Ind-As 10: Events occurring after reporting period
Introduction : In previous article we discussed the general concept relating to ‘events after reporting period’. In this part we will cover what are the special topic which has been given as exception to general rule; also, we will cover the relevant illustrations which will provide solutions to some practical difficulty.
Long Term Loan Arrangements: It has been provided that in case of long term loan arrangement if there is breach of condition which converts liability from long term to current liability or liability which is payable on demand; and in that case entity settle such breach after financial period but before approval of financial statement; than in such case even if on balance sheet date liability to pay the amount was to be disclosed as current liability, event of settlement i.e. amount will be payable as per original terms and conditions will be treated as adjusting event.
Illustration : Entity has borrowed the funds for the 10 years; one of the condition was that entity will not take the additional borrowing from any other party; however due to some emergency need of funds on 24th March, 2020 entity borrowed the funds from one of the financial institute; due to this breach as on 31st March, 2020 the long term liability of entity become payable on demand and therefore entity was liable to disclose the amount as current liability.
What if entity enters into arrangement that this breach will not make the amount payable on demand?
In this case, as specified above that if entity settles the transaction that amount will be payable as per original terms and conditions will be treated as adjusting event and will be disclosed as long-term liability.
What if in above case entity fails to settle the transaction and amount is still payable on demand?
In such case as on balance sheet date entity if it has already classified such amount as current liability than entity is not required to make any adjustment; but if entity has followed any other method of classification (which is also generally not permissible under any other Ind-As) than entity will be required to classify such amount as current liability.
What if in above case breach has been undertaken on 2nd April, 2020?
In such case, the scenario has not been specified in exception. As per Ind-As 10 only breach which has been in crystalized before 31st March and the settlement or non-settlement of which takes place in next financial year before the approval of financial statements is to be treated as adjusting events even though no condition of such settlement exists as at the end of financial year. In case if event of breach itself takes place in next financial year than it will be adjusted in that financial year itself and no adjustment is to carried out in previous financial year even if financial statements pertaining to such financial year is not been approved. In our illustration if breach has been incurred in financial year 2020-21 than it will be adjusted in financial statement for year ending on 31st March, 2021 and not in 31st March, 2020 even if such financial statements has not been approved.
What if after settlement amount is not payable on demand but it is payable with in 12 months from end of financial year?
As per Ind-As 1 it has been specified that if liability is payable within 12 months from end of reporting period than such liability is to be disclose as ‘current liability’. Now in case even if settlement of transactions is to be treated as adjusting event if entity is liable to pay the amount within 12 months than shall continue to display such amount as under current liability; In case entity is settling the transaction in such a way that amount is not payable on demand but the amount is to be paid after 12 months than in such case amount will disclosed as non-current liability and event will be treated as adjusting event.
Transaction impacting Going Concern of Entity: It is fundamental assumption that entity will prepare its financial statements on going concern basis; i.e. entity is does not intends to liquidate nor it wants to cease trading. It may happen that after the end of financial year for which entity has prepared the financial statement on going concern basis condition exists that cast doubts on entity’s ability to continue as going concern. In such case even though the condition has come to the knowledge of entity after the end of financial year and provides no evidence of such condition as at the end of financial year; such event will be treated as adjusting event.
Illustration: What if immediately after the end of financial year there is fire in plant and entire plant is destroyed? Whether this event will be treated as adjusting event?
In this case, event will be treated as non-adjusting event; but what entity needs to understand is that if entity’s going concern is impacted than in that case event will be treated as adjusting event; difference in treating both event is in case of non-adjusting events entity will be required to disclose the events in the financial statement by way of notes; on the other hand if event is treated as adjusting event than entity will be required to adjust that event in financial statement and in the instant case where assumption going concern is not fulfilled than in that case entity will be required to make the financial statement at realizable value.
Thus, it has been made very clear from above Ind-As that what entity is required to do for the transactions or events taking place immediately after financial year but before the approval of financial statements.