Accounting for post balance sheet events- FRS 102

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Whilst we hope that the below questions are beneficial to you, they are not a substitute for reading the relevant accounting standards in full and are not intended to replace the accounting standards. Users of these pages should be aware that different facts and circumstances may exist in relation to similar accounting matters which may significantly change the financial reporting implications, and as a result, these Q&As do not represent a "one size fits all" solution to financial reporting issues.

In these Q&As, we look at post balance sheet events under FRS 102 and some of the commonly asked questions.

1. What is a post balance sheet event?
2. What are examples of adjusting post balance sheet events?
3. How should events that occur after the year end which are classed as adjusting be accounted for?
4. What are examples of non-adjusting post balance sheet events?
5. How should events that occur after the year end which are classed as non-adjusting be accounted for?
6. What are the implications on the financial statements if it is identified after the year end that the company is not a going concern?
7. Should dividends declared after the year end be recognised in the year end’s financial statements?
8. What disclosures are required regarding the authorisation of financial statements?
9. What disclosures are required in relation to non-adjusting events?

1. What is a post balance sheet event?

   Section 32 of FRS 102 defines events after the end of the reporting period as follows:

   “Events after the end of the reporting period are 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. There are two types of events:

   (a) those that provide evidence of conditions that existed at the end of the reporting period (adjusting events after the end of the reporting period); and

   (b) those that are indicative of conditions that arose after the end of the reporting period (non-adjusting events after the end of the reporting period).”

   “Events after the end of the reporting period include all events up to the date when the financial statements are authorised for issue, even if those events occur after the public announcement of profit or loss or other selected financial information.”

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2. What are examples of adjusting post balance sheet events?

   • The settlement after the end of the reporting period of a court case that confirms the entity had a present obligation at the end of the reporting period.
   • The receipt of information after the end of the reporting period indicating that an asset was impaired at the end of the reporting period, or that the amount previously recognised as an impairment loss needs to be adjusted. Examples include:
     • The bankruptcy of a customer occurring after the year end will usually confirm a loss that existed at the end of the reporting period on a trade receivable and that the entity needs to adjust the carrying amount of the trade receivable.
     • The sale of inventory after the year end may give evidence about their selling price at the end of the reporting period for the purpose of assessing impairment at that date.
     • The determination after the end of the reporting period of the cost of assets purchased or proceeds from assets sold, before the end of the reporting period.
     • The determination after the end of the reporting period of the amount of profit-sharing or bonus payments, if the entity had a legal or constructive obligation at the end of the reporting period to make such payments as a result of events before that date.
     • The discovery of fraud or errors that show the financial statements are incorrect.

    

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3. How should events that occur after the year-end, which are classed as adjusting, be accounted for in the financial statements?

   If an event is classed as adjusting then the entity should adjust the amounts recognised in its financial statements, including related disclosures to reflect adjusting events after the end of the reporting period.

   Example - bad debt

   PB Limited is a wholesaler of alcoholic drinks and serves the bar and restaurant sector. It’s most recent year end is 31 December 20X1. On 15 January 20X2, a customer of PB goes into liquidation after a few years of struggling financially and are no longer able to pay the balance owed, being €25,000 at the year-end.

   In this situation, the bankruptcy of a customer after the year end usually confirms that the loss existed at the year-end. As a result, PB Limited should recognise the reduction in trade receivable in the financial statements for 31 December 20X1.
   

    

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4. What are examples of non-adjusting post balance sheet events?

   • A decline in market value of investments between the end of the reporting period and the date when the financial statements are authorised for issue. The decline does not relate to the condition of the investments at the end of the reporting period but reflects circumstances that have arisen subsequently.
   • An amount that becomes receivable as a result of a favourable judgement or settlement of a court case after the reporting date but before the financial statements are authorised for issued. This would be a contingent asset at the reporting date and disclosure may be required. However, agreement on the amount of damages for a judgement that was reached before the reporting date, but was not previously recognised because the amount could not be measured reliably, may constitute an adjusting event.
   • Information that becomes known after the end of the reporting period but before the financial statements are authorised for issue relating to the following:
     • a major business combination or disposal of a major subsidiary;
     • announcement of a plan to discontinue an operation;
     • major purchases of assets, disposals or plans to dispose of assets, or expropriation of major assets by government;
     • the destruction of a major production plant by a fire;
     • announcement, or commencement of the implementation, of a major restructuring;
     • issues or repurchases of an entity’s debt or equity instruments;
     • abnormally large changes in asset prices or foreign exchange rates;
     • changes in tax rates or tax laws enacted or announced that have a significant effect on current and deferred tax assets and liabilities;
     • entering into significant commitments or contingent liabilities, for example, by issuing significant guarantees; and
     • commencement of major litigation arising solely out of events that occurred after the end of the reporting period.

    

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5. How should events that occur after the year-end which are classed as non-adjusting be accounted for?

   Non-adjusting events which occur after the end of a reporting period should not be adjusted in the financial statements for that reporting period.

   The entity should disclose the nature of the non-adjusting event and an estimate of its financial effect or a statement that such an estimate cannot be made. This disclosure is required under both full FRS 102 and FRS 102, section 1A.

   Example - decline in market value

   CS Limited is a company which holds an investment property on its balance sheet. At the year end of 31 December 20X1, the investment property was held at its fair value on 31 December 20X1 of €500,000. In 20X2 a major recession occurred which reduced the fair value of the property by half. In this situation, as the circumstances causing the reduction happened after the year end, this is not an adjusting event. The carrying value at 31 December 20X1 should not be adjusted. However, the details of the reduction since the year end should be disclosed in the financial statements for year ended 31 December 20X1.

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6. What are the implications on the financial statements if it is identified after the year end that the company is not a going concern?

   If management decides after the year end that it either intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so, then it should not prepare its accounts on a going concern basis.

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7. Should dividends declared after the year-end be recognised in the year-end’s financial statements?

   No - If a dividend is declared after the year end, then those dividends should not be recognised as a liability at the end of the reporting period as no obligation existed at the year-end.

   The amount of the dividend may be presented as a segregated component of retained earnings at the end of the reporting period.

   Example

   VB Limited has a year-end of 31 December 20X1. On 1 March 20X2, they declared a dividend of €500,000 to their shareholders in respect of profits earned in the year ended 31 December 20X1.

   As the obligating event (the declaration of dividends) occurred after the year-end, this is a non-adjusting event and therefore a liability for this should not be recognised at the year-end. VB Limited may show the dividends in a segregated component of equity if they wish.

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8. What disclosures are required regarding the authorisation of financial statements?

   An entity is required to disclose the date the financial statements were authorised for issue and who provided that authorisation.

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9. What disclosures are required in relation to non-adjusting events?

   Where an entity has non-adjusting post balance sheet events, the following should be disclosed;

   • The nature of the event; and
   • An estimate of its financial effect or a statement that such an estimate cannot be made.
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