Deck 7: Events After the Reporting Period

Question 1

Bartlett Orchards in Tipperary, Ireland is a publicly traded entity with a December 31 year end. While preparing a portion of Bartlett Orchard's land for new pear trees, a worker finds a vein of gold worth an estimated €150 million! The timeline is as follows:
$\bullet$ March 3: the vein is discovered.
$\bullet$ March 4: The 20X1 financial statements are approved by the board of directors and authorized for issuance.
$\bullet$ March 8: The vein is appraised and booked as an asset.
$\bullet$ March 9: The shareholders formally approve the 20X1 financial statements.
Management is excited for the shareholders to know about this as soon as possible. How does Bartlett Orchards go about reporting this event in the 20X1 financial statements?

A) Provide no more than a note disclosure
B) Add the asset to the financial statements at €150 million
C) Add the asset to the financial statements using a rough estimate since the vein has not been appraised before the authorization date.
D) Provide no disclosure.

Answer 1

Provide no more than a note disclosure

Question 2

Olio Puro di Palermo (OPP), is a world-wide distributor of olives and olive oil. It grows most of its olives near San Vito lo Capo. Because of their sizable market in the United States as well as in other parts of the world, issues two sets of financial statements - one conforming to U.S. GAAP and one conforming to IFRS. The timeline of events is as follows:
$\bullet$ October 15: De Gaulle Olives (DGO), a major French customer buys a third of the OPP's harvest for olive oil production in France.
$\bullet$ September 31: OPP's year end
$\bullet$ November 31: Financial statements are authorized by the board of directors
$\bullet$ December 1: DGO declares bankruptcy
$\bullet$ December 2: Financial statements are approved by the shareholders
$\bullet$ December 15: Financial statements are issued
Is the bankruptcy of DGO an adjusting or non-adjusting event?

A) U.S. GAAP - Adjusting; IFRS - Adjusting
B) U.S. GAAP - Adjusting; IFRS - Non-adjusting
C) U.S. GAAP - Non-adjusting; IFRS - Adjusting
D) U.S. GAAP - Non-adjusting; IFRS - Non-adjusting

Answer 2

U.S. GAAP - Adjusting; IFRS - Non-adjusting

Question 3

Belmonte Mezzagno, an Italian entity that manufactures wine, aranciata, and other Italian beverages has 2.5 million common equity shares issued and outstanding. On December 20, the board determined that dividends ought to be paid to the shareholders on this year's record profits. On January 3, 20X2, Belmonte Mezzagno formally declared dividends of €0.35 per share. The reporting period ended December 31, 20X1. The financial statements were authorized for issuance by the board on March 15, 20X2. What should the dividend liability be recorded as for Belmonte Mezzagno as of December 31, 20X1?

A) €875,000
B) €2,500,000
C) €0
D) None of the above

Answer 3

€0

Question 4

Dutchman's Conestoga is a large, publicly traded sports store headquartered in Pretoria, South Africa. Dutchman's Conestoga has a year end of December 31, has 100,000 common equity shares outstanding, and declared dividends on December 25 of R2.50 per common equity share. The date of record is January 1, and the date of payment is February 15. The financial statements have not been authorized for issuance. What should the dividend liability be recorded as for Dutchman's Conestoga as of December 31?

A) R250,000
B) R100,000
C) R0
D) None of the Above

Question 5

Which of the following statements is true concerning non-adjusting events?

A) The financial statements should be adjusted.
B) The financial statements should not be adjusted.
C) Non-adjusting events do not require financial statement disclosure.
D) Non-adjusting events impact only future events.

Question 6

Dividends declared after the reporting period

A) are not recognized as liabilities at the end of the reporting period.
B) are recognized as liabilities at the end of the reporting period.
C) represent a present obligation at the reporting period.
D) are considered to be adjusting-events.

Question 7

An entity should not prepare its financial statements on a going concern basis if

A) the entity does not fully comply with IFRS.
B) the bank has notified the entity that the entity has violated loan debt covenants.
C) a fire destroyed a significant production facility.
D) management determines after the reporting period either that it intends to liquidate the entity or to cease trading.

Question 8

Entity A had an excellent year with record profits. However, Entity A experienced an unanticipated and significant downturn after the reporting period, but before the financial statements were authorized for issuance. The downturn was very severe and casts doubt on the ability of the entity to continue. Management must assess this event and determine the appropriateness of the going concern assumption for last year's financial statements.

Question 9

Royal Sheffield Motorcycles (RSM) is a public entity headquartered Rotherham, England with a December 31 year end. RSM owns several manufacturing plants in the Phillipines. In January, After the reporting period is over, but before the financial statements are authorized for issuance, RSM's main manufacturing plant is completely destroyed by a devastating monsoon. Along with the factory, 1200 brand new Classic 500cc motorcycles are destroyed. This is a non-adjusting event and does not require a note disclosure.

Question 10

Streatham Steel has been a long-time partner of Croyden Foundry, located in nearby Thornton Heath, England. In late February, the Streatham officially acquired Croyden Foundry. The new company is named Streatham-Croyden Foundries. The companies have been secretly working toward this merger since July of the previous year. Neither company has authorized the issuance of financial statements and both companies have a December 31 year end. They should report as a consolidated entity (an adjusting event).

Question 11

In 20X8, Germany raised its taxes to meet increasing government deficits. The new tax rate took effect on May 28, just days before Strassbourg Mills' year end. This is an adjusting event for Strassbourg Mills.

Question 12

There is often significant judgment involved in deciding whether an event is non-adjusting or adjusting.

Question 13

A non adjusting event means that you do not have to disclose it in the financial statements.

Question 14

The accounting treatment for events after the reporting period depends on whether the events are "adjusting events" or "non-adjusting events."

Question 15

Adjusting events provide additional evidence of conditions that existed at the end of the reporting period so the financial statements should not be adjusted.

Question 16

Events after the reporting period are defined as those events, favorable and unfavorable, that occur between the end of the reporting period and the date when the financial statements are authorized for issue.

Question 17

Define these terms:
-Events after the reporting period.

Question 18

Define these terms:
-Adjusting events after the reporting period.

Question 19

Define these terms:
-Non-adjusting events after the reporting period.

Question 20

Buehler's Broncos, located in The Hague, Netherlands, are the makers of the Denver, a sports utility vehicle. After the year end, but before the financial statements are authorized for issuance, Buehler's Broncos issues a recall of the last two years of the Denver for a fault in casting the engine block that could cause catastrophic engine failure at high speeds. The warranty expense related to this recall is extremely high, and bad publicity is having a strong, negative impact on sales. Is this an adjusting event or a non-adjusting event? Why?

Question 21

In February a year after the merger but before the financial statements have been authorized for issuance, Streatham-Croyden Foundries performed a year-end review of its inventory and determined that its inventory of cast iron fixtures was impaired due to changes in style trends. Based on sales, and market analysis, the fixtures became impaired sometime within a ten day window around year end (December 31). Is this an adjusting or a non-adjusting event? Why? What principles in the conceptual framework (chapter 2) guided your decision?

Question 22

Compounder Pharmaceuticals Entity (CPE) has a year end of December 31. In January 20X1, CPE released a new drug that it claims is extremely effective against many types of cancer. This new drug is heralded as revolutionary. However, in December 20X1, several people are severely injured from taking the drug. Lawyers at CPE surmise that a lawsuit is likely. Later in January 20X2, a class-action lawsuit is formally brought against CPE. CPE's law team estimates that ₤20 million are likely to be awarded to the plaintiffs. The financial statements have not yet been authorized for issuance. Is this an adjusting or non-adjusting event? Why?

Question 23

Alford Entity (AE) has a September 30 year end. On December 15, 20X7, AE's financial statements were authorized for issue. On December 8, 20X7, a third-party settled a lawsuit for unpaid royalties owed to AE by paying AE $450,000. AE instigated the lawsuit in 20X6 but the third-party disputed the case until December 1, 20X7. A profit-sharing and bonus plan requires AE to pay a specified proportion of its profit for the year to employees who serve throughout the year. How should AE accounting for this event?

Question 24

On March 2, 20X7, Blaylock Entity's (BE) annual financial statements for the year ended December 31, 20X7 are authorized for issue. On February 27, 20X7, a hurricane destroyed a production facility in Miami, Florida. The production facility was not insured. What should BE disclose?

Question 25

On February 15, 20X7, Mangrove Entity's (ME) financial statements for the reporting period ended December 31, 20X7, were authorized for issue. On December 28, 20X7, ME declared a dividend of $200,000 to be paid on February 5, 20X8. How should ME account for this event?