IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Wiley lFRS: Practicallmplementation Guide and Workbook

Case Study 5

Facts The statutory audit of ABC Inc. for year ended June 30, 2005, was completed on August 30, 2005. The financial statements were signed by the managing director on September 8, 2005, and approved by the shareholders on October 10,2005. The next events have occurred. (I ) On July 15,2005 , a customer owing $900,000 to ABC Inc. filed for bankruptcy. The financial statements include an allowance for doubtful debts pertaining to this customer only of $50,000. (2) ABC Inc.' s issued capital comprised 100,000 equity shares. The company announced a bonus issue of 25,000 shares on August 1, 2005. (3) Specialized equipment costing $545,000 purchased on March I, 2005, was destroyed by fire on June 13,2005. On June 30, 2005, ABC Inc. has booked a receivable of $400,000 from the in– surance company pertaining to this claim. After the insurance company completed its investi– gation, it was discovered that the fire took place due to negligence of the machine operator. As a result, the insurer' s liability was zero on this claim by ABC Inc. Required How should ABC Inc. account for these three post-balance sheet events? Solution (I ) ABC Inc. should increase its allowance for doubtful debts to $900,000 because the customer' s bankruptcy is indicative of a financial condition that existed at the balance sheet date. This is an "adjusting event." (2) lAS 33, Earnings Per Share, requires a disclosure of transactions as "stock splits" or "rights is– sue," which are of significant importance at the balance sheet. This is a nonadjusting event, and only disclosure is needed. (3) This is an adjusting event because it relates to an asset that was recognized at the balance sheet date. However, as the insurance company' s liability is zero, ABC Inc. must adjust its receivable on the claim to zero. 6. DIVIDENDS PROPOSED OR DECLARED AFTER THE BALANCE SHEET DATE Dividends on equity share s prop osed or decl ared after the balance sheet date should not be recog– nized as a liab ility at the balance sheet date. Such declaration is a nonadjusting subsequent event

and footnote disclosure is required, unless immateri al. 7. GOING CONCERN CONSIDERATIONS

Deteri oration in an entity' s fin ancial posit ion aft er the balance shee t date could ca st substantia l doubts abou t an entity ' s abi lity to continue as a goi ng concern . lAS 10 requires that an entity should not prep are its fin ancial statements on a goi ng conce rn basis if mana gemen t determines af– ter the balance sheet date eithe r that it inte nds to liqu idate the entity or cease tradi ng, or that it has no reali stic alterna tive but to do so. lAS 10 notes that disclosures prescribed by lAS I under such

circums tances should also be complied with. 8. DISCLOSURE REQUIREMENTS lAS IO requires these thre e d iscl osures :

(I ) The date when the financial statements were autho rized for issue and who gave that authorization. If the entity's owners have the power to ame nd the fin ancial statements after issuance, thi s fact should be discl osed. (2) If info rmation is received after the balance shee t date about conditions that existed at the balance sheet date, disclosures that relate to those conditions should be upd ated in the light of the new info rmatio n. (3) Where non adjusting events afte r the balance shee t date are of such significance that nondiscl osure wo uld affec t the ability of the users of financial stateme nts to make prop er evalua tions and decisions, disclosur e should be made for each such significant category of nonadjusting event regarding the nature of the event and an estimate of its fin ancial effec t or a statement that such an estimate cannot be made.