A non-adjusting event is an event that arises after the balance sheet date and is indicative of conditions that arose after the balance sheet date. Adjustments to amounts recognized in the financial statements are not made for material non-adjusting post-balance sheet events. They are, however, disclosed in the notes to the financial statements if they are material.

An entity discloses the nature of the event, and an estimate of its financial effect, for each material category of a non-adjusting event. If it is not possible to estimate an event’s financial effect, an entity must disclose that fact.

Examples of Non-adjusting events Decline in the fair value of investments between the end of the reporting period and the date when the financial statements are authorized for issue. The decline in fair value does not normally relate to the condition of the investments at the end of the reporting period. Instead, it reflects circumstances that have arisen subsequently. The entity does not, therefore, adjust the amounts recognized in its financial statements for the investments. Similarly, amounts disclosed for the investments at the end of the reporting period are not updated but additional disclosure may be required under IAS 10. For quoted investments with a readily ascertainable market price, it will be        straightforward to distinguish between the fair value at the end of the reporting period and any subsequent change in that value. However, for unquoted investments, the position will not usually be so clear. Proceeds of disposal after the end of the reporting period will sometimes provide the best available source of evidence of the value of the investment at the end of the reporting period. In other cases, it will be clear that there are circumstances which affected the value after the end of the reporting period. All the evidence should be carefully considered in such cases. Dividends to holders of equity instruments that are declared after the reporting period should not be recognized as a liability at the end of the reporting period. The declaration of such a dividend is therefore a non-adjusting event. The agreement of a lender to waive or vary loan covenants after the end of the reporting period is treated as a non-adjusting event. a major business combination after the reporting period or disposing of a major subsidiary. announcing a plan to discontinue an operation major purchases of assets, classification of assets as held for sale in accordance with IFRS 5 other disposals of assets, or expropriation of major assets by government A non-current asset or disposal group may be classified as held for sale only if it meets the relevant criteria at the end of the reporting period. However, if the relevant criteria are met after the end of the reporting period but before the financial statements are authorised for issue, IFRS 5 requires specified disclosures to be made. the destruction of a major production plant by a fire after the reporting period; announcing, or commencing the implementation of, a major restructuring; major ordinary share transactions and potential ordinary share transactions after the reporting period (IAS 33 requires an entity to disclose a description of such transactions, other than when such transactions involve capitalization or bonus issues, share splits or reverse share splits, all of which are required to be adjusted under IAS 33); abnormally large changes after the reporting period in asset prices or foreign exchange rates. changes in tax rates or tax laws enacted or announced after the reporting period that have a significant effect on current and deferred tax assets and liabilities; entering significant commitments or contingent liabilities (e.g., by issuing significant guarantees); and commencing major litigation arising solely out of events that occurred after the reporting period.

What is meant by ‘financial effect’?

IAS 10 does not explain the term ‘financial effect’ and whether it refers to the effect on profit or loss, other comprehensive income, equity, cash flows, or the balance sheet. The purpose of disclosing non-adjusting events is to inform the user of the financial statements about material events that have happened since the period ended.

The disclosure should, therefore, give sufficient numerical information to enable the reader to understand the event and its impact on the reporting entity. The exact figures given will depend on the precise facts and circumstances of each non-adjusting event and the information required to understand it and its impact.

Breach of contract

Management should consider disclosure of a breach of a contract or bank covenant that occurs in the period after the balance sheet date. However, breaches as at the balance sheet date, that become apparent after the period ends, often raise issues as to whether an entity’s borrowings should be presented as current or non-current in the balance sheet (that is, whether the event is adjusting or non-adjusting). Such breaches could also give rise to ongoing concerns and uncertainties.

Breach of law or regulation

A breach after the period ends rarely provides further evidence of a condition existing at the balance sheet date, but such breaches are often relevant to a user’s understanding of the entity’s position and prospects. A non-adjusting event is disclosed if the breach has had, or will have, a material impact on the entity.

Major restructuring

A provision is not made for future restructuring costs until a legal or constructive obligation to restructure arises. A post-balance sheet restructuring might, however, provide evidence of impairment at the balance sheet date, which is an adjusting event. Where an entity commences a restructuring after the balance sheet date but before the approval of the financial statements, and the significance of this event could influence the economic decisions of users of the financial statements, the restructuring is disclosed by IAS 37.

Share splits

The number of shares in issue might change after the balance sheet date, as a result of a bonus issue, a share split, or a reverse share split. IAS 33 requires earnings per share to be restated as a result of these events. IAS 10, however, states that they are non-adjusting events and share capital should not be restated. If a regulator requires the restatement of share capital, the treatment should be disclosed in the financial statements.

Changes in foreign exchange rates or asset prices

Changes in currency exchange rates or asset prices occurring after the balance sheet date do not normally reflect the conditions as at the balance sheet date, because the recoverable value at the balance sheet date is defined by the market (that is, by knowledgeable and willing participants).

Example 1 – Movement in foreign exchange rates

An adverse movement on the foreign exchange rate after the period end means that the exchange differences arising on the re-translation of a bank overdraft since the balance sheet date exceed the profit for the period under review.

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How should this be reflected in the financial statements?

Exchange rate changes are included in the list of non-adjusting post-balance sheet events set out in IAS 10. Although the bank overdraft existed at the balance sheet date, the conditions that gave rise to the loss did not. The exchange rate fluctuation occurred after the balance sheet date. So, in normal circumstances, the effect of the exchange rate fluctuations is not adjusted for in the financial statements. The effect of an exchange rate fluctuation should be quantified and disclosed as a post-balance sheet event (as at the latest date before the financial statements are authorized for issue by the directors) if the effect of the fluctuations is material.

Example 2 – Decline in asset market values

An entity holds shares in a listed company. These are included in the balance sheet at market value at the balance sheet date. Subsequently, the listed company discloses financial problems and, as a result, the investment is worth less than at the balance sheet date. Such an event is regarded as non-adjusting. This is because the loss arose after the balance sheet date, and it would have been possible for the holding to be sold for its market value at the balance sheet date. A major stock market movement after the balance sheet date is a similar example of a decline in value that is considered to have occurred after the balance sheet date. Such a ‘crash’ would, therefore, generally be regarded as a ‘non-adjusting’ event.

Acquisitions and disposals

Acquisitions and disposals that are made after the balance sheet date are usually non-adjusting post-balance sheet events that require only disclosure in financial statements. A post-balance sheet disposal might, however, provide evidence of impairment. IFRS 3 requires specific disclosures regarding acquisitions after the balance sheet date.

IFRS 5 requires specific disclosures in respect of assets classified as held for sale after the balance sheet date.

Entities cannot classify a non-current asset or disposal group as held for sale if it only meets the criteria to be classified as held for sale after the balance sheet date.

However, if the criteria are met between the balance sheet date and the date when the financial statements are authorized, the entity should disclose:

• A description of the non-current asset or disposal group.
• A description of the facts and circumstances of the sale, or those leading to an expected disposal, and the expected method and timing of the disposal.
• Where applicable, the segment that the non-current asset or disposal group is part of.

This applies in all cases where an entity presents segmental information.

Changes in tax rates

Proposed or expected changes in tax laws and tax rates are not reflected in the financial statements unless they have been enacted or substantively enacted by the balance sheet date. However IAS 10 requires disclosure of changes in the tax laws and tax rates enacted or announced after the balance sheet date if they have a significant effect on current or deferred tax.

Announcement of change in tax rates

An entity has deferred tax assets, recognized in the balance sheet on 31 December 20X1, in respect of unused tax losses that can be used to reduce taxable income in future years. The income tax rate used to calculate the deferred tax asset was 40%, which was the current rate of tax applicable at the balance sheet date.

A new government came to power on 1 January 20X2 and passed legislation such that, on 17 January 20X2, the income tax rate was reduced to 33% with immediate effect. The change in the income tax rate was announced (and enacted) after the balance sheet date.

Therefore, it is a non-adjusting event. Management should not adjust the amounts recognized in its financial statements because of this event. If the effect of the new tax rate on the deferred tax asset will be material, management should disclose details of the change in the income tax rate, and its related effects on the entity, in the notes to the financial statements. Where applicable, the disclosure should consider the impact on the different performance statements.

Financial commitments

Disclosure is required if an entity enters into any significant commitment or contingent liability after the period ends. This is a non-adjusting event. This is the only specific disclosure requirement concerning commitments in IAS 10, but other standards require disclosure of commitments that exist at the balance sheet date that will affect future periods. These include:

• Capital commitments.
• Future lease cash outflows that are not already included in lease liabilities, such as committed leases that have not yet commenced.
• Commitments in respect of investment properties.
• Other commitments.

Dividends payable and receivable

Dividends to holders of equity instruments are recognized when they have been declared and appropriately authorized and are no longer discretionary. Dividends might be payable only with the approval of the entity’s directors, or they might require other levels of approval (for instance, by the holders of the equity instruments). Therefore, dividends on equity instruments can be considered under four categories:

• Dividends are declared and paid in an accounting period.
• Interim dividends are announced by the directors but unpaid at the balance sheet date.
• Final dividends proposed by the directors but not declared.
• Final dividends declared.

Interim dividends announced by the directors but unpaid at the balance sheet date

Interim dividends announced by the directors but unpaid at the balance sheet date are a liability at that balance sheet date where, and only where, the directors do not retain the ability to cancel them. This is because a legal obligation exists to the shareholders to pay the dividend. In many jurisdictions, the directors retain the discretion to cancel interim dividends until the dividends are paid.

They are not ‘declared’ (that is, they are not appropriately authorized and are no longer at the discretion of the entity) and, therefore, are not recognized until paid.

Interim dividends that are recognized as a liability before payment and where shareholders but not the directors, have a right to waive the interim dividend remain as a liability until waived by the shareholders or are otherwise paid.

Final dividends proposed by the directors but not declared

Final dividends proposed by directors are not a liability until they are declared. In many jurisdictions, final dividends are proposed by directors but are then subject to approval by shareholders in a general meeting, at which point they become formally declared. In practice, final dividends are usually proposed by the directors, after the balance sheet date, for declaration by the company at the annual general meeting at a date even further removed from the balance sheet date.

An entity’s history of paying dividends does not give rise to a liability at the balance sheet date. There must be a legally binding obligation before a dividend is recognized. Therefore, no liability is recognized, at the balance sheet date, for proposed final dividends that are subject to shareholders’ approval.

Final dividends declared

Final dividends should be recognized as a liability in the period in which they are declared (that is, appropriately authorized and no longer at the discretion of the entity); in many jurisdictions, this binding declaration occurs through the passing of a resolution by the entity. The dividends remain as liabilities until they are paid.

The recipient of dividends declared after the year-end should not recognize them as an asset or as income at the balance sheet date. Treatment of dividends in a recipient’s financial statements will mirror that in the paying company − that is, dividends receivable will be recognized when the shareholder’s right to receive payment is established (that is when:-

(a) the entity’s right to receive payment of the dividends is established

(b) the economic benefits associated with the dividends will probably flow to the entity; and

(c) the amount of the dividends can be measured reliably by IFRS 9).

This might have consequences for those entities that depend on dividends from subsidiaries to cover their dividends to shareholders. In some jurisdictions, distributable profits are required to cover dividend payments.

Management is likely to focus on ensuring that the subsidiaries’ dividends are declared and properly approved before the year’s end so that the parent has recognized income. Local regulations governing distributions will govern whether or not the recognized income can then be distributed by the parent.