CHAPTER 8

EVENTS AFTER THE BALANCE SHEET DATE

(IAS – 10)
Objective
The objective of this standard is to prescribe when financial statements should be adjusted for the post
balance sheet events and disclosure of date of authorization of financial statements for issuance.
Scope
This standard is applied for accounting and disclosure of post balance sheet events.
Definitions
Events after the balance sheet date are those events favourable and un-favourable that occurs between
the balance sheet and the date when the financial statements are authorized for issue. Two types of
events can be identified: -
a) Those that provide evidence of conditions existing at the balance sheet date (adjusting events);
and
b) Those that are indicative of conditions that arose after the balance sheet date (non-adjusting
events)
Recognition and Measurement
Adjusting events after the balance sheet date
An entity shall adjust the amounts recognized in the financial statements to reflect adjusting events after
the balance sheet date.
Examples include: -
 The settlement of case after the balance sheet that confirms that the entity has the present
obligation at the balance sheet date.
 The receipt of information that an asset has impaired at the balance sheet date e.g. bankruptcy of
a customer, sale of inventories after the balance sheet date, which confirms the NRV.
 The determination after the balance sheet of cost of assets purchased or the proceeds of the
assets sold, before the balance sheet.
 The determination after the balance sheet date of bonus or profit sharing, if the entity has the
present legal or constructive obligation.
 The discovery of fraud or error that shows that the financial statements are incorrect.
EXAMPLE
The directors of shahid hameed Co LTD. Are due to approve the company’s financial statements for the
year ended 31st December 1986.
Since the financial statements were originally prepared the following material information has become
available.
On 15th march 1987 a new brand of cooking oil was found containing some harmful ingredients and its
sale was accordingly banned by the government.
Substantial stock of this product in hand as on 31st December 1986, marketed by the sale department was
subsequently withdrawn from the market and was returned to the company for a full refund. The
company had committed itself to an advertising schedule for this product involving a total sum of Rs
500,000 to be spent evenly over a period of two years, half of which having been spent in the financial
year 1986.

Page 1 of 25
SOLUTION
Sale of cooking oil was banned by government containing harmful ingredients subsequent to the balance
sheet date. Its effect will be incorporated in the financial statements. The journal entries will be as
1. Debit supplier account and credit stock account for stocks return to the suppliers
2. Debit sale account and credit customer’s account for sales returned.
This is an adjusting event since the information exit at the balance sheet date. Also, the full amount of
Rs.500, 000 should be charged to the profit and loss account for the year ended 31 st December 1986.
Non-adjusting events after the balance sheet
An entity shall not adjust the amounts recognized in its financial statements to reflect non-adjusting
events after the balance sheet date.
Examples include decline in the market value of investments between the balance sheet date and when
the financial statements are authorized for issue.
EXAMPLE
The directors of shahid hameed Co LTD. Are due to approve the company’s financial statements for the
year ended 31st December 1986.
Since the financial statements were originally prepared the following material information has become
available
On 15th February heavy rain causes flooding at company’s warehouse situated near the river bed resulted
in an uninsured stock loss of Rs 1 million.
SOLUTION
Stock is destroyed after balance sheet date so it has no effect on the financial statements, since the event,
which concerns a condition, which does not exit at the balance sheet date, but disclosure by way of
footnote is essential.
Dividends
If an entity declares dividend to the equity participants after the balance sheet date, the entity shall not
recognize those dividends as a liability at the balance sheet date.
Going Concern
An entity shall not prepare its financial statements on the going concern basis if the management
determines after the balance sheet date either that it intends to liquidate the entity or to cease trading,
or that it has no realistic alternative but to do so.
Disclosures
Date of authorization for issue
An entity should disclose: -
 The date when the financial statements are authorized for issuance
 Who gave the authorization
 The fact that the owners or others have any powers to amend the financial statements
Updating disclosures about conditions at the balance sheet date
The disclosures relating to the conditions in existence at the balance sheet date should be updated in the
light of new information.
Non-adjusting events after the balance sheet date
If the non-adjusting events are material then the following to be disclosed: -
 The nature of the event; and
 An estimate of its financial effect, or a statement that such an estimate could not be made.
The following are the examples of non-adjusting events, which requires disclosure: -
 Major business combinations after the balance sheet date or disposing of a major subsidiary
 Announcing a plan to discontinue an operation
 Major purchases of assets, classification of assets as held for sale in accordance with the IFRS 5
other disposal of assets or expropriation of major assets by Government

Page 2 of 25
 The destruction of a major production plant by fire after the balance sheet date
 Announcing or commencing and implanting a major reconstruction
 Major ordinary share transactions and potential ordinary share transactions
 Abnormally large changes after the balance sheet date in asset prices or foreign exchange rates.
 Changes in tax rates or laws enacted or announced after the balance sheet date that have
significant effect on current and deferred tax assets and liabilities
 Entering into significant commitments or contingent liabilities e.g. issuing significant guarantee
 Commencing major litigation arising solely out of events that occurred after the balance sheet
date.

Page 3 of 25
 PROVISIONS CONTINGENT LIABILITIES AND CONTINGENT
ASSETS (IAS – 37)
Objective
The objective of this IAS is to ensure that appropriate recognition criteria and measurement bases are
applied to provisions, contingent liabilities and contingent assets.
Scope
This IAS is applicable to all provisions, contingent liabilities and contingent assets except:
a) those resulting from executory non-onerous contracts
b) those covered by other IAS
Definitions
A provision is a liability of uncertain timing or amount.
A liability is a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits.
An obligating event is an event that creates a legal or constructive obligation that results in an enterprise
having no realistic alternative to settling that obligation.
A legal obligation is an obligation that derives from:
(a) a contract (through its explicit or implicit terms);
(b) legislation; or
(c) other operation of law.
A constructive obligation is an obligation that derives from an enterprise’s action where:
(a) by an established pattern of past practice, published policies or a sufficiently specific current
statement, the enterprise has indicated to other parties that it will accept certain responsibilities;
and
(b) as a result, the enterprise has created a valid expectation on the part of those other parties that it
will discharge those responsibilities.
A contingent liability is:
(a) a possible obligation that arises from past events and whose existence will be confirmed only by
the occurrence or non-occurrence of one or more uncertain future events not wholly within the
control of the enterprise; or
(b) a present obligation that arises from past events but is not recognized because:
(i) it is not probably that an outflow of resources embodying economic benefits will be
required to settle the obligation; or
(ii) the amount of the obligation cannot be measured with sufficient reliability.
A contingent asset is a possible asset that arises from past events and whose existence will be confirmed
only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the
control of the enterprise.
An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the
contract exceed the economic benefits expected to be received under it.
A restructuring is a program that is planned and controlled by management, and materially changes
either:
(a) the scope of a business undertaken by an enterprise; or
(b) the manner in which that business is conducted.

Page 4 of 25
Provisions and other liabilities
Provisions can be distinguished from other liabilities such as trade payables and accruals because there is
uncertainty about the timing or amount of the future expenditure required settlement.
Provisions and contingent liabilities
In a general sense, all provisions are contingent because they are uncertain in timing or amount.
However, within this Standard the term ‘contingent’ is used for liabilities and assets that are not
recognized because there existence will be confirmed only by the occurrence of one or more uncertain
future events not wholly within the control of the entity. In addition, the firm ‘contingent liability’ is used
for liabilities that do not meet the recognition criteria.
Recognition
Provisions
A provision shall be recognized when:
a) An entity has a present obligation (legal or constructive) as a result of a past event;
b) It is possible than an outflow of resources embodying economic benefits will be required to settle
the obligation; and
c) A reliable estimate can be made of amount of the obligation.
If these conditions are not met, no provision shall be recognized.
Present obligation
In rare cases it is not clear whether there is a present obligation. In the cases, a past event is deemed to
give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a
present obligation exists at the balance sheet date.
Past event
A past event that leads to a present obligation is called an obligating event. For an event to be an
obligating event, it is necessary that the entity has no realistic alternative to settling the obligation
created by the event. This is the case only:
a) Where the settlement of the obligation can be enforced by law; or
b) In the case of a constructive obligation, where the event (which may be an action of the entity)
creates valid expectations in other parties that the entity will discharge the obligation.
Contingent Liabilities
An enterprise should not recognize a contingent liability.
a) A contingent liability is disclosed in financial statements, unless the possibility of an outflow of
resources embodying economic benefits is remote.
b) Where an enterprise is jointly and severally liable for an obligation, the part of the obligation that
is expected to be met by other parties is treated as a contingent liability.
c) The enterprise recognizes a provision for the part of the obligation for which an outflow of
resources embodying economic benefits is probable, except in the extremely rare circumstances
where no reliable estimate can be made.
d) Contingent liabilities may develop in a way not initially expected. Therefore, they are assessed
continually to determine whether an outflow of resources embodying economic benefits has
become probable. If it becomes probable that an outflow of future economic benefits will be
required for an item previously dealt with as a contingent liability, a provision is recognized in the
financial statements of the period in which the change in probability occurs (except in the
extremely rare circumstances where no reliable estimate can be made.)

Page 5 of 25
Contingent Assets
An enterprise should not recognize a contingent asset.
a) Contingent assets usually arise from unplanned or other unexpected events that give rise to the
possibility of an inflow of economic benefits to the enterprise. An example is a claim that an
enterprise is pursuing through legal processes, where the outcome is uncertain.
b) Contingent assets are not recognized in financial statements since may result in the recognition of
income that may never be realized. However, when the realization of income is virtually certain,
then the related asset is not a contingent asset and its recognition is appropriate.
c) A contingent asset is disclosed in financial statements, where an inflow of economic benefits is
probable.
d) Contingent assets are assessed continually to ensure that developments are appropriately
reflected in the financial statements. If it has become virtually certain that an inflow of economic
benefits will arise, the asset and the related income are recognized in the financial statements of
the period in which the change occurs. If an inflow of economic benefits has become probable, an
enterprise discloses the contingent asset.
Measurement
The amount recognized as a provision shall be the best estimate of the expenditure required to settle the
present obligation at the balance sheet date. This means that:
 Provisions for one-off events (restructuring, environmental clean-up, settlement of a lawsuit) are
measured at the most likely amount.
 Provisions for large populations of events (warranties, customer refunds) are measured at a
probability-weighted expected value.
 Both measurements are at discounted present value using a pre-tax discount rate that reflects the
current market assessments of the time value of money and the risks specific to the liability.
In reaching its best estimate, the enterprise should take into account the risks and uncertainties that
surround the underlying events. Expected cash outflows should be discounted to their present values,
where the effect of the time value of money is material.
If some or all of the expenditure required to settle a provision is expected to be reimbursed by another
party, the reimbursement should be recognized as a reduction of the required provision when, and only
when, it is virtually certain that reimbursement will be received if the enterprise settles the obligation.
The amount recognized should not exceed the amount of the provision. In balance sheet, reimbursement
should be shown as an asset and provision should be shown at gross amount however, in income
statement they can be netted off.
In measuring a provision consider future events as follows:
 forecast reasonable changes in applying existing technology
 ignore possible gains on sale of assets
 consider changes in legislation only if virtually certain to be enacted
Re-measurement of Provisions
 Review and adjust provisions at each balance sheet date
 If outflow no longer probable, reverse the provision to income.
Application of recognition and measurement rules
a) Future operating losses
Provisions shall not be recognized for future operating losses.

Page 6 of 25
b) Onerous contracts
If an entity has a contract that is onerous, the present obligation under the contract shall be
recognized and measured as a provision.
c) Restructuring
The following are examples of events that may fall under the definition of restructuring:
 Sale or termination of a line of business
 Closure of business locations
 Changes in management structure
 Fundamental re-organization of company
Restructuring provisions should be accrued as follows:
Sale of operation: accrue provision only after a binding sale agreement. If the binding sale
agreement is after balance sheet date, disclose but do not accrue
Closure or re-organization: accrue only after a detailed formal plan is adopted and announced
publicly. A board decision is not enough.
Future operating losses: Provisions should not be recognized for future operating losses, even in
a restructuring
Restructuring provision on acquisition (merger): Accrue provision for terminating employees,
closing facilities, and eliminating product lines only if announced at acquisition and, then only if a
detailed formal plan is adopted 3 months after acquisition.
A management or board decision to restructure taken before the balance sheet date does not
give rise to a constructive obligation at the balance sheet date unless the entity has, before the
balance sheet date:
a) stated to implement the restructuring plan; or
b) announced the main features the restructuring plan to those affected by it in a sufficiently
specific manner to raise a valid expectation in them that the entity will carry out the
restructuring.
If an entity starts to implement a restructuring plan, or announces its main features to those
affected, only after the balance sheet date, disclosure is required under IAS 10 Events after the
Balance Sheet Date, if the restructuring is material and non-disclosure could influence the
economic decisions of users taken on the basis of the financial statements.
Restructuring provisions should include only direct expenditures caused by the restructuring, not
costs that associated with the ongoing activities of the enterprise such as: -
a) retraining or relocating continuing staff;
b) marketing; or
c) investment in new systems and distribution networks

Page 7 of 25
Examples of Provisions

Circumstance Accrue a Provision?

Restructuring by sale of an operation Accrue a provision only after a binding sale agreement

Restructuring by closure or re- Accrue a provision only after a detailed formal plan is
organization adopted and announced publicly. A Board decision is not
enough

Land contamination Accrue a provision if the company's policy is to clean up

even if there is no legal requirement to do so (past event is
the obligation and public expectation created by the
company's policy)

Customer refunds Accrue if the established policy is to give refunds (past event
is the customer's expectation, at time of purchase, that a
refund would be available)

Offshore oil rig must be removed and Accrue a provision when installed, and add to the cost of the

Page 8 of 25
sea bed restored asset

Abandoned leasehold, four years to Accrue a provision

run

CA firm must staff training for recent No provision (there is no obligation to provide the training)
changes in tax law

A chain of retail stores is self-insured No provision until a an actual fire (no past event)
for fire loss

Self-insured restaurant, people were Accrue a provision (the past event is the injury to
poisoned, lawsuits are expected but customers)
none have been filed yet

Major overhaul or repairs No provision (no obligation)

Onerous (loss-making) contract Accrue a provision

Page 9 of 25
CHANGES IN EXISTING DECOMMISSIONING, RESTORATION AND
SIMILAR LIABILITIES (IFRIC-1)
ISSUE
This Interpretation addresses how the effect of the following events that change the measurement of an
existing decommissioning, restoration or similar liability should be accounted for:
(a) a change in the estimated outflow of resources (e.g. cash flows) required to settle the obligation;
(b) a change in the current market-based discount rate of IAS 37; and
(c) an increase that reflects the passage of time – unwinding
CONSENSUS
Changes in the measurement of an existing decommissioning, restoration and similar liability that result
from changes in the estimated timing or amount of the outflow required to settle the obligation, or a
change in the discount rate, shall be accounted for as follows: -
If the related asset is measured using the cost model:
(a) Subject to (b), changes in the liability shall be added to, or deducted from, the cost of the related
asset in the current period.
(b) The amount deducted from the cost of the asset shall not exceed its carrying amount. If a
decrease in the liability exceeds the carrying amount of the asset, the excess shall be recognized
immediately in profit or loss.
(c) If the adjustment results in an addition to the cost of an asset, the entity shall consider whether
this is an indication that the new carrying amount of the asset may not be fully recoverable.
If it is such an indication, the entity shall test the asset for impairment by estimating its
recoverable amount, and shall account for any impairment loss, in accordance with IAS 36.

If the related asset is measured using the revaluation model:

(a) Changes in the liability alter the revaluation surplus or deficit previously recognized on that asset,
so that:
(i) a decrease in the liability shall (subject to (b)) be credited directly to revaluation surplus in
equity, except that it shall be recognized in profit or loss to the extent that it reverses a
revaluation deficit on the asset that was previously recognized in profit or loss;
(ii) An increase in the liability shall be recognized in profit or loss, except that it shall be
debited directly to revaluation surplus in equity to the extent of any credit balance
existing in the revaluation surplus in respect of that asset.
(b) In the event that a decrease in the liability exceeds the carrying amount that would have been
recognized had the asset been carried under the cost model, the excess shall be recognized
immediately in profit or loss.
(c) A change in the liability is an indication that the asset may have to be revalued in order to ensure
that the carrying amount does not differ materially from that which would be determined using
fair value at the balance sheet date. Any such revaluation shall be taken into account in
determining the amounts to be taken to profit or loss and equity under (a). If a revaluation is
necessary, all assets of that class shall be revalued.
(d) IAS 1 requires disclosure on the face of the statement of changes in equity of each item of income
or expense that is recognized directly in equity. In complying with this requirement, the change in
the revaluation surplus arising from a change in the liability shall be separately identified and
disclosed as such.
The adjusted depreciable amount of the asset is depreciated over its useful life. Therefore, once
the related asset has reached the end of its useful life, all subsequent changes in the liability shall

Page 10 of 25
 be recognized in profit or loss as they occur. This applies under both the cost model and the
revaluation model.
An increase that reflects the passage of time – unwinding
The periodic unwinding of the discount shall be recognized in profit or loss as a finance cost as it occurs.
The allowed alternative treatment of capitalization under IAS 23 is not permitted.

Page 11 of 25
PRACTICE QUESTIONS

Q–1
Sara Limited is finalizing its accounts for the year ended December 31, 2007 before the finalization of
account the following events came to the knowledge of the finance director.
1. The company owns a subsidiary in a foreign country. The government of that has communicated
to the company on December 28, 2007 that it will expropriate assets of the subsidiary. The book
value of the investment in the subsidiary at the yearend was Rs. 50 million and fair market value
Rs. 75 million. The foreign government has indicated that they will compensate the company only
to the extent of 25% of the fair value of the investment in the subsidiary.
2. A damages claim of Rs. 2 million has been filled against the company for the breach of contract.
The company’s lawyer is of the viewpoint that it is probable that the damages will be awarded to
the plaintiff. It is not possible to reasonably estimate the amount of damages, at the year end.
However, before the authorization of financial statements the court confirmed the claim at Rs.
500,000.
3. There was a fire at one of the warehouse of the company in January 5, 2008 stocks worth Rs 12
million were completely destroyed. The company stocks were under insurance to the extent of
25% of value.
4. The company has discontinued one of his business locations on November 30, 2007 and has been
planning to shift affected employees to other business locations. The relocation cost estimated at
the year end is Rs. 1.5 million.
5. One of the customers of the company has burnt himself during use of a product manufactured by
Sara Limited just after the year end. The company has decided to resolve the matter out of court
by paying damages of Rs. 1 million. The company has never created any provision regarding such
damages as this event has never occurred in the past.
REQUIRED: Show how each of the above events will be dealt in the financial statement of the company
for the year ended December 31, 2007. (15)
Q–2
An oil exploration and production entity has an obligation, at the date of installation, to decommission an
oilrig at the end of its twenty-year life in accordance with the local legislative requirements. The
decommissioning costs for the rig are estimated to be Rs. 140,000,000 the company uses 10% discount
rate for all its present value calculations.
Required: Discuss the accounting treatment of above obligation? (5)
Q–3
The accountant of ALI Limited has come across the following accounting issues while finalizing the
financial statements for the year ended December 31, 2009 and sought your opinion being the company
IFRS consultant.
(1) ALI Limited issued a 1 year warranty for defects on a single item of equipment that it delivered to
its customer. At the company's year end, the company is being sued by the customer for refusing
to replace or repair the item of equipment within the warranty period, as ALI Limited believes the
defect is not covered by the warranty, but instead has arisen because of the customer not
following the instructions provided in the working manual of the equipment. Khan and Khan the
company's lawyer has advised ALI Limited that it is more likely than not that they will be held
liable. This would result in the company being forced to replace or repair the equipment plus pay
court costs and a fine amounting to approximately Rs. 100,000. Based on past experience with
similar items of equipment, the company estimates that there is a 70% chance that the

Page 12 of 25
 equipment would need to be replaced which would cost Rs. 400,000 and a 30% chance that the
repair would only cost about Rs. 15,000. (5)
(2) The company also manufactures small items of equipment which it sells through a retail network.
The company sold 12,000 items of this type this year, which also have a 1 year warranty if the
equipment fails to perform properly. Based on past experience, 5% of items sold are returned for
repair or replacement. In each case, one third of the items returned are able to be repaired at a
cost of Rs. 1,000 each, while the remaining two thirds are scrapped and replaced. The
manufacturing cost of a replacement item is Rs. 10,000. (5)
(3) ALI Limited has a contract to buy 1,000 Kilograms of copper from a China Co each month for Rs.
3,000 per Kilograms. From each Kilogram of copper ALI Limited make one role of cable. The
company also incurs labor and other direct variable costs of Rs. 1,000 per role. Usually company
can sell each role of cable for Rs. 4,500 but in late July 2009 the market price falls to Rs. 3,500 per
role. The company is considering ceasing production since it thinks that the market may not
improve. If the company decides to cancel the copper purchase contract without 2 months' notice
it must pay a cancellation penalty of Rs 150,000 for each of the next two months. (5)
Required:-Discuss the accounting treatment of the above situations?
Q–4
QUTAB Limited is a listed company, whose shares are trading on all the three stock exchanges of the
country. The financial year end of the company is June 30, 2010. The financial statements of the company
have been approved on September 05, 2010. The chief accountant of the company has come across the
following events occurring after the reporting date.
a) During a board meeting held on July 15, 2010 the board decided to dispose off a location which is
identified cash generating unit located in KHYBER PAKHTUNKHA badly affected by the recent
flood. The carrying value of the cash generating unit is Rs. 15.5 million but the recoverable is now
significantly lower than the carrying value. The flood came in first week of June 2010.
b) During the month of August a local distributor of Chinese Company launched a new product at
very low price, which forced the company to reduce its selling price even below cost to dispose of
the entire stock. In the monthly meeting of board of directors, they decided to discontinue the
production of said product. The discontinuation of production will result in redundancy payments
of Rs. 2 million to employees currently involved in the production of said product.
c) During the year 2010, the company was sued by a large multinational company dealing in
software development for using pirated soft ware on its Information Technology equipments. The
case was pending with the Court and the legal advisor of the company has advised for a provision
of Rs. 5 million at the reporting date. The decision of the court came on August 20, 2010 and
penalty of Rs. 10 million was confirmed by the court. On August 25, 2010 the company filed
appeal against the court verdict in Higher Court. The legal advisor is still of the opinion the penalty
should not exceed Rs. 5 million.
d) During audit for the year ended June 30, 2010, the auditors detected that some tangible assets of
Rs. 500,000 are not traceable physically. The enquiry was initiated which concluded on August 31,
2010 that these assets were stolen by someone and are not recoverable. The company was
however, insured against theft and claim was lodged with the insurance company. The insurance
company has not confirmed the amount of claim; however, there is a possible chance that 50% of
the claim will be accepted by the insurance company.
Required: - Discuss the accounting treatment of above events in the financial statements of QUTAB
Limited? (12)
Q–5

Page 13 of 25
BWM Limited is a listed company on all three stock exchanges in Pakistan. After the year end but before
the authorization of financial statements the chief accountant has come across the following events
occurring after the year end.

a) BWM has been sued by a competitor for Rs. 10 million for infringement of a trade mark. The case
was pending with the Honorable Court at the year end. The legal advisors of BWM Limited
proposed a provision of Rs. 5 million to be recognized at the year end. The court has given the
verdict and confirmed a penalty of Rs. 8 million.
b) BWM Limited carries its inventory at lower of cost and net realizable value (NRV). At the yearend
BWM Limited carried its inventory at cost of Rs. 10 million. Due to severe negative trends and
worst economic conditions inventory could not be sold month after the year end. After one
month BWM Limited decided to sell the inventory to a competitor for Rs. 5.5 million.
c) Due to heavy floods in the country after the reporting date the Government decided to increase
the tax rate by 5% on all corporate entities. BWM Limited has recognized a provision for taxation
in its financial statements at the rate applicable at the reporting date.
d) After the year end the Board of Directors proposed a final dividend of Rs. 10 per share. During the
year the company has also declared two interim dividends on the end of first and third quarter.
Required: - discuss the implication of above events on the financial statements of BWM Limited?
(12)
Q–6
ANE Limited is listed company engaged in providing brokerage services in Karachi, Lahore and Islamabad
stock exchanges and you being audit trainee have come across the following issues during the audit.
a) A litigation has been started against the company during the year by one of its clients being
aggrieved that one of the company worker has not acted according to the directions which
resulted in a loss of Rs. 2 million. The phone call recorded by the company provides evidence that
the company worker has not acted according to the directions. The company has started
negotiations for out of court settlement and the said client is insisting for full claim. The company
has not provided for the expenses at the year end.
b) Due to severe losses and low volumes on stock markets the board of directors of the company has
decided to close down the office at Islamabad Stock Exchange and to redundant all the employees
at said office. The plan has however, not been announce by the year end. The estimated cost of
redundancy is Rs. 4 million.
c) The company has taken loan from a local bank of Rs. 40 million against creating charge on its
investment in shares. Due to heavy losses the company has made a default in payment of interest
and principal repayment. According to the agreement the bank has transferred the shares in its
name and have filed suit for recovery of the balance amount. The default was made before the
yearend however, the bank took the shares in its name and also filed suit for recovery of the
balance amount after the year end. The company has not derecognized the investments and loan
stands at the original value of Rs. 40 million.
d) The company has investments in many listed company shares but recorded at their cost of
purchase Rs. 20 million during the year. The market value of investment has fallen to Rs. 15.5
million by the year end and has further fallen to Rs. 10.5 million after the year end but before the
authorization of financial statements.
e) Due to heavy losses the company has not made contribution to Employees Old Age Benefit
Institution (EOBI) of Rs. 0.5 million. The amount not contributed is recognized however, the
amount of penalty for not making timely contribution of Rs. 15,500 has not been provided for.
Required: discuss the appropriate accounting treatment of the above in the ANE Limited?
(20)

Page 14 of 25
Q–7
An entity is finalizing its financial statements for the year ended December 31, 2013 and came across the
following events after the reporting date. You being the Manager Reporting required discussing the
implication of the following events on the financial statements.
a) The Government has changed the applicable corporate tax rate for the subsequent years from
35% to 30%. The current tax calculated at then applicable rate was Rs. 215,000 and deferred tax
liability was Rs. 515,000. The announcement was made after the year end by the Prime Minister
to attract foreign investment. (04)
b) A suit has been filed against the company by one of the customers of the company who got
seriously injured by explosion of its electric equipment. The event happened after the year end
however, goods were sold before the year end. This event can happen but chances of occurrence
have been remote. The legal advisor of the company has advised for out of court settlement and
the expected compensation is Rs. 1 million. (04)
c) The entity has recognized the provision against dismantling and site restoration for Rs. 0.25
million. After the year end a new technology has been introduced, which has resulted in revision
in expected cash outflows relating to dismantling and site restoration, which ultimately changed
the present value of provision to be recognized. (03)
Q–8
M/S Quality Products Limited (QPL) is in the process of finalizing the financial statements for the year
ended December 31, 2013 and came across the following problems. The profit before the following
adjustments is Rs. 1,250,250. The authorization date for the financial statements is March 31, 2014.
a) The tax rate applicable to the company has been changed from 35% to 34% on January 15, 2014.
b) Major fire broke out in the factory on February 15, 2014 and destroyed the stock valuing Rs.
50,000, the sale value of which is now nil.
c) A debtor from whom Rs. 30,000 were due went bankrupt because of a severe fire broke out in his
factory on March 19, 2014.
d) Mr. Jamil an old customer lodged a claim for Rs. 20,000 against the company for loss of his health
because of a medicine marketed by the company on January 15, 2014. The legal advisor is of the
opinion that there is no chance of acceptance of claim.
e) The auditors of the company detected a fraud on March 15, 2014, the financial impact of which is
Rs. 15,000 by the accountant of the company. The accountant resigned in February 2014. The
amount defraud prior to year end is Rs. 5,000.
Required: - Calculate the revised profit for the year after adjusting the impact of above events after the
reporting date? (13)
Q–9
Discuss the accounting treatment of the following: - (12)
a) The entity is an importer and whole seller of cell phones and normally maintains an inventory of
fifteen to thirty days. A new competitor has entered into market after the year end which forced
the entity to reduce the sale price even below cost. The information of new entrant was in
existence at the reporting date.
b) The entity is calculating its deferred tax for financial year 2014, the Government has issued
finance act 2014 in June 2014 in which it has changed the tax rate from 34% to 33% for companies
in the tax year 2015. The current year current tax will however, be calculated at 34%.
c) The entity was reviewing the useful life of its property, plant and equipment at the year end and
changed from 10 years to 8 years. The directors argue that the change in life will affect the
calculation of depreciation for the next year and not the current year.
d) The entity also took certain Government construction projects in the previous year which are
continuing in the current year as well. The entity was using survey method for calculating stage of

Page 15 of 25
 completion but in the current year the project manager said the cost to cost basis will be more
relevant. The directors argue that the prior year financial statements must also be changed
retrospectively.
Q – 10
At the end of the year of an entity the following points are required to be resolved.
a) During the year entity sold goods Rs. 100,000 on credit to a customer but the party did not pay
even after the year end and entity decided to initiate legal proceedings against the customer. The
court confirmed the claim up to 70% of the amount due. The entity has created a provision of
100% of the amount due on the reporting date.
b) The fair value of investments held at the reporting date was Rs. 1.2 million, after the reporting
date but before the authorization of financial statements the fair value has changed to Rs. 1.5
million.
c) The tax rate applicable for the entity for the tax year 2014 was 34% but after the year end the
Government imposed additional 5% food surcharge for the year ended June 30, 2014.
d) The entity sells readymade garments, one of its customer filed legal claim for recovery of Rs. 1
million because his cloths were not properly stitched and people made fun of him in a family get
together. The entity’s lawyer at the reporting date was of the view that there was a remote
chance of acceptance of claim by the court. However after the year end but before the reporting
date the court confirmed damages of Rs. 100,000.
Required: - discuss the impact of above events on the financial statements for the year ended June 30,
2014? (10)
Q – 11
The following events have been identified by the auditors after the year end of the company.
a) One of the cases filed against the company by the income tax department before the Honorable
Appellate Tribunal has been decided against the company, which has resulted in recognition of
additional income tax amounting to Rs. 2 million, but no provision has been made by the
company.
b) During the year company was sued by one of its old employees from terminating the job. The
company has created no provision against that case but company’s legal advisor is of the opinion
that the case may be decided in the favor of employee and company will be required to pay
compensation amounting to Rs. 1.5 million.
c) The income tax rate has been changed through finance act passed before the yearend but the
deferred tax provision is calculated on the old income tax rate. The difference in rate will result in
recognition of extra deferred tax expense of Rs. 1.75 million.
d) The company has issued bonus shares after the year end but the basic and dilution earning per
share is based on the old number of shares.
e) One of the operations of the company has been decided by the board of directors to be
discontinued being loss making. The decision was taken before the yearend but communicated
publically after the yearend. The operation is still presented as part of continuing operations in
financial statements.
Required: Discuss the effect of above events on current year financial statements? (15)
Q – 12
You have been recently appointed the chief accountant of a listed company and have been asked to assist
the auditors in the annual audit of the company. The audit trainee has given you the following list of
outstanding points.
a) There has been sale of inventory after the year end at below cost price and inventory is appearing
at cost in the statement of financial position. When you enquired from the relevant staff then you

Page 16 of 25
 came to know that a new competitor entered in the market after the year end because of which
the inventory was sold at below the cost price.
b) The company has not created a provision for a case pending before the honorable High Court,
Karachi. You approached the legal advisor, who responded that an old employee of the company
has filed this case being aggrieved because he was terminated in the last year. The legal advisor
was of the opinion that there is remote chance that the claim will be awarded to him.
c) The company has offered right shares to its shareholders after the year but the share capital has
not been changed accordingly.
d) The company has not written off a debtor from its books even the said party has been declared
bankrupt by the Honorable Court. When you enquired, you came to know that said debtor was
considered good at the reporting date but after the year end a major fire broke out at his factory
and destroyed everything.
e) Mr. Jamil is the major supplier of the raw material of your company but has not been disclosed as
related party in the financial statements.
Discuss the accounting treatment of above in the audited financial statements of the company
(15)

Page 17 of 25
A–1
1) This will be an adjusting event and the investment in the subsidiary will be reduced to its recoverable
value i.e. 18.75 million.
2) The enterprise should recognize the provision of Rs. 50,000 at the year end. The confirmation of
claim is an adjusting event.
3) This will be a non-adjusting event and if the is material then both amount of loss and insurance claim
to be disclosed in the financial statements.
4) The relocation cost does not qualify to be recognized as provision relating to discontinued
operations. The expense has not been incurred at the year end, therefore, nothing to be recognized
in the current year.
5) This will be a non-adjusting event as the event is isolated and this has never occurred in the past. The
damages paid will be taken in the profit and loss account in the period of payment.
A–2
Management should include 22,680,000, the net present value of the decommissioning cost, in the
carrying amount of the oilrig at the time of its installation. A provision for 22,680,000 is created because
the obligating event is the installation of the oilrig.
The amount included in PPE will be depreciated with the rest of the cost of the oilrig in the usual way. The
accretion of the discount after the initial recognition of the provision should be recognized as interest
expense.
The double entry required for the recognition of the asset and the liability will be:

Dr PPE – plant and machinery 22,680,000

Cr Provision - decommissioning 22,680,000

A–3
a) The provision will be required for court fees of Rs. 100,000 and provision for replacement
amounting to Rs. 400,000 will also be recognized which result in total provision of Rs. 500,000.
b) Provision required is as under: -
Total items can be returned 600
Provision for repair (600/3 x 1,000) = Rs. 200,000
Provision for replacement (660x2/3 x 10,000) Rs. 4,000,000
Total provision is: - Rs. 4,200,000
c) The provision will be recognized at lower of the following: -
I. Exit damages payable Rs. 300,000
II. Loss on production (500 x 2,000) Rs. 1,000,000
Therefore, the provision should be recognized of Rs. 300,000 and contract should be
cancelled.
A–4
This question relate to events after the reporting date under IAS -10. These are the events which occur
after the reporting date but before the authorization date of financial statements. These events are
categorized as adjusting and non-adjusting. The events which confirm the conditions existing on the
reporting date are adjusting and those which are independent of the conditions existing on the reporting
date are non-adjusting events. The solution to different situations in the question is as under: -
a) The cash generating unit will be written down to recoverable value as the flood came in early June,
which is before the year end and condition exist on reporting date, however, the cash generating

Page 18 of 25
 unit will not be classified as discontinued operation under IFRS 5 as the decision to dispose off was
taken after the reporting date.
b) As the information relating to the competitor was not available at the year end and the event
arises after the reporting date, the event is non-adjusting and no provision relating to redundancy
will be created. The said business will also not be classified as discontinued operation.
c) The event is adjusting event and provision will also be restated to Rs. 10 million. The appeal status
will be disclosed in notes.
d) The event is an adjusting one and assets should be written off and whole amount of loss should be
charged to income statement. The recovery of claim from insurance company has not been
confirmed if the chances are probable it can only be disclosed in the notes to accounts.
A–5
This question relates with the events occurring after the reporting date. The events are discussed
hereunder whether adjusting or non-adjusting.
a) The entity should adjust the amount of provision as the condition exists at the reporting date and
the court decision has confirmed the penalty.
b) The event is adjusting and the inventory should be written down to Rs. 5.5 million.
c) The event is non-adjusting as the tax rate has been enacted after the reporting date.
d) The final dividend will be recorded in the next year and it is a non-adjusting event.
A–6
a) The company should recognize the full provision as the obligating event exists at the reporting
date. The provision should be recognized for the full amount of Rs. 2 million.
b) As the plan has not been formerly announced by the year end therefore the obligating event does
not exist at the reporting date and provision should not be recognized at the year end.
c) The company should derecognize the investments and the proportionate amount of loan settled
by the bank, as the right to offset exists at the reporting date.
d) The write down in investments should be recognized as losses but only up to the fair value at the
reporting date i.e. Rs. 15.5 million. The decline in market value after the reporting date is not an
adjusting event.
e) As the obligating event exists at the reporting date therefore the provision for penalty should be
recognized at the year end.
A–7
a) The tax rates announced after the yearend are not applicable and do not effects the tax
calculation, whether current or deferred.
b) Although the goods are sold before the yearend but chances of occurrence considered were
remote, further the explosion also occurred after the yearend. Therefore, there is no need to
recognize the provision.
c) The amount of provision should be revised and updated according to new information and
reduction in provision should be incorporated in the current year financial statements.
A–8
Rs. Rs.
Draft profit for the year 1,250,250
Add: --

Page 19 of 25
Less: Fraud (10,000)
1,240,250
Note: All other events after the reporting date are non-adjusting and can only be disclosed in the financial
statements if considered material.
A–9
a) This is an adjusting event as the information of competitor exists on the reporting date therefore,
the inventory should be written down to NRV and loss should be recognized in the current
financial year.
b) As the deferred tax is tax of future years therefore the applicable tax rate for deferred tax will be
33% because the rate exists at the reporting date.
c) The change in accounting estimate is applicable on the year of change and on future years.
d) The change in method of calculation of stage of completion is also change in accounting estimate
and is applicable on the year of change on future years.
A – 10
a) This is an adjusting event. As the court has confirmed the recovery up to 70% of the amount due
therefore the debtor should be written off up to 30% of the amount due and provision in total
should be reversed.
The double entry will be:
Provision for doubt full account 100,000
Debtors account 30,000
Profit or loss account 70,000
b) This event is non-adjusting event and will not affect the fair value of the date of reporting. The fair
value is a point of time value and reflects the facts and circumstances of the particular date.
c) The change in tax rate or imposition of surcharge will also be a non-adjusting event and will not
change the calculation of current or deferred tax because taxes are calculated according to the
tax rate applicable on the reporting date.
d) The entity should create a provision of Rs. 100,000 as there is a probable chance that the claim
will be accepted by court up to said amount.
A – 11
a) This is an example of an adjusting event and provision for additional tax should be recognized
immediately amounting to Rs. 2 million as the cases have been filed against the company before
the end of current year.
b) This is also an example of adjusting event and provision should be recognized amounting to Rs.
1.5 million as the legal advisor is of the opinion that there is a probable chance of awarding
compensation to the employee.
c) The company should recognize the additional deferred tax expense because IAS 12 required that
the deferred tax should be recognized at the tax rate substantively enacted by the reporting date.
The additional deferred tax will result in decrease in profit and increase in provision for deferred
tax for Rs. 1.75 million.
d) The bonus issue after the year end is an adjusting event for calculation of basic and dilutive
earning per share (EPS) even announced after the year end. Therefore, not only the EPS both

Page 20 of 25
 basic and dilutive of current year but previous year also will be recalculated after considering the
bonus issue.
e) The operation will continue to be presented as continuing in the current year because the
decision was announced after the year end, however, in the next year it will be presented as
discontinued in the current year.
A – 12
a) This is an example of a non-adjusting event as the competitor entered in the market after year
end. Therefore, the inventory should remain at the cost and not reduced to net realizable value.
b) This is an example of a contingent liability but as the chances are remote, it will not be recognized
or disclosed in the financial statements.
c) The right issue after year end is a non-adjusting event and the share capital should not be
changed.
d) This is also an example of a non-adjusting event as the condition relating to this default does not
exist at the reporting date. However, if the material amount is outstanding against this debtor it
can be disclosed in the financial statements.
e) The major suppliers and customers are not related parties as normally they are not in a position
to effect the decision making process of the entity.

Page 21 of 25
Practice Questions and Answers IFRIC 1
Q–1
Violet Power Limited is running a coal based power project in Pakistan. The Company has built its plant in
an area which contains large reserves of coal. The company has signed a 20 years agreement for sale of
power to the Government. The period of the agreement covers a significant portion of the useful life of
the plant. The company is liable to restore the site by dismantling and removing the plant and associated
facilities on the expiry of the agreement.
Following relevant information is available:
(i) The plant commenced its production on July 1, 2007. It is the policy of the company to measure
the related assets using the cost model;
(ii) Initial cost of plant was Rs. 6,570 million including erection, installation and borrowing costs but
does not include any decommissioning cost;
(iii) Residual value of the plant is estimated at Rs. 320 million;
(i) Initial estimate of amount required for dismantling of plant, at the time of installation of plant
was Rs. 780 million. However, such estimate was reviewed as of June 30, 2008 and was
revised to Rs. 1,021 million;
(ii) The Company follows straight line method of depreciation; and
(iii) Real risk-free interest rate prevailing in the market was 8% per annum when initial estimates of
decommissioning costs were made. However, at the end of the year such rate has dropped to 6%
per annum.
Required: - Work out the carrying value of plant and decommissioning liability as of June 30, 2008.
(08)
Q–2
Waste Management Limited (WML) had installed a plant in 2005 for generation of electricity from
garbage collected by the civic agencies. WML had signed an agreement with the government for
allotment of a plot of land, free of cost, for 10 years. However, WML has agreed to restore the site, at the
end of the agreement.
Other relevant information is as under:
(i) Initial cost of the plant was Rs. 80 million. It is estimated that the site restoration cost would
amount to Rs. 10 million.
(ii) It is the policy of the company to measure its plant and machinery using the revaluation model.
(iii) When the plant commenced its operations i.e. on April 1, 2005 the prevailing market based
discount rate was 10%.
(iv) On March 31, 2007 the plant was revalued at Rs. 70 million including site restoration cost.
(v) On March 31, 2009 prevailing market based discount rate had increased to 12%.
(vi) On March 31, 2011 estimate of site restoration cost was revised to Rs. 14 million.
(vii) Useful life of the plant is 10 years and WML follows straight line method of depreciation.
(i) Appropriate adjustments have been recorded in the prior years i.e. up to March 31, 2010.
Required: - Prepare accounting entries for the year ended March 31, 2011 based on the above
information, in accordance with International Financial Reporting Standards. (Ignore taxation.)
(17)
Q–3
The financial statements of Bravo Limited (BL) for the year ended 30 September 2013 are under
finalization and the following matter is under consideration:

Page 22 of 25
i) BL’s plant was commissioned and became operational on 1 April 2008 at a cost of Rs. 130 million.
At the time of commissioning its useful life and present value of decommissioning liability was
estimated at 20 years and Rs. 19 million respectively.
BL’s discount rate is 10%.
There has been no change in the above estimates till 30 September 2013 except for the
decommissioning liability whose present value as at 1 April 2013 was estimated at Rs. 25 million.

Required: - Compute the related amount as that would appear in the statements of financial position and
comprehensive income of Bravo Limited for the year ended 30 September 2013 in accordance with IFRS.
(Ignore corresponding figures). (06)
A–1
Rs. in million
Assets carrying value as at June 30, 2008 (Asset)
Cost (Given) 6,570
20
Decommissioning liability on July 1, 2007 (780 / (1+0.08) ) 167
Depreciation for the year (321) Working 1
Adjustment for revision in provision for decommissioning cost 157 Working 2
6,573

Decommissioning liability on June 30, 2008 (1,021 / (1+0.06)19) 337

Working 1: Depreciation for the year (P&L)

Cost 6570
Decommissioning liability on July 1, 2007 167
Residual value (320)
6,417
Depreciation (6,417 / 20) 321

Working 2: Increase in decommissioning liability during the year ended June

30, 2008
Decommissioning liability on June 30, 2008 337
Less: Decommissioning liability on July 1, 2007 (167)
Less: Unwinding of interest for the year (167 x 8%) (13)
157
A-2
Date Particulars Ref. Dr. Cr.
Rs. in million
31-03-11 PL Account (Depreciation exp) 70,000/8 8.750
Accumulated depreciation 8.750
PL Account (Unwinding of discount) 1 0.681

Page 23 of 25
 Site restoration liability (Unwinding of discount) 1 0.681
Revaluation surplus (Incremental depreciation) 1 0.461
Retained earnings (Incremental depreciation) 1 0.461
PL account (Excess of increase in site restoration cost over revaluation 0.699
balance) 2.542-1.843
Revaluation surplus (Increase in site restoration cost) 2 1.843
Site restoration liability (Increase in site restoration cost) 2 2.542
12.434 12.434

WORKING Ref. Site Revaluation

restoration surplus
01-04-05 PV of site restoration cost of Rs. 10 million at 10% 10/(1.1)10 liability
3.855
discount rate
31-03-06 Unwinding at 10% 0.386
31-03-07 Unwinding at 10% 0.424
31-03-07 Carrying value of the plant (80+3.855)*8/10 67.084
31-03-07 Revalued amount of the plant 70.000 2.916
31-03-08 Unwinding at 10% / Incremental dep. (2.916/8) 0.467 (0.365)
31-03-09 Unwinding at 10% / Incremental dep. 0.513 (0.365)
5.645 2.186
31-03-09 Increase / (decrease) in liability / revaluation 5.0665.645 (0.579) 0.579
surplus on revision of discount rate to 12%
31-03-09 PV of site restoration cost of Rs. 10 million at 12% 10/(1.12)6 5.066# 2.765
discount rate
31-03-10 Unwinding at 12% / Incremental dep. (2.765/6) 0.608 (0.461)
31-03-11 Unwinding at 12% / Incremental dep. 1 0.681 (0.461)
6.355 1.843
31-03-11 Increase / (decrease) in liability relating to site 8.8976.355 2 2.542 (1.843)
restoration costs
31-03-11 PV of site restoration cost of Rs. 14 million at 12% 14/(1.12)4 8.897 -
discount rate
A–3
1. Decrease in decommissioning liability Finance/ Property, Decommissioning
depreciation plant and liability
expenses equipment
Rs. (m) Rs. (m) Rs. (m)
Carrying amount as at 30-06-2012
(130/19)/20x(20-4.5) 115.48
[19x(1.10)^4.5] 29.18
Depreciation Oct 2012 –Mar 2013 3.73 (3.73)
[(130/19)/20x0.5]
Finance cost Oct 2012 – Mar 2013 1.42 1.42
[19x(1.1)^5]-[19x(1.10)^4.5]
Decrease due to revision in liability (5.60) (5.60)

Page 24 of 25
(30.6-25)
Revised balance as at 1-4-2013 106.15 25.00
Depreciation Apr - Sep 2013
(106.15/15x0.5) 3.54 (3.54)
Finance cost Apr – Sep 2013 1.22 1.22
9.91 102.61 26.22

Page 25 of 25