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- 20 Marks
Question
a) The financial controller of Kantanka Ltd, a technology company, has asked you, a trainee financial accountant within the company, for an explanation of some accounting terminologies and for advice on how to account for various transactions that occurred after the financial year-end date of 31 December 2016.
Required:
Explain TWO (2) reasons why a company would not prepare its financial statements on a going concern basis. (4 marks)
b) In accordance with IAS 10: Events after the Reporting Period, explain what is meant by an ‘event after the reporting period’. (4 marks)
c) How should the information in (b) above be dealt with in the financial statements? (3 marks)
d) i) Kantanka purchased a motor vehicle on 30 December 2016 and paid a non-refundable deposit of GH¢5,000 on that date. He also wrote a cheque on that date for the balance of GH¢20,000. The seller cashed the cheque on 3 January 2017. (3 marks)
ii) Kantanka Ltd was sued by a customer who was unhappy with the quality of a product delivered to him in June 2016. The court case was heard in late October 2016 but it was not until 8 January 2017 that the judge ruled in favor of Kantanka Ltd and awarded it damages of GH¢20,000 to cover its solicitor’s fees. The legal costs were paid by the customer to Kantanka Ltd on 12 January 2017. Kantanka Ltd was unsure of winning the case and had previously included a provision in its financial statements for the year ended 31 December 2016 for compensation and legal costs as follows:
| GH¢ | GH¢ |
|---|---|
| Dr Legal Fees – Administrative Expenses | 25,000 |
| Dr Cost of Sales | 35,000 |
| Cr Provisions – Current Liabilities | 60,000 |
| (4 marks) |
iii) One of Kantanka’s Ltd customers was declared bankrupt on 5 January 2017, owing GH¢4,000 to Kantanka Ltd. (2 marks)
Required:
How should the issues raised in (i) to (iii) be treated in the financial statements of Kantanka Ltd?
Answer
a) Reasons for not Preparing Financial Statements on a Going Concern Basis:
Per paragraph 14 of IAS 10, a company would not prepare its financial statements on a going concern basis if management determines after the reporting period either that:
- It intends to liquidate the company, or
- It intends to cease trading, or that it has no realistic alternative but to do so. (4 marks)
b) Events after the Reporting Period:
Paragraph 3 of IAS 10 states that 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. Two types of events can be identified:
- Adjusting events are those that provide evidence of conditions that existed at the end of the reporting period.
- Non-adjusting events are those that are indicative of conditions that arose after the reporting period. (4 marks)
c) Dealing with Events after the Reporting Period:
Per paragraph 19 of IAS 10, if a company receives information after the reporting period about conditions that existed at the end of the reporting period, it shall update disclosures that relate to these conditions in light of the new information. (3 marks)
d) Treatment of Specific Issues:
i) Purchase of Motor Vehicle: Per paragraph 9(c) of IAS 10, this is an adjusting event. The determination after the statement of financial position date of the cost of assets purchased before the end of the reporting period is an adjusting event after the reporting period. Therefore, the full cost of the motor vehicle needs to be reflected in the financial statements for the year ended 31 December 2016. (3 marks)
ii) Legal Case: Per paragraph 9(a) of IAS 10, this is an adjusting event. The event took place during the reporting period and the settlement after the reporting period of the court case confirms that there was a present obligation at the end of the reporting period. Therefore, the previous provision should be reversed, and the money received for legal fees should be netted against any legal costs that Kantanka Ltd bore in defending the case in the financial statements for the year ended 31 December 2016. (4 marks)
iii) Customer Bankruptcy: Per paragraph 9(b)(i) of IAS 10, this is an adjusting event. The receipt of information after the reporting period indicating that an asset was impaired at the end of the reporting period, such as the bankruptcy of a customer, confirms that a loss existed at the end of the reporting period on a trade receivable. Therefore, Kantanka Ltd should write off the amount as a bad debt in its financial statements for the year ended 31 December 2016. (2 marks)
- Tags: Adjusting Events, Events after the Reporting Period, Going Concern, IAS 10
- Level: Level 1
- Topic: The IASB’s Conceptual Framework
- Series: NOV 2018
- Uploader: Theophilus