Boedelbereddering: Is my finansiële sake in orde?
September 5, 2014
Cash is King: How bargaining power can influence your business model, profitability and ultimately cash flow
September 29, 2014

Events after the date of the financial statements

Last month’s article in our series aimed at enlightening clients on the different aspects of the audit process, focussed on what the different types of audit reports really mean. This month we take a look at how financial statements may be affected by certain events that occur subsequent to the date of the statements.

Adjustment and disclosure relating to so-called subsequent events is a requirement of the International Financial Reporting Standards (IFRS) as well as the International Financial Reporting Standards for Small and Medium Entities (IFRS for SMEs). It is of the utmost importance that these events are identified and correctly interpreted, as this provides up to date and relevant information to the users of the financial statements.

Subsequent events can be divided into two main types:

  1. Events that provide evidence of conditions that existed at the date of the financial statements, commonly referred to as adjusting events. These events require appropriate adjustments to be made in the financial statements. Examples are the following:
  • The settling of a court case that confirms that the entity had an obligation as at the reporting date;
  • Liquidation or bankruptcy of a customer that confirms that the trade receivable was not recoverable as at the reporting date;
  • The sale of inventory that provides evidence about the net realisable value (NRV) of the inventory as at the reporting date;
  • Discovery of fraud or errors with regard to the financial information up to the reporting date;
  • Determination of the costs of assets purchased or proceeds of assets sold before the reporting date; and
  • Events that indicate that the going concern assumption is not appropriate.
  1. Events that provide evidence of conditions that arose after the date of the financial statements, commonly referred to as non-adjusting events. These events do not require any adjustments to be made but their nature and, if possible, an estimate of the financial effect, need to be disclosed, if it is expected to be material. Examples are the following:
  • A major change in the value of assets or of foreign exchange rates;
  • Major business combination or disposal of a major subsidiary after the reporting date;
  • Announcement of a plan to discontinue an operation;
  • Major purchases of assets or classification of an asset held for sale, or expropriation of assets by government;
  • Destruction of a major production plant as a result of a natural disaster;
  • Announcement of major restructuring;
  • Major ordinary share transactions;
  • Changes in tax rates or tax law;
  • Entering into major commitments or contingent liabilities;
  • Commencement of major litigation arising solely out of events that occurred after the reporting date; and
  • Dividends declared after the reporting date.

It should be noted that these events need to be disclosed regardless of whether they have a positive or a negative effect on the entity. For example: A major new asset purchase can have a positive effect and should be disclosed, while the loss of a major asset due to a natural disaster can have a negative effect and should be disclosed as well.

As auditors we need to perform certain procedures to satisfy ourselves that all such events are identified and that the necessary adjustments and disclosures are made in the financial statements. It is for this reason that we might inquire about transactions and other events that took place after the date of the financial statements. Should such events come to our attention even after we have signed the audit report, we will have to evaluate the effect thereof on the financial statements.

As part of the procedures performed in identifying such events, we require management to complete a questionnaire that serves as management’s consideration of any subsequent events that might impact the financial statements. In this questionnaire we cover the most common events that might have an effect on the financial statements and give management the opportunity to disclose any other events they may be aware of.

A1

If you need any further information about this matter or generally about the auditing services we offer, please contact your relationship director, or Cecil Mulligan at cecil@asl.co.za, tel. 021 840 1600.