Events after the Reporting Period (PAS 10) and Accounting Policies, Estimates, and Errors (PAS 8)

Both standards are about time. PAS 10 asks whether something that happened after the reporting date should reach back into the statements. PAS 8 asks whether a change in accounting should reach backwards or only forwards. Both are decided by a single question asked precisely.

Core concept

PAS 10: the one question

Events after the reporting period are those occurring between the end of the reporting period and the date the financial statements are authorised for issue. The entity discloses that date and who gave the authorisation.

Adjusting event: provides evidence of conditions that existed at the end of the reporting period. Adjust the amounts recognised.

Non-adjusting event: indicative of conditions that arose after the end of the reporting period. Do not adjust; disclose if material.

The test is not when the information arrived. It is when the condition existed.

Adjusting events include:

• the settlement of a court case after the reporting date that confirms the entity had a present obligation at that date;
• the bankruptcy of a customer after the reporting date, which ordinarily confirms that the receivable was already impaired at that date;
• the sale of inventory after the reporting date giving evidence of its net realisable value at that date;
• the determination after the reporting date of the cost of assets purchased or the proceeds of assets sold before it;
• the determination of profit-sharing or bonus payments where a present obligation existed at the reporting date;
• the discovery of fraud or errors showing the statements are incorrect.

Non-adjusting events include:

• a decline in the fair value of investments after the reporting date, since the fall reflects circumstances arising afterwards;
• a major business combination or the disposal of a major subsidiary;
• destruction of a major plant by fire;
• announcing a plan to discontinue an operation, or announcing or commencing a major restructuring;
• abnormally large changes in asset prices or foreign exchange rates;
• changes in tax rates enacted after the reporting date;
• entering into significant commitments or contingent liabilities;
• commencing major litigation arising solely out of events occurring after the reporting date.

Two special rules override the general test.

Dividends declared after the reporting period. An entity shall not recognise a liability for dividends on ordinary shares declared after the reporting date, because no present obligation existed at that date. They are disclosed, not accrued.

Going concern. If management determines after the reporting date that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so, the entity shall not prepare its financial statements on a going concern basis. This is treated as fundamental, and it applies whatever the timing of the deterioration, so it operates as an adjusting event even though the decision was made afterwards.

PAS 8: which direction does the change reach?

	Change in accounting policy	Change in accounting estimate	Prior period error
What it is	A change in the basis of measurement or recognition	A revision of the carrying amount from new information	An omission or misstatement from failure to use, or misuse of, reliable information that was available
Treatment	Retrospective application	Prospective	Retrospective restatement
Effect	Restate comparatives; adjust the opening balance of retained earnings of the earliest period presented	Recognise in the current period, and future periods if affected	Restate comparatives; adjust the opening balance of retained earnings

A change in accounting policy is permitted only where it is required by a PFRS, or where it results in financial statements providing reliable and more relevant information. Applying a policy to transactions that differ in substance from those previously occurring is not a change in policy. Neither is applying a new policy to transactions that did not occur previously or were immaterial.

Retrospective application and restatement are excused where they are impracticable, that is, where the entity cannot apply them after making every reasonable effort. In that case the entity adjusts from the earliest period for which retrospective treatment is practicable.

Two boundary rules the Board tests repeatedly:

• A change in depreciation method is a change in accounting estimate, not of policy. So is a change in the useful life or residual value of an asset. Each is a revision of the expected pattern of consumption of the asset's future economic benefits, applied prospectively.
• Where a change is difficult to distinguish between a change in policy and a change in estimate, it is treated as a change in accounting estimate.

A change from a policy that is not permitted by a PFRS to one that is, or the correction of a mathematical mistake, is the correction of an error, not a change in policy.

How this appears in the exam

• A customer declares bankruptcy in February, before the March authorisation date, on a receivable outstanding at 31 December. The receivable was already impaired at year-end. Adjust.
• A warehouse burns down in January. The condition arose after year-end. Do not adjust; disclose.
• Dividends are declared in February on ordinary shares. No liability at 31 December. Disclose.
• An entity switches from the straight-line to the double-declining method. This is a change in estimate, applied prospectively. No comparative is restated.
• An entity discovers that depreciation was omitted entirely two years ago. This is a prior period error, restated retrospectively.

Common traps

• Adjusting for a post-year-end decline in the fair value of investments. The decline reflects conditions arising after the reporting date. Non-adjusting.
• Accruing dividends declared after the reporting period. PAS 10 forbids it: there was no obligation at the reporting date.
• Treating a change in depreciation method as a change in policy. It is a change in estimate, applied prospectively, and no prior period is touched.
• Restating comparatives for a change in estimate. Estimates never reach backwards.
• Applying the general adjusting-event test to a going concern problem. Abandoning going concern always changes the basis of preparation, regardless of when the decision was made.

Worked examples

Example 1: sorting the events

Rizal Trading's reporting period ends 31 December 20x4, and the financial statements are authorised for issue on 20 March 20x5. Classify each event.

On 15 January 20x5 a major customer files for insolvency. The customer owed P1,800,000 at 31 December 20x4, and its financial condition had been deteriorating throughout 20x4. Adjusting. The insolvency confirms that the receivable was already impaired at the reporting date. Increase the allowance and the loss for 20x4.

On 2 February 20x5 inventory carried at a cost of P900,000 at year-end is sold for P700,000, net of selling costs. Adjusting. The sale provides evidence of the net realisable value at the reporting date. Write the inventory down by P200,000 in 20x4.

On 10 February 20x5 the board declares a cash dividend of P3,000,000 on ordinary shares. Non-adjusting, and specifically no liability is recognised at 31 December 20x4. Disclose the dividend.

On 1 March 20x5 a fire destroys the entity's main warehouse, a loss of P25,000,000. Non-adjusting. The condition arose after the reporting date. Disclose the nature of the event and an estimate of its financial effect.

On 5 March 20x5 Congress enacts a reduction in the corporate income tax rate, effective 20x6. Non-adjusting. PAS 12 requires the rate enacted or substantively enacted by the end of the reporting period, so the 20x4 deferred taxes are not remeasured. Disclose.

On 12 March 20x5 the directors resolve to liquidate the entity, having no realistic alternative. The 20x4 financial statements must not be prepared on a going concern basis, even though the decision came after the reporting date.

Example 2: policy, estimate, or error

Cebu Mills changes its inventory cost formula from weighted average to first-in, first-out because the new formula gives more relevant information. A change in accounting policy. Apply retrospectively: restate the comparative period and adjust the opening retained earnings of the earliest period presented.

It changes the estimated useful life of a machine from ten years to seven, three years into its life. A change in accounting estimate. Apply prospectively. The remaining carrying amount is depreciated over the remaining four years. Nothing already reported is disturbed.

It changes from the straight-line method of depreciation to the sum-of-the-years-digits method. Also a change in accounting estimate, since the method reflects the expected pattern of consumption. Prospective.

It discovers that P400,000 of research costs were capitalised two years ago, which PAS 38 never permitted. A prior period error. Apply retrospective restatement: restate the comparatives and adjust opening retained earnings. This is not a change in policy, because the old treatment was never an allowable policy.

Example 3: the effect of a change in estimate

Cebu Mills bought equipment on 1 January 20x1 for P5,000,000, with an estimated useful life of 10 years and no residual value, depreciated on the straight-line basis. On 1 January 20x4 it revises the total useful life to 7 years, still with no residual value.

Accumulated depreciation through 20x3 = (P5,000,000 / 10) x 3 = P1,500,000

Carrying amount at 1 January 20x4 = P5,000,000 - P1,500,000 = P3,500,000

Remaining useful life = 7 - 3 = 4 years

Depreciation for 20x4 = P3,500,000 / 4 = P875,000 each year for four years

The P1,500,000 already recorded is not touched, and no comparative is restated. The change is absorbed prospectively over the remaining life.

Quick review

• Events after the reporting period run from the reporting date to the date of authorisation for issue, which must be disclosed.
• Adjusting if the event provides evidence of a condition existing at the reporting date. Non-adjusting if the condition arose after. Disclose material non-adjusting events.
• Dividends declared after the reporting period are never a liability at that date. Abandoning going concern always changes the basis of preparation, whenever the decision was taken.
• Change in accounting policy: retrospective application, comparatives restated, opening retained earnings adjusted. Permitted only if required by a PFRS or if it yields reliable and more relevant information.
• Change in accounting estimate: prospective, current and future periods only.
• Prior period error: retrospective restatement.
• A change in depreciation method, useful life, or residual value is a change in estimate. Where policy and estimate cannot be distinguished, treat the change as a change in estimate.