FRS 102: Events after the reporting period

Events after the reporting period (or ‘post balance sheet events’ as many accountants are familiar with) are carried over into FRS 102 in Section 32 Events after the end of the Reporting Period.  Such events can have a significant impact on a company’s financial statements because of the need to reflect certain transactions which take place after the year-end but occur after the year-end in the financial statements and for other material issues which did not exist at the year-end to make additional disclosures within the notes.

Section 32 refers to two types of event under its scope:

• Adjusting events; and
• Non-adjusting events

Adjusting events

An adjusting event is one which is reflected within the financial statements and is an event where the conditions existed at the year-/period-end but which crystallises after the year-/period-end. The key to identifying whether the event is adjusting is to ensure that it is clear that the conditions giving rise to the event existed at the balance sheet date.  Some examples of adjusting events are:

• The settlement of a court case after the balance sheet date which confirms that an entity had a present obligation at the balance sheet date.
• Receipt of information after the balance sheet date which confirms that an asset has suffered impairment.
• The classic scenario of the bankruptcy of a customer after the balance sheet date which confirms the trade debtor is irrecoverable (ie impaired).
• Sale of stock after the balance sheet date which may give evidence relating to their estimated selling price less costs to complete and sell.
• The cost of assets purchased after the balance sheet date, or proceeds received from the sale of assets sold prior to the balance sheet date.
• Determination of profit-sharing bonus payments made after the balance sheet date.
• Discovery of fraud/error.

If the conditions relating to the above existed at the balance sheet date, they would be reflected within the financial statements.

Example – bonus payments

Company A has always paid bonuses to its two directors based on 5% of profit before tax. The draft management accounts as at 31 March 2016 include a gross bonus, plus employer’s NIC amounting to £11,500 each following the resolution to pay a bonus based on the draft figures on 20 March 2016.  This bonus is not paid until such time that the financial statements are approved because of various adjustments that are often incorporated into the finalised financial statements.  The financial statements are approved four months after the year-end and because of a large stock write-down, the profits have reduced to such an extent that the gross bonus, plus the employer’s NIC should only be £4,500 each.

This is an example of an adjusting event because the decision to pay the bonuses was made prior to the year-end and therefore bonuses will need to be reduced.

 Non-adjusting events

By their definition, non-adjusting events are not adjusted for in the financial statements. This is because their conditions did not exist at the balance sheet date.  Instead, additional disclosures may be required in the financial statements.  Some practitioners have fallen foul to non-compliance with standards regarding post-balance sheet events in the belief that if an event occurs after the year-end, then that is all there is to it and to deal with the issue in the subsequent accounting period.  Section 32 (and its previous FRS 21 Events after the Balance Sheet Date) requires disclosure of a non-adjusting event if non-disclosure would influence the decisions that users make on the basis of the financial statements.

Section 32 offers some (non-exhaustive) examples of non-adjusting events at paragraph 32.7 and 32.11 as follows:

• A decline in the market value of investments between the end of the reporting period and the date when the financial statements are authorised for issue. The decline in market value does not normally relate to the condition of the investments at the end of the reporting period, but reflects circumstances that have arisen subsequently. Therefore, an entity does not adjust the amounts recognised in its financial statements for the investments. Similarly, the entity does not update the amounts disclosed for the investments as at the end of the reporting period, although it may need to give additional disclosure in accordance with paragraph 32.10.
• An amount that becomes receivable as a result of a favourable judgement or settlement of a court case after the reporting date but before the financial statements are authorised for issue. This would be a contingent asset at the reporting date and disclosure may be required by paragraph 21.16. However, agreement on the amount of damages for a judgement that was reached before the reporting date, but was not previously recognised because the amount could not be measured reliably, may constitute an adjusting event.
• A major business combination or disposal of a major subsidiary.
• Announcement of a plan to discontinue an operation.
• Major purchases of assets, disposals or plans to dispose of assets, or expropriation of major assets by government;
• The destruction of a major production plant by a fire;
• Announcement, or commencement of the implementation, of a major restructuring;
• Issues or repurchases of an entity’s debt or equity instruments;
• Abnormally large changes in asset prices or foreign exchange rates;
• Changes in tax rates or tax laws enacted or announced that have a significant effect on current and deferred tax assets and liabilities;
• Entering into significant commitments or contingent liabilities, for example, by issuing significant guarantees; and
• Commencement of major litigation arising solely out of events that occurred after the end of the reporting period.

Example – discontinuing a division

Company A Ltd is a supermarket which operates four different classes of business division: groceries, mobile telephone providers, internet service providers and domestic appliances. Each division is considered material to the financial statements of the company.  The financial year-end is 31 August 2016 and the financial statements have not yet been approved.  On 30 September 2016, the company directors decided that because of extremely difficult trading conditions, and a heavy loss, it would discontinue the domestic appliances division.  This announcement was made on 1 October 2016.

This is a non-adjusting event because the decision to discontinue the division took place after the balance sheet date. However, because the division is considered to be material to the financial statements, it would need to make disclosure concerning the closure of the appliances division.

Example – share issue after year-end

Company B Limited has a year-end of 31 July 2016. On 4 August 2016, it issues a further 1,000 shares in an attempt to raise finance as the company has recently been experiencing cash flow difficulties and the bank have requested shareholders make further investment to demonstrate their commitment to the company before the bank will agree to further lending.

Section 32.11 recognises issues or repurchases of an entity’s debt or equity instruments as a non-adjusting event and therefore this transaction should be disclosed as such within the financial statements.

Going concern

The issue of going concern is a material one in all companies – large and small. When preparing financial statements, the company usually does so on the going concern basis.  However, a company will not be able to use the going concern basis of preparing the financial statements if management determines after the reporting date that it either intends to cease trading or liquidate the business, or has no realistic alternative but to cease trade or liquidate.

In situations when the directors feel that the financial statements should not be prepared on the going concern basis, the effect is so pervasive that there has to be a change in the basis of preparation (ie a basis other than the going concern basis). This alternative basis should not merely be an adjustment to the amounts recognised in the financial statements, but should be a complete change to the basis of accounting.  The ‘break up’ basis is not explicitly mentioned in Section 32, but would be regarded as an appropriate basis when the going concern presumption is not used.

In addition to the change of basis of preparing the financial statements, management must ensure that it discloses the uncertainties about the entity being able to continue as a going concern together with the basis on which the financial statements have been prepared, the fact that they have not been prepared on the going concern basis and the reason why the entity is not regarded as a going concern.

Example – going concern basis not appropriate

Company A Ltd is preparing financial statements to 31 December 2015. On 4 February 2016, following negotiations, the bank have ‘called in’ the overdraft of £500,000 immediately to the company’s ongoing trading difficulties.  This has had a catastrophic effect on the company as they have failed to secure borrowing facilities with other financiers and the directors have decided that they have no realistic alternative but to cease trading with immediate effect and liquidate the company.

The going concern basis is not appropriate in this company’s circumstances, and therefore the directors may make disclosures as follows (please note the following disclosures are illustrative disclosures only and may not be appropriate in every situation).

In the directors’ report:

Statement of directors’ responsibilities

The last bullet point regarding the responsibility of the directors to prepare the financial statements on a going concern basis should be amended to make it clear that, despite their responsibilities still remaining the same, the going concern basis is no longer appropriate. Such a disclosure may be as follows:

As explained in Note X to the financial statements, the directors do not consider the going concern basis to be appropriate and these financial statements have therefore not been prepared on that basis.

Basis of preparation of the financial statements

The basis of preparation paragraph should explain the reasons why the going concern basis is no longer appropriate in the circumstances and the effect of this approach. Such a disclosure could be as follows:

The company has failed to reach agreement with its bankers concerning the renewal of the company’s borrowing facilities. The company has ceased trading with immediate effect and therefore the financial statements have been prepared under the ‘break-up’ basis.  Fixed assets have been restated to recoverable amount on the grounds that the company is no longer trading and are available for sale in their current condition and current assets have been stated at recoverable amounts.  Creditors falling due after more than one year have been reclassified as current liabilities.

Event after the reporting period

This would be relevant in this scenario because the event causing the going concern presumption to be departed from occurred after the year-end. A disclosure example is as follows:

As disclosed in the accounting policies note at Note X, the company ceased to trade on 4 February 2016 on the grounds that the directors have been unable to source additional finance to enable the business to continue as a going concern. The going concern basis is not appropriate and the directors have therefore not prepared the financial statements on that basis.

Dividends

Dividends which are proposed after the balance sheet date cannot be recognised in the financial statements at the balance sheet date. This requirement also applies where the financial statements have not yet been authorised for issue.  This is because at the balance sheet date, no obligation existed.  However, the dividends proposed would be disclosed within the financial statements and could be shown as a separate component of retained earnings at the end of the reporting period.

Date of authorisation of the financial statements

Under Section 32, the entity must disclose the date on which the financial statements were authorised for issue and who gave that authorisation. This disclosure is usually generated automatically by the accounts production software system and may look something as follows:

The financial statements were approved by the Board of Directors on [insert date of approval] and were signed by:

……………………………………………………                                   

J Smith – Director                                                                  

……………………………………………………

B Jones – Director     

If the business owners have the power to amend the financial statements after they have been issued, there must be disclosure also within the financial statements to that effect.

Disclosure requirements – non-adjusting events

As non-adjusting events require disclosure within the financial statements, an entity must disclose the following for each category of non-adjusting event(s) after the end of the reporting period:

(a)        The nature of the event; and

(b)        An estimate of its financial effect or a statement that such an estimate cannot be made.

Category: Accounting and standards, Audit