Definition
Adjusting events, also referred to as post-balance-sheet events, are incidents that occur between the balance-sheet date and the date on which financial statements are approved. These events provide additional evidence of conditions that existed as of the balance-sheet date. Adjusting events necessitate changes in the financial statements to reflect that new evidence, ensuring that the statements present a “true and fair view” of the company’s financial status.
Examples
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Impairment of Assets: If a valuation conducted after the balance-sheet date reveals that a property held is permanently impaired, the financial statements must be adjusted to reflect this impairment.
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Settlement of Lawsuits: If a company concludes a lawsuit and the settlement is finalized after the balance-sheet date but relates to conditions that existed as of that date, the financial statements must be updated accordingly.
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Receipt of Information Confirming an Estimated Amount: Receiving new information about a customer’s insolvency after the balance-sheet date which was evident before, necessitates an adjustment.
Frequently Asked Questions
Q: Are adjusting events only relevant for single-instance occurrences?
A: No, adjusting events are not limited to single-instance occurrences. They can include any events that provide additional evidence about conditions existing at the balance-sheet date.
Q: How do adjusting events differ from non-adjusting events?
A: Adjusting events give evidence of conditions that existed at the balance-sheet date and require changes to the financial statements. Non-adjusting events only indicate conditions that arose after the balance-sheet date and typically do not require adjustment but may need disclosure.
Q: What is the role of adjusting events in compliance with FRS 102 and IAS 10?
A: Section 32 of the Financial Reporting Standard (FRS) applicable in the UK and IAS 10 establish guidelines for identifying and accounting for adjusting events to ensure financial statements present a true and fair view.
Q: When should adjusting events be recognized?
A: Adjusting events should be recognized between the balance-sheet date and the date the financial statements are approved for issue.
- Non-Adjusting Events: Events after the balance-sheet date that do not provide evidence of conditions existing at that date but are significant enough to disclose in the notes of the financial statements.
- Financial Statements: Reports that provide an overview of a company’s financial condition, including the balance sheet, income statement, and cash flow statement.
- True and Fair View: A fundamental concept in accounting meaning that financial statements should faithfully represent the financial position and performance of an entity.
- FRS 102: A standard outlining specific requirements for accounting practices in the UK and Republic of Ireland.
- IAS 10: An International Accounting Standard that provides guidance on principles related to events occurring after the reporting period.
Online References
Suggested Books for Further Studies
- “International Financial Reporting Standards (IFRS) Workbook and Guide” by Abbas A. Mirza and Graham Holt
- “Financial Accounting: Tools for Business Decision Making” by Paul D. Kimmel, Jerry J. Weygandt, and Donald E. Kieso
- “Accounting Made Simple: Accounting Explained in 100 Pages or Less” by Mike Piper
Accounting Basics: “Adjusting Events” Fundamentals Quiz
### What are adjusting events?
- [x] Events that occur between the balance-sheet date and the date financial statements are approved, providing evidence of conditions existing at the balance-sheet date.
- [ ] Events that occur only during the financial year.
- [ ] Events that always lead to a change in organizational structure.
- [ ] Events that occur before the balance-sheet date but are recorded later.
> **Explanation:** Adjusting events occur within the specified period between the balance-sheet date and the approval date, providing additional evidence regarding the conditions at the balance-sheet date.
### Why are adjusting events important?
- [ ] They only provide future forecasts.
- [x] They ensure that financial statements reflect the most accurate and true financial position and performance.
- [ ] They lead to mergers and acquisitions.
- [ ] They primarily attract investors.
> **Explanation:** Adjusting events are critical because they ensure that financial statements reflect the true and fair financial position and performance by integrating new evidence related to conditions as of the balance-sheet date.
### Do adjusting events always require financial adjustments?
- [x] Yes, if they provide additional substantive evidence of conditions existing at the balance-sheet date.
- [ ] No, they never require adjustments.
- [ ] Only if they show a significant increase in profits.
- [ ] Only if they are related to inventory.
> **Explanation:** Adjusting events leading to adjustments provide substantive evidence about conditions that existed at the balance-sheet date, necessitating financial changes for accuracy.
### What is an example of an adjusting event?
- [x] Valuation showing impairment of assets.
- [ ] Announcement of a future profit.
- [ ] Projected sales forecasts.
- [ ] Winning a new client.
> **Explanation:** A valuation showing a permanent impairment of assets indicates conditions that existed at the balance-sheet date and requires a financial adjustment, making it an adjusting event.
### Which accounting standard provides guidelines for adjusting events?
- [ ] FRS 105
- [ ] IFRS 9
- [x] IAS 10
- [ ] GAAP Section IV
> **Explanation:** IAS 10 is the International Accounting Standard that provides comprehensive guidelines for identifying and accounting for adjusting events.
### How do adjusting events impact financial reports?
- [ ] They change the currency denomination.
- [x] They ensure financial statements reflect true and fair views.
- [ ] They simplify reporting procedures.
- [ ] They ensure reports are presented in multiple languages.
> **Explanation:** Adjusting events ensure that financial statements reflect a true and fair view, incorporating new evidence related to conditions at the balance-sheet date.
### When does an event qualify as a non-adjusting event?
- [ ] When it affects asset valuations significantly.
- [ ] When it occurs exactly on the balance-sheet date.
- [ ] When it suggests conditions before the balance-sheet date.
- [x] When it indicates conditions that arose after the balance-sheet date.
> **Explanation:** Non-adjusting events indicate conditions that arose after the balance-sheet date and do not necessitate adjustments in the financial statements but may still require disclosure.
### Must adjusting events always be disclosed?
- [ ] Only if they are related to revenue.
- [ ] No, disclosure is optional.
- [x] Yes, financial adjustments based on these events must be reflected in financial statements.
- [ ] Only if they relate to international transactions.
> **Explanation:** Adjusting events that provide significant evidence of conditions existing at the balance-sheet date must be disclosed and reflected in the financial statements to maintain accuracy.
### According to FRS 102, what view should financial statements provide?
- [ ] Estimated future earnings view.
- [ ] Contractual obligations view.
- [x] True and fair view.
- [ ] Market growth projections.
> **Explanation:** FRS 102 mandates that financial statements provide a true and fair view of a company’s financial position and performance, integrating evidence from adjusting events.
### Which of the following qualifies as evidence shaping an adjusting event?
- [ ] Forecast of market trends.
- [x] Settlement of a lawsuit related to prior conditions.
- [ ] Upcoming product launch.
- [ ] Changes in stock prices.
> **Explanation:** The settlement of a lawsuit that relates to conditions existing before the balance-sheet date qualifies as evidence that results in an adjusting event.
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