Events after the reporting period under IAS 10 and Polish Accounting Standard No. 7

This article addresses the following questions:

• Is similar guidance for events after the balance sheet date included an IAS 10 and Polish Accounting Standard No. 7?
• What are examples of adjusting events?

In accordance with the Polish Accounting Act, an entity is obliged to prepare its financial statements no later than three months from the balance sheet date. The entity’s authorities then have another three months to approve the financial statements. The entire process can then be completed within a maximum of six months from the balance sheet date. However, there might be a situation that events that materially affect the reported data occur after the balance sheet date to the approval of the financial statements. How should the board of the Polish entity proceed in that case?

Regulations concerning the adjustment of financial statements

If, after the approval of the financial statements, events that materially affect the reported data occur, we can refer to International Accounting Standard 10: Events after the Reporting Period (IAS 10). 

It is worth noting that in Poland the issues regulated by IAS 10 are also included in the Polish Accounting Standard No. 7: Changes in accounting policies, estimates, error adjustment, events after the balance sheet date – recognition and presentation (Krajowy Standard Rachunkowości nr 7 – KSR 7). 

Both of these sources provide clear guidance on disclosing material events after the balance sheet date, so it is worth carefully reviewing the information contained in them.

What does International Accounting Standard 10 (IAS 10) prescribe?

By specifying the procedure after the balance sheet date, IAS 10 defines:

• In which situations an entity should adjust its financial statements for events after the reporting period.
• The disclosures that an entity should give about the date when the financial statements were authorised for issue and about events after the reporting period.

Before discussing IAS 10 in detail, it is worth defining one term which is commonly used across the Standard, namely "events after the reporting period", also referred to as events after the balance sheet date. Events after the reporting period are favourable and unfavourable events that occur between the end of the reporting period and the date when the financial statements are authorised for issue. 

IAS 10 breaks down events after the balance sheet date into:

• adjusting events after the balance sheet date
• non-adjusting events after the reporting period

It is worth noting here that KSR 7 breaks down such events in basically the same manner.

What are adjusting events?

Events which trigger adjustments to the financial statements (adjusting events) include events occurring after the reporting period that give evidence to the existence of a particular state as at the balance sheet date. The entity then discloses the amount not previously reported or adjusts the amount already recognised in the financial statements. 

IAS 10 also includes events that make the going concern assumption with respect to the entirety or part of the entity no longer appropriate. If the management decides after the reporting period either 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.

Deterioration in operating results and financial position after the reporting period should indicate a need to consider whether the going concern assumption is still appropriate. If the entity receives information that the going concern assumption made before is inappropriate, it is necessary not only to adjust the financial statements, but also to make a fundamental change in the accounting policies, implemented in accordance with International Accounting Standard 1: Presentation of Financial Statements (IAS 1).

The events occurring after the balance sheet date and requiring adjustment of the financial statements as at the balance sheet date listed in IAS 10 coincide with those specified in KSR 7. These include:

• The settlement after the reporting period of a court case that confirms that the entity had a present obligation at the balance sheet date; in this case, the entity adjusts any previously recognised provision or creates a new one, as merely disclosing a contingent liability is insufficient.
• The receipt of information after the balance sheet date indicating that an asset was impaired at the end of the reporting period of the entity or that the amount of a previously recognised impairment loss for the asset needs to be adjusted, for example: 
  • The bankruptcy of a customer that occurs after the balance sheet date; this event usually confirms that the loss resulting from the non-recoverability of trade debts existed at the balance sheet date (and therefore, the entity should adjust the value of these debts at the balance sheet date).
  • The sale of inventories after the balance sheet date gave evidence about their net realisable value at the end of the reporting period.
• The determination after the balance sheet date of the exact 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 balance sheet date to make such payments as a result of events occurring before that date).
• The discovery of fraud or errors that show that the financial statements are incorrect.

Non-adjusting events

The second group of events listed in IAS 10 comprises non-adjusting events indicating the status after the end of the reporting period. This means that if, after the balance sheet date, the entity receives information about conditions at the end of the reporting period, it updates the related disclosures in the financial statements.

This obligation is due to the fact that failure to disclose such events would adversely affect the ability of users of financial statements to make appropriate judgement and decisions. The disclosure required by international standards constitutes:

• the nature of the event
• an estimate of its financial effect or a statement that a reasonable estimate cannot be made

The list of examples of non-adjusting events after the balance sheet date includes:

• announcing a plan to discontinue the entity's operation
• a decrease in the market value of investments held by the entity
• declaring dividends payable to holders of the entity’s equity instruments
• carrying out major ordinary share transactions and potential ordinary share transactions (after the balance sheet date)
• a business combination
• disposing of a major subsidiary
• major purchases of assets by the entity
• classifying assets as held for sale or significant disposal of assets by the entity
• expropriation of major assets by the government
• destruction of a major production plant of the entity by fire or flood
• announcing of the commencement (or commencing the implementation) of restructuring of the entity
• major changes in asset prices or foreign exchange rates impacting the entity’s operations
• changes in tax rates or tax laws (if they were enacted or announced after the balance sheet date and have a significant effect on current tax assets and liabilities, but also on deferred tax assets and liabilities)
• entering into significant commitments by the entity
• arising of contingent liabilities (e.g. issuing high guarantees or suretyships)
• commencing major litigation by the entity or it being sued in matters arising solely out of events that occurred after the balance sheet date

IAS 10 and KSR 7 contain similar lists of examples of events after the balance sheet date, but in both cases, the lists are not closed, as it would be impossible to cover all situations that may appear in the business operations of a given entity. 

Note that not all of the above events affect the figures presented in the financial statements (or affect not only the figures). The scope of disclosures is therefore each time strictly conditional on the nature of a particular event. So, to maintain compliance and confidentiality of essential information while dealing with similar situations, it is worth consulting statutory auditors.

Approval of financial statements in compliance with IAS 10

IAS 10 requires that an entity disclose the date when the financial statements were authorised for issue and who gave that authorisation. It should also indicate the power of owners (or other persons) to amend the financial statements after issue.

Approval of the annual financial statements means that they are known to the governing body of the entity and are considered to present a true and fair view of its financial situation and its accurate financial result.

It is important for users to know when the financial statements were authorised for issue, because the financial statements do not reflect events after this date.

Bottom line

Fiscal and tax year-end close is a period of hard work for both accounting departments and senior management. Improper disclosure of events after the balance sheet date is a common error found in financial statements (more on that topic can be found in our previous articles).

It is the responsibility of the management and supervisory boards to make sure that the financial statements of the entity are free of any major error. It should be emphasised in particular in this case, taking into account the impact of information known to the management on events after the balance sheet date that may affect the financial statements. 

It is the managerial staff (and not accountants) who usually have information on disputes, transactions, planned bonus payments, or other material events that affect the entity's filings. 

Therefore, a particularly important issue for the managers is to be transparent and share information with finance and accounting teams and auditors, who assess the impact of this information on the financial statements.