of non-adjusting events are declines in the fair value of investments, especially if the decline in fair value is due to the overall decline markets; and the condition arose after the end of the reporting period.
A natural disaster is another example of a non-adjusting event. If for example and earthquake destroys a significant proportion of property. IN this case a note disclosure would be required and the financial impact could perhaps be measurable.
So for events subsequent to balance date we need to establish two facts. First, at what date did management become aware of the event. If this is before the approval of the accounts the will require disclosure. The type of disclosure then depends on whether the event is an adjustable event or non-adjustable. The former will require both adjusts in the financial statements and note disclosures. While the latter will note disclosure only.