Subsequent Events Under IAS 10: Adjusting vs Non-Adjusting Events
Subsequent events are events that occur between the end of the reporting period and the date when the financial statements are authorized for issue. Under IAS 10 Events After the Reporting Period, these events require careful evaluation to determine whether they affect the financial statements.
What Are Subsequent Events?
IAS 10 defines subsequent events as both:
- Favorable and unfavorable events that occur after the reporting period
- Events that provide evidence of conditions that existed at the end of the reporting period (adjusting events)
- Events that are indicative of conditions that arose after the reporting period (non-adjusting events)
Two Types of Subsequent Events
1. Adjusting Events
These events provide evidence of conditions that existed at the end of the reporting period. Financial statements must be adjusted to reflect these events.
Examples of Adjusting Events
- Bankruptcy of a customer: A major customer's financial difficulties that became evident after year-end confirm that an existing receivable is uncollectible
- Settlement of a lawsuit: A lawsuit that was pending at year-end is settled, confirming a liability that should have been recognized
- Inventory obsolescence: Physical inventory count after year-end reveals damaged inventory that existed at year-end
- Tax audit adjustments: Tax authority assessment received after year-end confirms tax expense that should have been recognized
- Impairment indicators: Decline in fair value of investments after year-end indicates impairment that existed at year-end
2. Non-Adjusting Events
These events are indicative of conditions that arose after the reporting period. Do not adjust financial statements but may require disclosure.
Examples of Non-Adjusting Events
- Business combination: Entity acquires another business after year-end
- Major ordinary activities: Significant purchase or disposal of assets after year-end
- Decling in fair value: Decline in fair value of investments after year-end (unless indicates impairment existed)
- Changes in foreign exchange rates: Changes occurring after year-end
- Announcing restructuring: Management decides to restructure after year-end
- Distributing dividends: Dividends declared after year-end relating to the prior period
Authorization for Issue
Determining when financial statements are "authorized for issue" is critical:
- Date when management authorizes financial statements for issue
- Typically the date financial statements are approved by the board or audit committee
- Events after this date are not accounted for in the financial statements
- Must disclose when financial statements were authorized and who gave authorization
Going Concern Assessment
IAS 10 requires specific consideration of going concern for non-adjusting events:
- If non-adjusting events indicate going concern may no longer be appropriate, treat as adjusting event
- Assess whether financial statements should be prepared on going concern basis
- Disclose facts if financial statements are not prepared on going concern basis
Disclosure Requirements
For Non-Adjusting Events:
- Nature of the event
- Estimate of financial effect (or statement that such estimate cannot be made)
For Dividends:
- Disclose dividends declared after reporting period (not recognized as liability at year-end)
- Disclose amount per share
Audit Procedures for Subsequent Events
Auditors must perform procedures to identify subsequent events:
1. Inquiries of Management
- Ask about procedures for identifying subsequent events
- Inquire about any subsequent events not previously communicated
2. Review Subsequent Period Records
- Review minutes of board meetings after year-end
- Review interim financial statements (if prepared)
- Review cash payments and receipts after year-end
3. Letters of Representation
- Obtain written representation about subsequent events
- Confirm all events requiring adjustment or disclosure are included
4. Events After Year-End
- Review events up to date of auditor's report
- Consider whether auditor's report date needs to be changed
Key Takeaways
- Adjusting events: Exist at reporting period date → adjust financial statements
- Non-adjusting events: Arise after reporting period → disclose (unless going concern issue)
- Authorization date determines which events require consideration
- Proper documentation and disclosure protects against material misstatement
Decision Framework
When evaluating a subsequent event, ask:
- Did the event occur after the reporting period?
- Does it provide evidence of conditions that existed at reporting date? → Adjust
- Does it indicate conditions that arose after reporting date? → Disclose (if material)
- Does it cast doubt on going concern? → Assess and potentially adjust
