Question Tag: Events After Reporting Period

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  • 5 Marks

FR – Nov 2023 – L2 – Q5b – Financial Reporting Standards and Their Applications

Explain the accounting treatment of an event after the reporting period for a specific type of inventory

Kaime Ltd (Kaime) deals in cosmetics and make-up manufacturing and with year-end 31
December 2022. Its date of authorization of financial statements for issue was 9 February 2023 and the annual general meeting is scheduled on 8 March 2023. The following event occurred:
A particular type of inventory held by Kaime at a different location was recorded at its cost of GH¢598,000 at 31 December 2022 in the statement of financial position. The entity sold 70% of this inventory for GH¢364,000 on 15 January 2023, incurring a commission expense of 15% of the selling price of the inventory. The remaining 30% of the inventory are estimated to be realised at cost.

Required:
In accordance with IAS 10: Events after the Reporting Period, explain the appropriate accounting treatment of the event in the financial statements of Kaime for the year ended 31 December 2022

This will be treated as an adjusting event as the sale of inventory after the reporting date reflects that the NRV of inventory is less than the cost.

The NRV of 70% inventory is GH¢309,400 calculated using the selling price of GH¢364,000 less commission expense of GH¢54,600 (GH¢364,000 × 15%), and it has a cost of GH¢418,600 (GH¢598,000 × 70%).

NRV = 364,000 – 54,600 = 309,400

Value of Inventory = GH¢309,400 + (30% of 598,000) = GH¢309,400 + GH¢179,400 = GH¢488,800

Inventory write-down = GH¢598,000 – GH¢488,800 = GH¢109,200 (in SOP/L).

(Marks are evenly spread using ticks = 5 marks)

  • 5 Marks

CR – Nov 2017 – L3 – Q2d – IAS 10: Events After the Reporting Period

Recommend the accounting treatment for a doubtful debt arising after the reporting period.

Adonko Ltd is a listed Ghanaian company that reports under International Financial Reporting Standards (IFRS) with 31 December as the financial year-end. The company performed some work for Adenta Municipal Assembly, a local government authority, during 2016 and issued an invoice for the work for GH¢12 million in July 2016. The invoice was accepted as valid by the local government authority but remains unpaid at the year-end.

In January 2017, following extensive press coverage, financial information was published showing that Adenta Municipal Assembly is heavily indebted and is unable to meet its obligations and pay its suppliers, including Adonko Ltd. This was unexpected by Adonko Ltd, and no allowance had previously been made against the debt in Adonko Ltd’s financial statements.

The Government of Ghana stated on 1 February 2017 that it was not prepared to fund the excesses of regional and local governments and that regional and local governments will need to make the necessary sacrifices to balance their budgets. Adenta Municipal Assembly stated that its priority was the provision of social amenities and economic well-being of its inhabitants and that other suppliers must wait for payment, with no date specified. Based on written correspondence with the local government’s legal advisers, Adonko Ltd believes it will eventually receive full payment, although this may take several years, and that interest on late payments is unlikely.

Required:
As the Finance Director of Adonko Ltd, recommend the accounting treatment of the above, in the financial statements for the year ended 31 December 2016.

  • Event After the Reporting Period:
    The situation described is an event after the reporting period (IAS 10) because it provides additional evidence of conditions that existed at the reporting date (31 December 2016). The financial difficulties of the Adenta Municipal Assembly relate to the recoverability of the debt.
  • Adjusting Event:
    Since the new information provides additional evidence of the financial difficulties of the debtor, the event is classified as an adjusting event under IAS 10. The debt should be reassessed in the light of this new information, even though it was discovered after the reporting period.
  • Impairment of Receivable:
    The delayed payment indicates an impairment of the receivable. Although the amount may eventually be recovered, the delay implies a reduction in its present value. The debt should be discounted to reflect the time value of money for the period Adonko Ltd expects to wait for payment. This results in recognizing an impairment loss in profit or loss for the year ended 31 December 2016.
  • No Interest on Late Payment:
    As there is little expectation that interest on the delayed payment will be received, no interest income should be recognized for this debt in 2016 or future periods.

(5 marks)

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