At the reporting date, a company holds a trade receivable from a customer, assessed at that date as fully collectible based on the information then available. Three weeks after the reporting date, but before the financial statements are authorised for issue, the customer files for bankruptcy because of financial difficulties that had already existed at the reporting date. Under IAS 10, how should the company treat this development?
- As a non-adjusting event, disclosed in the notes only, because the bankruptcy filing itself occurred after the reporting date
- As a non-adjusting event, with no disclosure required, because the receivable was assessed as fully collectible at the reporting date based on the best information available at that time
- As an adjusting event, because the bankruptcy provides evidence of conditions that already existed at the reporting date, requiring the carrying amount of the receivable to be adjusted
- As an adjusting event, but only if the company's auditors had already flagged the customer as a credit risk before the reporting date
Why C? And why not the others?
Correct answer: C. As an adjusting event, because the bankruptcy provides evidence of conditions that already existed at the reporting date, requiring the carrying amount of the receivable to be adjusted
IAS 10 treats a customer's bankruptcy occurring after the reporting period as an adjusting event when it confirms that the customer's financial difficulties, and therefore the impairment of the receivable, already existed at the reporting date; the carrying amount of the receivable must be adjusted to reflect that evidence. The option classifying this as non-adjusting because the filing itself happened after the reporting date focuses on the wrong moment in time — what matters under IAS 10 is when the underlying conditions (the customer's financial difficulty) existed, not when the formal bankruptcy filing or announcement occurred. The option treating the earlier favourable assessment as the end of the matter, with no disclosure or adjustment needed, misses the entire purpose of adjusting events: later-arriving evidence is used to correct the reporting-date estimate to reflect what was actually true then, even though it was not yet known. The option conditioning the classification on whether auditors had previously flagged the customer as a credit risk introduces a factor IAS 10 does not use at all; the adjusting/non-adjusting distinction turns solely on whether the event provides evidence of conditions existing at the reporting date, not on what any particular party had previously flagged.
Source: IAS 10 Events after the Reporting Period, paragraph 9(a) (example of an adjusting event: bankruptcy of a customer confirming a loss existed at the reporting date)