Suame Ltd is a listed telecommunication company which prepares its financial statements for the year ended 31 October, 2015 in accordance with IFRS. The financial statements are due to be authorised for issue on 15 January 2016.
i) Suame Ltd holds an investment in the shares of a listed company, Asafo Ltd. During November 2015 there was a material fall in the value of Asafo Ltd’s shares. Analysts attribute the fall in value principally to a fraud dating back to December 2014 that was discovered by Asafo Ltd’s management and announced publicly in November 2015.
ii) In December 2015, the directors of Suame Ltd publicly announced a plan to reduce the workforce by 10% as a result of worsening economic conditions.
Required:
Discuss the effects of each of the above items on the financial statements of Suame Ltd for the year ended 31 October 2015 in accordance with IAS 10 Events after the Reporting Period. (4 marks)
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i) The fall in value relates to conditions that arose after the end of the reporting period. Therefore, the fall in value is a non-adjusting event after the reporting period.
Whilst the effect of the fraud may be an adjusting event in Asafo Ltd’s own financial statements, it is not an adjusting event for the value of the company’s shares on the stock market as that market value was based on all information available at that time (for example investors who purchased shares on 31 December at the market price on that date would not be able to make a claim against the previous owner when the fraud was discovered).
In accordance with IAS 10, which requires disclosure of material non-adjusting events after the reporting period, disclosure will be made of:
- the nature of the event
- the amount of the financial effect, ie fall in value.
ii) The announcement of plans to restructure creates a constructive obligation to do a restructuring. As a result, a restructuring provision will be recognised from that date, providing the IAS 37 criteria are met. However, no legal or constructive obligation existed to restructure at the 31 October 2015 year end and this is therefore a non-adjusting event after the reporting period.
In accordance with IAS 10, which requires disclosure of material non-adjusting events after the reporting period, disclosure will be made of:
- The nature of the event
- The amount of the financial effect, ie the expected restructuring costs.