Exam 7: Events After the Reporting Period

Compounder Pharmaceuticals Entity (CPE) has a year end of December 31. In January 20X1, CPE released a new drug that it claims is extremely effective against many types of cancer. This new drug is heralded as revolutionary. However, in December 20X1, several people are severely injured from taking the drug. Lawyers at CPE surmise that a lawsuit is likely. Later in January 20X2, a class-action lawsuit is formally brought against CPE. CPE's law team estimates that ₤20 million are likely to be awarded to the plaintiffs. The financial statements have not yet been authorized for issuance. Is this an adjusting or non-adjusting event? Why?

A non adjusting event means that you do not have to disclose it in the financial statements.

In 20X8, Germany raised its taxes to meet increasing government deficits. The new tax rate took effect on May 28, just days before Strassbourg Mills' year end. This is an adjusting event for Strassbourg Mills.

Buehler's Broncos, located in The Hague, Netherlands, are the makers of the Denver, a sports utility vehicle. After the year end, but before the financial statements are authorized for issuance, Buehler's Broncos issues a recall of the last two years of the Denver for a fault in casting the engine block that could cause catastrophic engine failure at high speeds. The warranty expense related to this recall is extremely high, and bad publicity is having a strong, negative impact on sales. Is this an adjusting event or a non-adjusting event? Why?

Belmonte Mezzagno, an Italian entity that manufactures wine, aranciata, and other Italian beverages has 2.5 million common equity shares issued and outstanding. On December 20, the board determined that dividends ought to be paid to the shareholders on this year's record profits. On January 3, 20X2, Belmonte Mezzagno formally declared dividends of €0.35 per share. The reporting period ended December 31, 20X1. The financial statements were authorized for issuance by the board on March 15, 20X2. What should the dividend liability be recorded as for Belmonte Mezzagno as of December 31, 20X1?