at 3.3 below.
3.1 Valuation
of
inventory
The sale of inventories after the reporting period is normally a good indicator of their
net realisable value (NRV) at that date. IAS 10 states that such sales ‘may give evidence
about their net realisable value at the end of the reporting period’. [IAS 10.9(b)(ii)].
However, in some cases, NRV decreases because of conditions that did not exist at the
end of the reporting period.
Therefore, the problem is determining why NRV decreased. Did it decrease because of
circumstances that existed at the end of the reporting period, which subsequently
became known, or did it decrease because of circumstances that arose subsequently? A
decrease in price is merely a response to changing conditions so it is important to assess
the reasons for, and timing of, these changes.
Some examples of changing conditions are as follows:
Events after the reporting period 2957
(a) Price reductions caused by a sudden increase in cheap imports
Whilst it is arguable that the ‘dumping’ of cheap imports after the reporting period
is a condition that arises subsequent to that date, it is more likely that this is a
reaction to a condition that already existed such as overproduction in other parts
of the world. Thus, it might be more appropriate in such a situation to adjust the
value of inventories based on its subsequent NRV.
(b) Price reductions caused by increased competition
The reasons for price reductions and increased competition do not generally arise
overnight but normally occur over a period. For example, a competitor may have
built up a competitive advantage by investing in machinery that is more efficient.
In these circumstances, it is appropriate for an entity to adjust the valuation of its
inventories because its own investment in production machinery is inferior to its
competitor’s and this situation existed at the end of the reporting period.
(c) Price reductions caused by the introduction of an improved competitive product
It is unlikely that a competitor developed and introduced an improved product
overnight. Therefore, it is correct to adjust the valuation of inventories held at the
end of the reporting period to their NRV after that introduction because the
entity’s failure to maintain its competitive position in relation to product
improvements existed at the end of the reporting period.
Competitive pressures that caused a decrease in NRV after the reporting period are
generally additional evidence of conditions that developed over a period and existed at
the end of the reporting period. Consequently, their effects normally require
adjustment in the financial statements.
However, for certain types of inventory, there is clear evidence of a price at the end of
the reporting period and it is inappropriate to adjust the price of that inventory to reflect
a subsequent decline. An example is inventories for which there is a price on an
appropriate commodities market. In addition, inventory may be physically damaged or
destroyed after the reporting period (e.g. by fire, flood, or other disaster). In these cases,
the entity does not adjust the financial statements. However, the entity may be required
to disclose the subsequent decline in NRV of the inventories if the impact is material
(see 2.3 above).
3.2
Percentage of completion estimates
Events after the reporting period frequently give evidence about the profitability of
revenue from contracts with customers, where revenue is measured over time, that are
in progress at the end of the reporting period.
IFRS 15 – Revenue from Contracts with Customers – requires an assessment to be
made of the progress towards complete satisfaction of performance obligations satisfied
over time (see Chapter 28 at 8.2). [IFRS 15.40]. In such an assessment, consideration
should be given to events that occur after the reporting period and a determination
should be made as to whether they are adjusting or non-adjusting events for which the
financial effect is included in the method used to measure progress over time or the
percentage of completion method.
2958 Chapter 34
3.3
Insolvency of a debtor
The insolvency of a debtor or inability to pay debts usually builds up over a period.
Consequently, if a debtor has an amount outstanding at the end of the reporting period
and this amount is written off because of information received after the reporting
period, the event is normally adjusting. IAS 10 states that the bankruptcy of a customer
that occurs after the reporting period usually confirms that the customer was credit-
impaired (Stage 3 under the IFRS 9 general approach – refer to Chapter 47 at 3.1) at the
end of the reporting period. [IAS 10.9(b)(i)]. If, however, there is evidence to show that the
insolvency of the debtor resulted solely from an event occurring after the reporting
period, then the event is a non-adjusting event. If the impact is material, the entity will
be required to disclose the nature and effect of the debtor’s default (see 2.3 above).
3.4
Valuation of investment property at fair value and tenant
insolvency
The fair value of investment property reflects, among other things, the quality of
tenants’ covenants and the expected future rental income from the property. If a tenant
ceases to be able to meet its lease obligations due to insolvency after the reporting
period, an entity considers how this event is reflected in the valuation at the end of the
reporting period.
IAS 40 – Investment Property – requires the fair value of investment property, when
measured in accordance with IFRS 13 – Fair Value Measurement, to reflect, among
other things, rental income from current leases and other assumptions that market
participants would use when pricing investment property under current market
conditions. [IAS 40.40]. In addition, professional valuations generally reference the state
of the market at the date of valuation without the use of hindsight. Consequently, the
insolvency of a tenant is not normally an adjusting event to the fair value of the
investment property because the investment property still holds value in the market.
However, it would generally be indicative of an adjusting event for any rent receivable
from that tenant.
This conclusion is consistent with the treatment of investment property measured using
the alternative cost model. IAS 10 states that a decline in fair value of investments after
the reporting period and before the date the financial statements are authorised for
issue is a non-adjusting event, as the decline does not normally relate to a condition at
the end of the reporting period (see 2.1.3 above). This decline in fair value, however,
may be required to be disclosed if material (see 2.3 above).
3.5
Discovery of fraud after the reporting period
When fraud is discovered after the reporting date the implications on the financial
statements should be considered. In particular, it should be determined whether the fraud
is indicative of a prior period error, and that financial information should be restated, or
merely a change in estimate requiring prospective adjustment. Application of the IAS 8
definitions of a ‘prior period error’ and a ‘change in accounting estimate’ (see Chapter 3
at 4.5 and 4.6) in the case of a fraud requires the exercise of judgement. The facts and
circumstances are evaluated to determine if the discovery of the fraud resulted from a
previous failure to use, or misuse of, reliable information; or from new information. If the
Events after the reporting period 2959
fraud meets the definition of a prior period error, the fraud would be an adjusting event
as it relates to conditions that existed at the end of the reporting period. However, if the
fraud meets the definition of a change in estimate, the application of IAS 10 is required to
determine whether financial information is required to be adjusted, or whether disclosure
is sufficient. The facts and circumstances are evaluated to determine if the discovery of
the fraud provides evidence of circumstances that existed at the end of the reporting
period or circumstances that arose after that date. Determining this is a complex task and
requires judgement and careful consideration of the specifics to each case.
3.6
Changes to estimates of uncertain tax treatments
IFRIC 23, was issued in June 2017 and is mandatory for annual reporting periods
beginning on or after 1 January 2019, with earlier application permitted. [IFRIC 23.B1]. The
Interpretation addresses how to reflect uncertainty in accounting for income taxes. It
requires an entity to reassess any judgement or estimate relating to an uncertain tax
treatment if the facts and circumstances on which the judgement or estimate was based
change, or as a result of new information that affects the judgement or estimate. In cases
where the change in facts and circumstances or new information occurs after the
reporting period, the Interpretation requires an entity to apply IAS 10 to determine
whether the change gives rise to an adjusting or non-adjusting event, as set out above
at 2.1.2 and 2.1.3. [IFRIC 23.13, 14].
Examples of changes in facts and circumstances or new information that could result in
the reassessment of a judgement or estimate required by IFRIC 23 include, but are not
limited to, the following:
(a) examinations or actions by a taxation authority. For example:
(i) agreement or disagreement by the taxation authority with the tax treatment
or a similar tax treatment used by the entity;
(ii) information that the taxation authority has agreed or disagreed with a similar
tax treatment used by another entity; and
(iii) information about the amount received or paid to settle a similar tax treatment;
(b) changes in rules established by a taxation authority; and
(c) the expiry of a taxation authority’s right to examine or re-examine a tax treatment.
[IFRIC 23.A2].
A change in rules established by a taxation authority after the reporting period
constitutes a non-adjusting event. [IAS 10.22(h)]. An entity should apply IAS 10 to
determine whether any other change that occurs after a reporting period is an adjusting
or non-adjusting event. The requirements of IFRIC 23 are further discussed in
Chapter 29 at 9.
2960 Chapter 34
References
1
ED/2017/6
‘Definition of Material’ proposes
2
IFRIC Update, November 2012.
the following amendment to IAS 10.21, in
3
IFRIC Update, May 2013.
order to align IAS 10 with the proposed 4 This is not, in our experience, a common
amendment to the definition of material in
occurrence. An example of disclosure
IAS 8. “If non-adjusting events after the
regarding abnormally large changes in foreign
reporting period are material, non-disclosure
exchange rates after the reporting period can be
could reasonably be expected to influence the
found in the 2014 annual report of UBS AG.
economic decisions that the primary users of an
entity’s financial statements make on the basis
of the those financial statements.
Accordingly, and entity…”.
2961
Chapter 35 Related party disclosures
1 INTRODUCTION .......................................................................................... 2965
1.1
The related party issue ..................................................................................... 2965
1.2 Possible
solutions
............................................................................................... 2965
1.2.1
Remeasurement of related party transactions at fair values ..... 2965
1.2.2 Disclosure
of
transactions ................................................................ 2966
2 REQUIREMENTS OF IAS 24 ....................................................................... 2966
2.1
Objective and scope .......................................................................................... 2966
2.1.1
Objective ............................................................................................. 2966
2.1.2 Scope
....................................................................................................
2966
2.2
Identification of a related party and related party transactions ............... 2967
2.2.1
Persons or close members of a person’s family that are
related parties ..................................................................................... 2968
2.2.1.A
Control ............................................................................ 2970
2.2.1.B Joint
control
...................................................................
2970
2.2.1.C Significant
influence
.....................................................
2970
2.2.1.D
Key management personnel ........................................ 2971
2.2.2
Entities that are members of the same group .............................. 2972
2.2.3
Entities that are associates or joint ventures................................ 2972
2.2.3.A
Joint operations ............................................................. 2974
2.2.4
Entities that are joint ventures of the same third party ............. 2974
2.2.5
Entities that are joint ventures and associates of the same
third entity ........................................................................................... 2975
2.2.6
Post-employment benefit plans ....................................................... 2975
2.2.7
Entities under control or joint control of certain persons
or close members of their family .................................................... 2976
2.2.8
Entities under significant influence of certain persons or
close members of their family .......................................................... 2977
2.2.9
Entities, or any member of the group of which they are a
part, that provide key management personnel services ............. 2977
2962 Chapter 35
2.2.10 Government-related
entities
...........................................................
2978
2.3
Parties that are not related parties ................................................................. 2978
2.4
Disclosure of controlling relationships .......................................................... 2979
2.5 Disclosable
transactions .................................................................................... 2981
2.5.1
Materiality ........................................................................................... 2982
2.6
Disclosure of key management personnel compensation ......................... 2982
2.6.1
Compensation .................................................................................... 2983
2.6.2 Short-term
employee
benefits
........................................................
2984
2.6.3 Post-employment
benefits
..............................................................
2984
2.6.4
Other long-term benefits ................................................................. 2985
2.6.5 Termination
benefits
........................................................................
2985
2.6.6 Share-based
payment transactions ................................................ 2985
2.6.7
Reporting entity part of a group ..................................................... 2985
2.6.8
Key management personnel compensated by other
entities .................................................................................................. 2985
2.6.9 Illustrative
disclosure of key management personnel
compensation ..................................................................................... 2986
2.7
Disclosure of other related party transactions, including
commitments ...................................................................................................... 2986
2.7.1
Related party transactions requiring disclosure .......................... 2986
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 588
