- 4 Marks
Question
Nabdam Ltd operates in the media and publications industry and reports under IFRS. The 2018 financial statements of Nabdam Ltd are still in draft form. The audit is ongoing, and the company intends to authorise the financial statements in April 2019.
Nabdam Ltd rents a distribution warehouse in Korle, located beside the River Odorna. On 3 January 2019, the River Odorna burst its banks, and GH¢650,000 of Nabdam’s inventory was destroyed by the flood. The inventory was not insured, and Nabdam will not receive any compensation for the loss. The company is not sure how to account for this event. The destroyed inventory is included in the inventory figure that is disclosed on Nabdam’s draft statement of financial position at 31 December 2018.
Required:
Explain with justification, the appropriate accounting treatment of the above transaction. (4 marks)
Answer
- The applicable accounting standard is IAS 10: Events After the Reporting Period. IAS 10 defines events after the reporting period as events, both favorable and unfavorable, that occur between the end of the reporting period and the date on which the financial statements are authorized for issue.
- Events after the reporting period can be classified as either adjusting or non-adjusting events. Adjusting events provide evidence of conditions that existed at the end of the reporting period. Non-adjusting events, on the other hand, are indicative of conditions that arose after the reporting period.
- In this case, the flood and the destruction of the inventory occurred on 3 January 2019, which is after the 31 December 2018 reporting date. Since the flood occurred after the reporting period, it is a non-adjusting event.
- Therefore, the GH¢650,000 loss should not be adjusted in the 2018 financial statements. However, due to the materiality of the loss, disclosure is required. Nabdam Ltd should disclose the nature of the event and provide an estimate of its financial effect (GH¢650,000) in its 2018 financial statements.
Marks allocation:
Correct identification of IAS 10 as the relevant standard: 1 mark
Explanation of the distinction between adjusting and non-adjusting events: 1 mark
Classification of the event as non-adjusting: 1 mark
Disclosure requirement due to materiality: 1 mark
- Topic: Financial Reporting Standards and Their Applications
- Series: NOV 2019
- Uploader: Cheoli