Financial Statements Essay

Tutorial 2
RQ 12.15. What is the difference between the two types of events occurring after the end of the reporting period? Is their accounting treatment identical? Events occurring after the end of the reporting period are defined in AASB 110 as those events, both favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue. There are two types of events described in AASB 110:  adjusting events after the end of the reporting period which provide evidence of conditions that existed at end of the reporting period (e.g. the settlement of a court case after the end of the reporting period that confirms the company had a present obligation at the end of the reporting period)  non-adjusting events after the end of the reporting period are events that are indicative of conditions that arose after the end of the reporting period (e.g. a flood or fire after the end of the reporting period that destroys a company’s building and plant). The treatment in the financial statements is different in both cases. Paragraph 8 of AASB 110 requires the financial effect of the adjusting events to be reflected in the financial statements prepared at the end of the reporting period, i.e. an adjustment must be made to the financial statements before publication. AASB 110, paragraph 21 requires material non-adjusting events to be disclosed by way of note to the financial statements.

PQ 12.4. Classification of after reporting period events Assuming all events are material by reason of size and nature: Date Classification Justification 17 July 2013 Non-Adjusting The storm which caused the loss of the fishing fleet and the uninsured loss of profits occurred after the end of the reporting period and impacts on future conditions. 19 July 2013 Adjusting The receipt and subsequent return of the fishing net provides new information about the assets owned by Camel Ltd as at the end of the reporting period. 29 August 2013 Non-Adjusting The lawsuit arose as a consequence of an after the end of the reporting period event (the storm on 17 July) and it may have material effects on future cash flows or operations if the company has to pay the $4 million damages claim.

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1 September 2013

Non-Adjusting

The issue of $100 000 5% debentures to the public does not relate to conditions existing at the end of the reporting period but will have a material impact on future cash flows.

PQ 12.8. A. 1. Misposting of sales returns notes

These incorrectly posted transactions overstate Sales Revenue and Accounts Receivable by $16 500. Base Amount Profit before tax Sales Revenue Receivables (Current assets) Error as % of base 7.6% 0.2% 3.8%

$218 000 10 000 000 431 000

The error is not greater than 10% for any of the relevant base amounts. However, it is between 5-10% of profit and thus its materiality is a matter of judgement. 2. Uninsured disruption to production output

This disruption (financial effects estimated to be $150 000) will have an overall decreasing effect on future profits. As future profits are concerned average base amounts will be used. Base Amount Average profit before tax Average equity This event is material. 3. Increased cost of raw cotton inventory Error as % of base 56.3% 65.8%

$266 500 228 000

The increase in cost affects Inventory and Accounts Payable by $38 000 ($163 000 $125 000). Base Amount Inventory (Current assets) Accounts payable (Current liabilities) Error as % of base 8.8% 9.6%

$431 000 396 000

Given that the understatement is close to 10% of both base amounts it is likely to be regarded as material.
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4. Receipt of damages (assume that the law suit originated in April 2015, not April 2014) The damages award will increase Revenue and Cash by $1.5 million. Base Amount Profit before tax Cash (Current assets) The item is clearly material. B. The following events provide more information about conditions existing at

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