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Should Taj Corp. adjust its financial statements for the year ended December 31, 2009?
Solution
Taj Corp. should adjust the provision upward by $4 million to reflect the award decreed by the Supreme Court (assumed to be the final appellate authority
on the matter in this example) to be paid by Taj Corp. to its competitor.
Had the judgment of the Supreme Court been delivered on February 25, 2010, or later, this post – reporting period event would have occurred after the
cut-off point (i.e., the date the financial statements were authorized for original issuance). If so, adjustment of financial statements would not have been
required.
Facts
CASE STUDY 4
Shiny Corp. carries its inventory at the lower of cost and net realizable value. At December 31, 2009, the cost of inventory, determined under the first-in,
first-out (FIFO) method, as reported in its financial statements for the year then ended, was $10 million. Due to severe recession and other negative
economic trends in the market, the inventory could not be sold during the entire month of January 2010. On February 10, 2010, Shiny Corp. entered into
an agreement to sell the entire inventory to a competitor for $6 million.
Required
Presuming the financial statements were authorized for issuance on February 15, 2010, should Shiny Corp. recognize a write-down of $4 million in the
financial statements for the year ended December 31, 2009?
Solution
Yes, Shiny Corp. should recognize a write-down of $4 million in the financial statements for the year ended December 31, 2009.
Examples of nonadjusting events include:
• Declaration of an equity dividend
• Decline in the market value of an investment after the reporting period
• Entering into major purchase commitments in the form of issuing guarantees after the reporting period
• Classification of assets as held for sale under IFRS 5 and the purchase, disposal, or expropriation of assets after the reporting period
• Commencing a lawsuit relating to events that occurred after the reporting period
Facts
CASE STUDY 5
The statutory audit of ABC Inc. for the year ended June 30, 2009, was completed on August 30, 2009. The financial statements were signed by the
managing director on September 8, 2009, and approved by the shareholders on October 10, 2009. The following three post – reporting period events have
occurred:
1. On July 15, 2009, a customer owing $900,000 to ABC Inc. filed for bankruptcy. The financial statements include an allowance for doubtful debts
pertaining to this customer of only $50,000.
2. ABC Inc.’s issued capital comprised 100,000 equity shares. The company announced a bonus issue of 25,000 shares on August 1, 2009.
3. Specialized equipment costing $545,000 purchased on March 1, 2009, was destroyed by fire on June 13, 2009. On June 30, 2009, ABC Inc. has
booked a receivable of $400,000 from the insurance company pertaining to this claim. After the insurance company completed its investigation, it
was discovered that the fire took place due to negligence of the machine operator. As a result, the insurer’s liability was zero on this claim by ABC
Inc.
Required
How should ABC Inc. account for these three post – reporting period events?
Solution
1. ABC Inc. should increase its allowance for doubtful debts to $900,000 because the customer’s bankruptcy is indicative of a financial condition that