IAS 10 – Impact for Banks and Other Financial Institutions

3. IAS 10 – Impact for Banks and Other Financial Institutions

IAS 10 is important for banks as events move quickly in the world of financial services. Any material event between the balance sheet date and the date of approval of the financial statements may be subject to reporting and auditing.

Such events include changes to the environment in which the bank operates as well as specific actions taken by the bank itself. If it is an adjusting event (see below) then the financial statements will have to be changed, involving further costs.

To reduce such events to a minimum, the quicker the financial statements can be approved, the better. The longer the time between the balance sheet date and the approval of the financial statements, the more time is available for reportable events to occur.

It is also in the interests of users for a speedy production and issue of financial statements. Material events after the approval of the financial statements can be communicated to users without changing the financial statements.

Examples that apply to loans that need to be disclosed as post-balance sheet events include

(i) refinancing of loans on a long-term basis;

(ii) rectification of a breach of a long-term loan agreement; and

(iii) the receipt from the lender of a period of grace to rectify a breach of a long-term loan agreement ending at least twelve months after the balance sheet date.

Resolving whether an event should be reported in accordance with IAS 10, a bank should consider its materiality to the financial statements that are being prepared or are awaiting approval. Materiality is a judgement and some guidelines are presented below:

Materiality                               

The nature and materiality of the information affects its relevance, and in some cases the nature of information alone is sufficient to determine its relevance.

Information will also be material where the nature and circumstances of the transaction or event are such that users of the financial statements should be made aware of them.

Determining whether information is material or not is a matter of professional judgement. The test is whether omission or misstatement of the information could influence decisions a user of the financial statements might make.

The following items will often qualify as material, regardless of their individual size:

i)    related party transactions;

ii)    a transaction or adjustment that changes a profit to a loss, and vice versa;

iii)   a transaction or adjustment that takes an undertaking from having net current assets to net current liabilities, and vice versa;

iv)   a transaction or adjustment that affects an undertaking’s ability to meet analysts’ consensus expectations;

v)   a transaction or adjustment that masks a change in earnings or other trends; 

vi)   a transaction or adjustment that concerns a segment or other portion of the undertaking’s business that has been identified as playing a significant role in the undertaking’s operations or profitability;

vii)  a transaction or adjustment that affects an undertaking’s compliance with loan covenants  or other contractual requirements;

viii) a transaction or adjustment that has the effect of increasing management’s compensation, for example by satisfying requirements for the award of bonuses;

ix)   changes in laws and regulations;

x)   non-compliance with laws and regulations;

xi)   fines against the undertaking;

xii)  legal cases;

xiii) deterioration in relationships with individual or groups of key suppliers, clients or employees; and

xiv) dependency on a particular supplier, client or employee.

EXAMPLE- materiality Information is material if its omission or misstatement could, individually or collectively, influence the users’ economic decisions that are based on the financial statements. Should management disclose a change in the classification of an expense that is not material in relation to the equity and net income? Background                 An undertaking reclassifies certain items of PPE, from PPE used for industrial purposes to PPE used for administrative purposes. The related depreciation expense was previously part of cost of sales and has subsequently been reclassified to administrative expenses. Management has decided not to disclose this change in classification because the asset’s carrying value and depreciation expense for the period is not material. Presented below is an extract from the income statement after the adjustment. Revenue 200,000 Cost of sales 199,000 Gross profit 1,000 Loss for the year 45,000 Depreciation reclassified from cost of sales to administrative expenses 1,200 Shareholders’ equity 130,000 Total assets 270,000 Solution Yes. The undertaking should disclose the change in classification. The undertaking has reported a ‘gross profit’ as a result of the reclassification rather than a ‘gross loss’. The presentation of a gross profit rather than a gross loss might alter the users’ perception of the undertaking’s performance.