Exam 7: Events After the Reporting Period

The accounting treatment for events after the reporting period depends on whether the events are "adjusting events" or "non-adjusting events."

Which of the following statements is true concerning non-adjusting events?

Define these terms: -Events after the reporting period.

On March 2, 20X7, Blaylock Entity's (BE) annual financial statements for the year ended December 31, 20X7 are authorized for issue. On February 27, 20X7, a hurricane destroyed a production facility in Miami, Florida. The production facility was not insured. What should BE disclose?

There is often significant judgment involved in deciding whether an event is non-adjusting or adjusting.

Dutchman's Conestoga is a large, publicly traded sports store headquartered in Pretoria, South Africa. Dutchman's Conestoga has a year end of December 31, has 100,000 common equity shares outstanding, and declared dividends on December 25 of R2.50 per common equity share. The date of record is January 1, and the date of payment is February 15. The financial statements have not been authorized for issuance. What should the dividend liability be recorded as for Dutchman's Conestoga as of December 31?

Entity A had an excellent year with record profits. However, Entity A experienced an unanticipated and significant downturn after the reporting period, but before the financial statements were authorized for issuance. The downturn was very severe and casts doubt on the ability of the entity to continue. Management must assess this event and determine the appropriateness of the going concern assumption for last year's financial statements.

Define these terms: -Adjusting events after the reporting period.

An entity should not prepare its financial statements on a going concern basis if

Royal Sheffield Motorcycles (RSM) is a public entity headquartered Rotherham, England with a December 31 year end. RSM owns several manufacturing plants in the Phillipines. In January, After the reporting period is over, but before the financial statements are authorized for issuance, RSM's main manufacturing plant is completely destroyed by a devastating monsoon. Along with the factory, 1200 brand new Classic 500cc motorcycles are destroyed. This is a non-adjusting event and does not require a note disclosure.

Define these terms: -Non-adjusting events after the reporting period.

Alford Entity (AE) has a September 30 year end. On December 15, 20X7, AE's financial statements were authorized for issue. On December 8, 20X7, a third-party settled a lawsuit for unpaid royalties owed to AE by paying AE $450,000. AE instigated the lawsuit in 20X6 but the third-party disputed the case until December 1, 20X7. A profit-sharing and bonus plan requires AE to pay a specified proportion of its profit for the year to employees who serve throughout the year. How should AE accounting for this event?

Dividends declared after the reporting period

In February a year after the merger but before the financial statements have been authorized for issuance, Streatham-Croyden Foundries performed a year-end review of its inventory and determined that its inventory of cast iron fixtures was impaired due to changes in style trends. Based on sales, and market analysis, the fixtures became impaired sometime within a ten day window around year end (December 31). Is this an adjusting or a non-adjusting event? Why? What principles in the conceptual framework (chapter 2) guided your decision?

Adjusting events provide additional evidence of conditions that existed at the end of the reporting period so the financial statements should not be adjusted.

Bartlett Orchards in Tipperary, Ireland is a publicly traded entity with a December 31 year end. While preparing a portion of Bartlett Orchard's land for new pear trees, a worker finds a vein of gold worth an estimated €150 million! The timeline is as follows: $\bullet$ March 3: the vein is discovered. $\bullet$ March 4: The 20X1 financial statements are approved by the board of directors and authorized for issuance. $\bullet$ March 8: The vein is appraised and booked as an asset. $\bullet$ March 9: The shareholders formally approve the 20X1 financial statements. Management is excited for the shareholders to know about this as soon as possible. How does Bartlett Orchards go about reporting this event in the 20X1 financial statements?

Olio Puro di Palermo (OPP), is a world-wide distributor of olives and olive oil. It grows most of its olives near San Vito lo Capo. Because of their sizable market in the United States as well as in other parts of the world, issues two sets of financial statements - one conforming to U.S. GAAP and one conforming to IFRS. The timeline of events is as follows: $\bullet$ October 15: De Gaulle Olives (DGO), a major French customer buys a third of the OPP's harvest for olive oil production in France. $\bullet$ September 31: OPP's year end $\bullet$ November 31: Financial statements are authorized by the board of directors $\bullet$ December 1: DGO declares bankruptcy $\bullet$ December 2: Financial statements are approved by the shareholders $\bullet$ December 15: Financial statements are issued Is the bankruptcy of DGO an adjusting or non-adjusting event?

Streatham Steel has been a long-time partner of Croyden Foundry, located in nearby Thornton Heath, England. In late February, the Streatham officially acquired Croyden Foundry. The new company is named Streatham-Croyden Foundries. The companies have been secretly working toward this merger since July of the previous year. Neither company has authorized the issuance of financial statements and both companies have a December 31 year end. They should report as a consolidated entity (an adjusting event).

On February 15, 20X7, Mangrove Entity's (ME) financial statements for the reporting period ended December 31, 20X7, were authorized for issue. On December 28, 20X7, ME declared a dividend of $200,000 to be paid on February 5, 20X8. How should ME account for this event?

Events after the reporting period are defined as those events, favorable and unfavorable, that occur between the end of the reporting period and the date when the financial statements are authorized for issue.