IAS 10 : Adjusting Events after the Balance Sheet Date

4. Adjusting Events after the Balance Sheet Date

A bank shall adjust the amounts recorded in its financial statements, to reflect adjusting events after the balance sheet date.

In the following examples, I/B refers to Income Statement and Balance Sheet.

EXAMPLE confirmation of obligation Your bank has been sued for trademark infringement. You made a provision of $1 million for the lawsuit in your financial statements at 31st December 2XX4 which have not yet been approved. On January 10th 2XX5, the court awards $0,6 million damages against your bank so the provision is adjusted to $0.6m
	I/B	DR	CR
Provision against legal costs	B	0,4m
Legal costs	I		0,4m
Reduction of provision

EXAMPLE crystallisation of liability Your bank has been sued for anticompetitive behaviour. This has been denied by your bank, and no provision was made in your financial statements at 31st December 2XX4. On January 14th 2XX5, the court awards $5 million damages against your bank. If your financial statements have not been approved, you create a provision for $5 million in your financial statements to 31st December 2XX4.
	I/B	DR	CR
Legal costs	I	5m
Provision against legal costs	B		5m
Creation of provision

The receipt of information, after the balance sheet date, indicating that an asset was impaired at the balance sheet date, or that the amount of a previously recorded impairment loss for that asset needs to be adjusted. This will result in an adjusting event.

EXAMPLE impairment -1 At 31st December 2XX4, part of your computer system is being repaired. It has a carrying value of $2 million in your financial statements. On January 16th 2XX5, you are informed that the part is irreparable, and the scrap value is only $0,4 million. If your financial statements have not been approved, you reduce the carrying value of the part to $0,4 million in your financial statements to 31st December 2XX4.
	I/B	DR	CR
Depreciation	I	1,6m
Accumulated depreciation	B		1,6m
Fixed asset impairment provision

EXAMPLE impairment -2 Management shall adjust the amounts recognised in a bank’s financial statements to reflect adjusting events after the balance sheet date. Additionally, it shall update the disclosure related to the conditions that are clarified in the light of the new events. Should management recognise a loss in its consolidated financial statements in respect of the sale of a subsidiary after the balance sheet date, where that subsidiary is sold at a loss? Background T’s management is preparing its consolidated financial statements for the year ended 31 December 2XX2. T disposed of subsidiary X on 15 February 2XX3, incurring a loss of 700,000, which is material to T. T’s consolidated financial statements are due to be finalised on 28 February 2XX3. Management has confirmed that the individual assets held in X have been reviewed for impairment and no provision for impairment is required in the subsidiary’s single-entity financial statements. Management has also confirmed that no other significant events have occurred since 31 December 2XX2 to cause a reduction in the value of X. There has therefore been no material change in the value of X between year-end and the date of disposal.  Solution Yes, management shall adjust the consolidated financial statements because the event provides evidence of conditions that existed at the balance sheet date.  The subsidiary must already have been impaired by the balance sheet date, because there has not been a significant event since then to cause a reduction in the subsidiary’s value. The disposal since year-end simply provides evidence of the impairment. Management shall therefore recognise an impairment of the subsidiary in the consolidated financial statements in accordance with IAS 36.

EXAMPLE existing loss Your bank has a client that owes you $8 million on 31st December 2XX4. On January 9th 2XX5, your client goes into liquidation. You are informed that you will receive nothing from the liquidation. If your financial statements have not been approved, you reduce the carrying value of financial statements receivable by $8 million in your financial statements to 31st December 2XX4
	I/B	DR	CR
Accounts receivable	B		8m
Bad debt provision	I	8m
Bad debt write off

EXAMPLE evidence of realisable value Your bank has some loans receivable that originally cost $5 million. At 31st December 2XX4, they had a carrying value of $1 million, following the recording of loan-loss provisions of $4 million. On February 8th2XX5, these loans were sold for $1,7 million.  If your financial statements have not been approved, you increase the carrying value of loans receivable by $0,7 million in your financial statements to 31st December 2XX4.
	I/B	DR	CR
Loan-loss provision	I		0,7m
Provision	B	0,7m
Increasing loans receivable carrying value

EXAMPLE confirmation of value Your bank sold a subsidiary for $4 million on 1st January 2XX4. In addition, your bank will receive $1 million, if the business that you sold reaches its profit target for the year to 31st December 2XX4. When preparing your financial statements for 31st December 2XX4, you are told that profit target has not been met. Therefore you produce the financial statements to reflect the sale proceeds as $4 million. On January 28th 2XX5, you learn that the profit target had been met, and therefore you are owed $1 million more.  If your financial statements have not been approved, you increase the sale proceeds of the business sold by $1 million in your financial statements to 31st December 2XX4.
	I/B	DR	CR
Accounts receivable	B	1m
Profit on disposal	I		1m
Increase of sale proceeds

EXAMPLE determination of present legal, or constructive obligation Your bank has a profit-sharing system based on the audited profit in the financial statements of 31st December 2XX4. On February 26th 2XX5, your auditors confirm the bank’s profit. The resulting profit-share that will be paid in March 2XX5 amounts to $2,4 million. If your financial statements have not been approved, you increase salary costs by $2,4 million in your financial statements to 31st December 2XX4.
	I/B	DR	CR
Salary costs-bonuses	I	2,4m
Accrued bonuses	B		2,4m
Accruing bonus

EXAMPLE fraud and error Your bank has been compiling the financial statements of 31st December 2XX4. On January 15th 2XX5, your auditors identify some fictitious fee income totaling $10 million. Expenses have also been overstated by $8 million, as part of the fraud. If your financial statements have not been approved, you reduce fees by $10 million, and reduce expenses by $8 million, in your financial statements to 31st December 2XX4.
	I/B	DR	CR
Fee income	I	10m
Expenses	I		8m
Accounts receivable	B		10m
Accounts payable	B	8m
Corrections of fee income and expenses