May 2019 Q6 c.
Danqua Ltd (Danqua) is in the process of finalising its financial statements for year ended 31 March 2019. The draft statements were completed on 14 April 2019, and the audit is currently in progress. The financial statements are expected to be approved by the board of directors on 15 May 2019, and published on 20 May 2019. The following matters have come to light during the audit and your advice is requested. No adjustment has yet been made for any of the following:
i) Closing inventory at 31 March 2019 includes 100 items carried at cost GH¢5,000 each. New safety regulations were announced on 5 April 2019 with immediate effect. The items of inventory do not comply with these regulations. As a result, the net realisable value of the inventory is only GH¢4,500 each.
ii) An investment in unquoted equity instruments was held by Danqua Ltd at 31 March 2019 at an amount of GH¢3.5 million. This was its fair value on 30 September 2018, the most recent reporting date. Due to the unavailability of professional valuers, an updated fair value was not available until 15 April 2019. On this date, the valuer provided an estimated fair value of GH¢2.8 million.
Required:
In each case (i) to (ii) above, prepare a briefing note advising on the accounting treatment and / or disclosures required as a result of the event(s) after the reporting date. (6 marks)
View Solution
i) It would appear that the event causing the loss in value only occurred after the reporting date. There was no condition existing at the reporting date. Had we sold the goods at the reporting date we would have obtained full price for them. Hence this is a non-adjusting event. If the loss is material, disclosure of the event should be made in the notes to the financial statements.
ii) Unless it is clear that a particular event between 31 March and 15 April 2019 caused the drop in the value of this investment, it should be assumed that the investment had in fact lost value on 31 March 2019, and the subsequent valuation only pro-vided evidence of this. Hence, the receipt of the valuation is an adjusting event, and the investment should be written down at the reporting date.