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Greetings sir,
I have a contention in this chapter. Why would destruction of assets like inventory after the reporting date be considered as a non adjusting event. If some of the inventory for example was destroyed, then would it not indeed affect the closing inventory balance used to prepare the SOPL and the SOFP, and should thus be rather considered as an Adjusting Event, which concerns conditions existing at the reporting date, and effecting the items in the SOFP and SOPL ?
Also, I originally thought that the reporting period meant when the FS are issued, but now I am learning they are two separate events. Why is such a gap existing ? What then exactly happens in the reporting period, if the FS are not issued ?
Thanks sir.
Up until the date that the accounts are signed (which will be later than the year end (the reporting date)) it is possible to make changes to the accounts if necessary.
However since the inventory existed as at the reporting date there is no adjustment (but if the amount is material there will be a note to the accounts about it). It would only be an adjusting event if the inventory figure in the year end accounts was discovered to be wrong, because either it had been counted wrongly or it had been valued wrongly.
What then about the bankruptcy of a customer after the reporting date turning the debt into irrecoverable expense. Why is that an Adjusting event ? Like the inventory explanation, we can contend the customer existed before the reporting date. We could just add a note, if the loss is material. How can one differentiate between this case and the case of the Inventory ?
As at the reporting date, if they had known the customer would go bankrupt they would either have treated the debt as irrecoverable or would have created an allowance for receivables. That is normal practice.
As far as inventory is concerned, either the inventory existed at the reporting date or it didn’t. It is not normal practice to predict that is might be destroyed on a future date.
I meant after the reporting date they found out the customer went bankrupt (not at the reporting date), just as after the reporting date they would find out the inventory got destroyed. So why for one it is an Adjusting event (bankrupt customer) and for the other (inventory destroyed) a non adjusting event ?
I have already explained.
We ask ourselves would things have been shown directly had we known about the event on the reporting date.
If we had known that the debtor had problems we would have either written off the debt or created an allowance for it. The profit for the year would reduce because the sale to the ‘bad customer’ had been made during the reporting period. This is as required by accounting standards.
If we had known at the reporting date that the inventory would end up being destroyed by a fire or whatever, we would not change the inventory as at the reporting date because it existed at the reporting date. Changing the inventory would reduce the profit for the year but that would be wrong because the cost of what was sold is not changed because the event had not occurred during the year.The only time we would charge the loss in the reporting year would be if we knew that we would scrap the inventory ourselves because something was wrong as a result of what happened during the reporting year – that is why we value inventory the way we do.
I actually say all this in my lectures on this. I use both inventory and irrecoverable debts as examples!!
I will watch the “Events after the reporting period” lecture. I found it. Thankyou
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