Busy as bees, words best to describe the financial statement preparers during this audit and tax season. As bookkeepers and accountants are in the process of summarizing those financial records for its presentation, interpretations are done by Ph government tax and regulatory agencies and other users of the financial statements.
External auditors, on the other hand, as part of their engagement quality control review procedures, check details in accordance with applicable financial reporting and auditing standards to ensure that the components of the financial statements are complete and contain necessary disclosure so that end users of the financial statements gain more credibility on what was just the audit report issued on.
A financial statement is considered half-baked if the notes to financial statements are incomplete. Therefore, it is important to put in gist the necessary disclosure financial statement preparers often forgot: Events After the Reporting Period.
As defined by IAS 10, Events After the Reporting Period are those events, favorable and unfavorable, that occur between the end of the reporting period and the date when the financial statements are authorized for issue. The two types of these events are either adjusting events (which requires adjustments in the books) and non-adjusting events (which requires disclosure if this item is considered material to the financial statements).
Management, working alongside with the accountant, should identify and/or keep the external auditor abreast of any events that may require adjustments and disclosure in the notes to financial statements.
Forthwith the list of examples that guides the financial statements preparers on events after the reporting period:
Adjusting events that provides evidence of conditions that existed at the end of the reporting period are the following:
- Events that indicate that the going concern assumption in relation to the whole or part of the entity is not appropriate;
- Settlements after reporting date of court cases that confirm the entity had a present obligation at reporting date;
- Receipt of information after reporting date indicating that an asset was impaired at reporting date;
- Bankruptcy of a customer that occurs after reporting date that confirms a loss existed at reporting date on trade receivables;
- Sales of inventory after reporting date that give evidence about their net realizable value at reporting date;
- Discovery of fraud or errors that show the financial statements are incorrect
Non-adjusting events that is indicative of a condition that arose after the end of the reporting period and do not result in adjustment to the financial statements, but generally would require disclosure:
- Major business combinations or disposal of a major subsidiary;
- Major purchase or disposal of assets, classification of assets as held for sale or expropriation of major assets by government;
- Destruction of a major production plant by fire after reporting date;
- Announcing a plan to discontinue operations;
- Announcing a major restructuring after reporting date;
- Major ordinary share transactions;
- Abnormally large changes, after the reporting date. in asset prices or foreign exchange rates;
- Changes in tax rates or tax law;
- Entering into major commitments such as guarantees;
- Commencing major litigation arising solely out of events that occurred after the reporting date.
The essential takeaways for financial statement preparers for non-adjusting events include a narrative disclosure comprising estimates, assumptions, and results of factual occurrences. The management who oversees business operations is completely aware of current business developments and should not disregard those unfavorable events.
It is a reminder that financial statements, including the notes thereof as to its preparation and presentation, are the responsibility of the management. Learning the ropes in advance and making your external auditor aware of such events after the reporting period facilitates early completion of the financial statements and the timely issuance of the independent auditor’s report.
Every financial statement, as they say, is a tale of financial and nonfinancial events that occurred during the reporting period – but never skip over the events that must be told after the reporting period because they still represent stories from the previous reporting period. In a nutshell, no cliffhanger endings!
Reference Source: IAS 10