7. Disclosure
Date of
Approval for Issue
A bank shall disclose the date when the financial statements were
approved for issue, and who gave that approval.
EXAMPLE
‘These financial
statements have been approved for issue by the Board of Directors on 28
February 2XX5.’ (Note at the foot
of the balance sheet.)
If the bank’s owners, or others, have the power to amend the financial
statements after issue, the undertaking shall disclose that fact.
It is important for users to know when the financial statements were approved
for issue, because the financial statements do not reflect events after this
date.
Updating
Disclosure about Conditions at the Balance Sheet
Date
If a bank receives information, after the balance sheet date, about
conditions that existed at the balance sheet date (adjusting events), it
shall update disclosures that relate to those conditions, in the light of the
new information.
In some cases, a bank needs to update the disclosures in its financial
statements to reflect information received after the balance sheet date,
even when the information does not affect the amounts that it records in its
financial statements (non-adjusting events).
One example of the need to update disclosures is when evidence becomes
available, after the balance sheet date, about a contingent liability that
existed at the balance sheet date.
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EXAMPLE –updating disclosure
Your bank has been sued for anticompetitive behaviour. This has been
denied by your bank, and there was only a contingent liability in your
financial statements at 31st December 2XX4.
On January 14th2XX5, the court awards $7 million damages
against your bank.
If your financial statements have not been approved, you create a
provision for $7 million in your financial statements to 31st
December 2XX4, to replace the contingent liability.
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I/B
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DR
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CR
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Legal
costs
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I
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7m
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Provision
against legal costs
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B
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7m
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Creation of provision to replace contingent
liability
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In addition to considering whether it should record, or change, a
provision under IAS 37 Provisions, Contingent Liabilities and Contingent
Assets, a bank updates its disclosures about the contingent liability in the
light of that evidence, by providing comprehensive notes.
Non-adjusting
Events after the Balance Sheet Date
If non-adjusting events after the balance sheet date are material, non-disclosure
could influence the economic decisions of users taken on the basis of the
financial statements.
To comply, a bank shall disclose the following for each material
category of non-adjusting event after the balance sheet date:
(i) the nature of the event; and
(ii) an estimate of its financial effect, or a statement that such an estimate
cannot be made.
The following are examples of non-adjusting events after the balance sheet
date that would generally result in disclosure:
(i) a major business combination after the balance sheet date, or disposal
of a major subsidiary;
(ii) announcing a plan to discontinue an operation, disposing of assets,
or settling liabilities attributable to a discontinuing operation, or entering into
binding agreements to sell such assets, or settle such liabilities;
(iii) major purchases and disposals of assets, or expropriation of major
assets by government;
EXAMPLE
‘On January 5th 2XX5, the government
announced that a new road would be built.
This road will result in the destruction of the bank’s
head office. Negotiations have started with the government for compensation.
The carrying value of the head office building, and
the land on which it stands was $6,3 million, as at 31st December 2XX4.’
(iv) the destruction of a major operating unit by a fire after the
balance sheet date;
(v) announcing, or commencing the implementation of, a major restructuring;
EXAMPLE
‘ On January 9th 2XX5, the board of
directors announced that the group would cease operating in branches smaller
than 500 square metres. Existing branches that are smaller than 500 square
metres will be phased out over the next 18 months.
In the year to 31st December 2XX4, such branches
provided revenues of
$129 million, and a net loss of $2 million. Such branches
comprised fixed assets of $18 million as at 31st December 2XX4,
including property subject to finance leases of $4 million.
368 people were employed in such branches, as at 31st
December 2XX4.
Many of the jobs will be relocated to other group
premises, but a provision of $0,3 million will been made for redundancy costs.’
(vi) Provide a description of ordinary share transactions or potential
ordinary share transactions that occur after the balance sheet date, especially
those that would have changed significantly the number of ordinary shares or
potential ordinary shares outstanding at the end of the period if those
transactions had occurred before the end of the reporting period. ;
EXAMPLE
‘On January 20th 2XX5, the directors were
notified that Big Investment Company had purchased 65% of the ordinary shares
of the bank from Small Investment Company.
Big Investment Company has stated that it wishes to
buy the remaining 35% of the ordinary shares, and intends to notify shareholders
of the terms of the intended purchase over the next 2 months.’
A bank should disclose a description of such transactions, including
when such transactions involve capitalisation, bonus issues, or share splits
(or reverse share splits).
If
the number of ordinary or potential ordinary shares outstanding increases as a
result of a capitalisation, bonus issue or share split, or decreases as a
result of a reverse share split, the calculation of basic and diluted earnings
per share for all periods presented shall be adjusted retrospectively.
If
these changes occur after the balance sheet date but before the financial
statements are authorised for issue, the per share calculations for the
reporting period and any prior period financial statements presented shall be
based on the new number of shares.
The
fact that per share calculations reflect such changes in the number of shares
shall be disclosed. In addition, basic and diluted earnings per share of all
periods presented shall be adjusted for the effects of adjustments resulting
from changes in accounting policies accounted for retrospectively.
(vii) abnormally large changes, after the balance sheet date, in asset
prices, or foreign exchange rates;
EXAMPLE
Your bank has
invested heavily in South American stocks, and has investments worth $100
million at 31st December 2XX4.
On January 19th
2XX5, a series of floods hit the region, causing major industrial devastation.
Stock markets plummet, and remain very depressed until the date of approval of
your financial statements: February 18th.
On February 18th2XX5, the South American stocks are valued at $30 million.
You do not change the figures in
your financial statements to 31st December 2XX4, but note the
post-balance-sheet decline of these investments.
(viii) changes in tax rates, or tax laws enacted, or announced after the
balance sheet date, that have a significant effect on current and deferred tax
assets and liabilities;
EXAMPLE
–deferred tax -1
Your financial
statements at 31st December 2XX4 have been drawn up on the basis of
a national income tax rate of 24%. Your
deferred tax liability forms a major liability in your balance sheet.
On January 30th2XX5,
the government announces that the income tax rate will fall to 18% at the start
of 2XX6.
You do not change the figures in
your financial statements to 31st December 2XX4, but note the future tax
reduction, and its impact on your deferred tax liability.
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EXAMPLE–deferred tax -2
Management
shall not adjust the amounts recognised in the bank’s financial statements to
reflect non-adjusting events after the balance sheet date.
A
new income tax rate is enacted after the balance sheet but before the date
the financial statements are authorised for issue. Should management consider
this event as a non-adjusting event?
Background
A
bank has deferred tax assets recognised in the balance sheet at 31 December
20X1 in respect of unused tax losses that can be used to reduce taxable
income in future years. The income tax rate used to calculate the deferred
asset was 40%, which was the current rate of tax applicable at the balance
sheet date.
On
1 January 2XX2 a new president came to power and on 17 January 2XX2 the
income tax rate was reduced to 33%.
Solution
The
change in the income tax rate was announced (and enacted) after the balance
sheet date, therefore it is a non-adjusting event. The change in the tax rate
is an event that occurred after the year-end. Management shall not adjust the
amounts recognised in its financial statements because of this event.
If
the effect of the new tax rate on the deferred tax
asset will be material, management shall disclose details of the change in
the income tax rate and its related effects on the bank, in the notes to the
financial statements.
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(ix) entering into significant commitments or contingent liabilities, for
example, by issuing significant guarantees;
EXAMPLE
- major guarantees
Following the
preparation of your financial statements at 31st December 2XX4, but
before their approval, your bank agrees to provide major guarantees to your subsidiary’s
correspondent banker, in order to renew your facilities on more favourable
terms.
You do not change the
figures in your financial statements to 31st December 2XX4, but
provide details of the guarantees and the assets provided as security.
(x) commencing major litigation arising solely out of events that occurred
after the balance sheet date.
EXAMPLE
–law suit
Following the
preparation of your financial statements at 31st December 2XX4, but
before their approval, your bank receives notice that the government intends to
sue the company for $8 million for anti-competitive behaviour. (At the balance
sheet date, your bank had no reason to anticipate this.)
You do not change the
figures in your financial statements to 31st December 2XX4, but note
the intention of the government.
Sample Note - 1
(taken from
Illustrated Corporate Financial Statements – 2002, PwC)
Post balance sheet event
On 1 March 2003 the Group acquired a 100% interest in [name
of company] which produces bank software, and is incorporated in [name
of country].
The consideration of Local Currency 7,950 was settled in cash.
The fair value of the net identifiable assets of the
company at the date of
acquisition was Local Currency 5,145.
Goodwill arising on this acquisition of Local
Currency was 2,805.
[Name of company] will be consolidated with effect from 1 March 2003.
Sample Note – 2
(taken from
Illustrative Consolidated Financial Statements 2006 – Banks, PwC)
Events after the balance
sheet date
On 13 March 2007, the
Group announced its intention to acquire ANM Bank.
The transaction has
still to be approved by the Group’s shareholders.
Regulatory approval
is not expected until the end of 2007. Due to the stage of negotiations, the
estimate of financial effect cannot yet be made reliably.
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