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Chapter
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EVe1Its afte r the Balance Sheet Date (l AS
/0)
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• The sale of property, plant , and equipment for a net selling price that is lower than the carry–
ing amoun t is indicative of an impairment that took place at the balance sheet date .
• The determination of an incentive or bonus paymen t after the balance sheet when an entity
has a constructive obligation at the balance sheet date.
• A deterioration in the financial position (recurring losses) and operating results (working
capital deficiencies) of an entity that has a bearing on the entity' s continuance as a "going
concern" in the foreseeabl e future.
Case Study
3
Facts
During the year 2005, Taj Corp. was sued by a competitor for $ 15 million for infringement of a
trademark . Based on the advice of the company' s legal counsel, Taj Corp . accrued the sum of $10
million as a provision in its financial statements for the year ended December 31, 2005. Subsequent to
the balance sheet date, on February 15, 2006, the Supreme Court decided in favor of the party alleging
infringement of the trademark and ordered the defendant to pay the aggrieved party a sum of $14 mil–
lion. The financial statements were prepared by the company' s management on January 31, 2006, and
approved by the board on February 20, 2006.
Requ ired
Should Taj Corp. adjust its financial statements for the year ended December 31, 2005?
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, 2005, or later, this post-balance
sheet event would have occurred after the cutoff point (i.e., the date the financial statements were au–
thorized for original issuance). If so, adjustment of financial statements would not have been required.
Case Study 4
Facts
Shiny Corp. carries its inventory at the lower of cost and net realizable value. At Decemb er 31, 2005, 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 eco–
nomic trends in the market, the inventory could not be sold during the entire month of January 2006. On
February 10,2006. Shiny Corp. entered into an agreement to sell the entire inventory to a competitor for
$6 million.
Req uired
Presuming the financial statements were authorized for issuance on February 15, 2006 , should Shiny
Corp. recognize a write-down of $4 million in the financial statements for the year ended December 31,
2005?
Solution
Yes, Shiny Corp. should recognize a write-down of $4 million in the financi al statements for the year
ended December 31, 2005.
Examples of nonadjusting events include
• Declaration of an equity dividend
• Decline in the market value of an investment after the balance sheet date
• Entering into major purchase commitments in the form of issuing guarantees after the balance
sheet date
Classification of assets as held for sale under IFRS 5 and the purchase, disposal, or expropriation
of assets after the balance sheet date
• Commencing a lawsuit relating
to
events that occurred after the balance sheet date