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Hello Mr kim,
Q196-200 in 2021-2022 Kaplan Exam kitThere is one question which was requiring to see whether two of the subsequent events they are adjusting or not but later in another question for the same scenario it was checking whether there should be amendment or not to FS .So here there is some confusion between the two.Can you please clarify.
————Q
Event 2 – Explosion
An explosion occurred at the smallest of the four offsite storage locations on 20 April 20X5. This
resulted in some damage to inventory and property, plant and equipment. Panda Co’s management
have investigated the cause of the explosion and believe that they are unlikely to be able to claim
on their insurance. Management of Panda Co has estimated that the value of damaged inventory
and property, plant and equipment was $900,000 and it now has no scrap value.Answer
196 OPTION 2
The defective inventory is included in the financial statements as at 31 March 20X5. The
quality control checks performed after the year end provide evidence of a condition in
existence at the year end. This is an adjusting event.
The explosion occurred after the year and the damage caused was therefore not a condition
in existence at the year end. This is a non?adjusting event.
199 OPTION 4
Event 1: The write down of $751,000 (850k – 99k) is material as it represents 13.4%
(751/5,600) of profit before tax and 1.4% (751/55,000) of revenue. The directors should
amend the financial statements by writing down the inventory.
Event 2: The damaged assets of $900,000 are material as they represent 16.1% (900/5,600)
of profit before tax and 1.6% (900/55,000) of revenue. The directors should amend the
financial statements by including a disclosure note detailing the explosion and the value of
the assets impacted.Thanks
This is how “adjusting” is described in IAS 10:
“Adjusting events after the reporting period
“An entity shall adjust the amounts RECOGNISED in its financial statements
to reflect adjusting events after the reporting period.”According to the IFRS Conceptual Framework:
“Recognition is the process of capturing for inclusion in the statement of financial position or the statement(s) of financial performance an item that meets the definition of one of the elements of financial statements—an asset, a liability, equity, income or expenses. Recognition involves depicting the item in one of those statements—either alone or in aggregation with other items—in words and by a monetary amount, and including that amount in one or more
totals in that statement.”Therefore, an adjusting event will affect one or more amounts in the SoFP and/or SoCiE and/or SoPL.
Perhaps what is confusing you is that the answer justification using the word “amend” …
“The directors should amend the financial statements by including a disclosure note detailing the explosion and the value of the assets impacted.”
This is correct – a material non-adjusting event is not “adjusted” – i.e. there is no recognition of the effects of the event in the financial STATEMENTS (as I listed above) – but there is DISCLOSURE in the NOTEs to those financial statements.
Thank you very for the detailed answer. I actually know that the adjusting events have to recognized in the financial statements of the period that’s why they are called adjusting events.
The word amending was confusing me.So they mean to say that even though the event of explosion because it was happening after the year end it is not an adjusting events but the financial statements have to be amended by adding the disclosure of this events.
Thanks for help.
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