Understanding Events After the Reporting Period & Contingent Liabilities
The relationship between IAS 10 and IAS 37 in Financial Reporting lies in how events after the reporting period affect the recognition, measurement, and disclosure of contingent liabilities in financial statements. Below is an in-depth analysis of their connection:
1. IAS 10 – Events After the Reporting Period
These are events that occur between the end of the reporting period and the date the financial statements are authorized for issue. According to IAS 10 – Events After the Reporting Period, these events can be classified into:
- Adjusting Events: Events that provide additional evidence of conditions that existed at the reporting date, requiring adjustments to the financial statements.
- Non-Adjusting Events: Events that indicate conditions that arose after the reporting date, requiring disclosure but not adjustment.
2. IAS 37 – Contingent Liabilities in Financial Reporting
Contingent liabilities, as defined by IAS 37 – Provisions, Contingent Liabilities, and Contingent Assets, are:
- Possible obligations that arise from past events, whose existence will be confirmed only by the occurrence or non-occurrence of uncertain future events not wholly within the entity’s control.
- Obligations that are not recognized because it is not probable that an outflow of resources will be required, or the amount cannot be reliably measured.
3. Relationship Between IAS 10 and IAS 37 in Financial Reporting
- Adjusting Events: If an event after the reporting period provides evidence about a contingent liability (e.g., a court ruling confirming a legal obligation related to a lawsuit ongoing at the reporting date), the entity must adjust the financial statements to recognize a provision or update the disclosure of the contingent liability.
- Non-Adjusting Events: If an event after the reporting period creates new information about contingent liabilities but does not relate to conditions existing at the reporting date (e.g., a new lawsuit filed after year-end), it is disclosed in the financial statements without any adjustment.
4. Practical Example of IAS 10 and IAS 37
- Adjusting Event: A company is involved in a legal dispute as of the reporting date, with the outcome uncertain (a contingent liability). If, after the reporting period but before the financial statements are authorized, a court decision confirms the company’s obligation to pay damages, this becomes an adjusting event requiring recognition of a provision.
- Non-Adjusting Event: If a new lawsuit is filed after the reporting date, it is a non-adjusting event and would be disclosed as a subsequent event, if material.
Conclusion
Understanding the relationship between IAS 10 and IAS 37 in Financial Reporting ensures that financial statements present a fair and transparent view of an entity’s financial position while adhering to accounting standards. Proper classification and treatment of such events enhance the reliability and accuracy of financial reporting.
Written By Barasa
