Ind AS 10

What is Ind AS 10?

Ind AS 10, also known as ‘Events After the Reporting Period’, is an Indian Accounting Standard that prescribes the principles for when an entity should adjust its financial statements for events occurring after the reporting period but before the financial statements are authorised for issue. It also details the disclosures an entity should give about such events. The primary objective of Ind AS 10 is to ensure that financial statements reflect the most accurate and up-to-date information possible, considering significant events that transpired between the reporting date and the date of authorisation, thereby enhancing their relevance and reliability for users.

The Journey to Ind AS 10: Understanding its Background

Ind AS 10 is part of the Indian Accounting Standards (Ind AS), which are converged with International Financial Reporting Standards (IFRS). This convergence journey began to align Indian accounting practices with global standards, aiming to improve transparency, comparability, and quality of financial reporting for Indian companies, especially those with international operations or investors. Ind AS 10 is essentially the Indian equivalent of IAS 10, ‘Events After the Reporting Period’, issued by the International Accounting Standards Board (IASB). The Ministry of Corporate Affairs (MCA) in India, in consultation with the National Advisory Committee on Accounting Standards (NACAS), notifies these standards. The framework for Ind AS became mandatory for certain classes of companies in a phased manner starting from April 1, 2016.

Deciphering Ind AS 10: Events After the Reporting Period Explained

At its core, Ind AS 10 deals with events, both favourable and unfavourable, that occur between the end of the reporting period (e.g., March 31st for many Indian companies) and the date when the financial statements are authorised for issue (e.g., by the board of directors). The standard categorises these events into two main types, each with distinct accounting treatments and disclosure requirements:

Adjusting Events: When Financial Statements Need a Rethink

Adjusting events are those that provide evidence of conditions that existed at the end of the reporting period. These events require an entity to adjust the amounts recognised in its financial statements or to recognise items that were not previously recognised. The rationale is that these events clarify or confirm conditions that were already present on the balance sheet date, and therefore, the financial statements should be updated to reflect this new information. Examples include:

• The settlement after the reporting period of a court case that confirms the entity had a present obligation at the end of the reporting period. The entity would adjust any previously recognised provision or recognise a new provision.
• The bankruptcy of a customer that occurs after the reporting period, which typically confirms that a loss existed at the end of the reporting period on an account receivable. The entity would adjust the bad debt provision.
• The sale of inventories after the reporting period provides evidence about their net realisable value at the end of the reporting period. If the sale price indicates a lower net realisable value, the inventory must be written down.
• The determination after the reporting period of the cost of assets purchased, or the proceeds from assets sold, before the end of the reporting period.
• The discovery of fraud or errors that show the financial statements were incorrect.

Non-Adjusting Events: Disclosures for Future Insights

Non-adjusting events are those that indicate conditions that arose after the reporting period. While these events do not lead to adjustments in the amounts recognised in the financial statements, they are often so significant that non-disclosure would affect the ability of users to make proper evaluations and decisions. Therefore, Ind AS 10 requires specific disclosures for such material non-adjusting events. The disclosure should include the nature of the event and an estimate of its financial effect, or a statement that such an estimate cannot be made. Examples include:

• A major business combination (merger or acquisition) after the reporting period.
• An announcement of a plan to discontinue an operation.
• Major purchases of assets, disposal of subsidiaries, or the sale of assets.
• The destruction of a major production plant by fire after the reporting period.
• Announcements of significant changes in taxation rates after the reporting period.
• Declaring or proposing dividends after the reporting period.

The Going Concern Principle: A Critical Consideration

Ind AS 10 also addresses situations where events after the reporting period might cast significant doubt on an entity’s ability to continue as a going concern. If, after the reporting period, management determines that it intends to liquidate the entity or cease trading, or that it has no realistic alternative but to do so, the financial statements should not be prepared on a going concern basis. Instead, they should be prepared on a liquidation basis, which often entails significant adjustments to asset values and classification.

Disclosure Requirements: Transparency is Key

For non-adjusting events, the standard mandates disclosure of the nature of the event and an estimate of its financial effect, or a statement that such an estimate cannot be made. For adjusting events, the adjustments are incorporated directly into the financial statements, but additional disclosures might be necessary to provide clarity on the impact of those events.

Why Ind AS 10 Matters: Safeguarding Financial Integrity

Ind AS 10 is crucial for businesses because it directly impacts the accuracy, relevance, and reliability of financial statements. By requiring companies to consider and appropriately account for events occurring after the reporting period, it ensures that financial statements provide a more complete and fair view of an entity’s financial position and performance. This is vital for:

• Informed Decision-Making: Investors, creditors, and other stakeholders rely on financial statements to make crucial economic decisions. Ind AS 10 helps them receive information that reflects the most current understanding of an entity’s financial state, preventing misinformed decisions based on outdated information.
• Enhanced Credibility: Adherence to Ind AS 10 bolsters the credibility of a company’s financial reporting, signifying a commitment to transparency and adherence to high accounting standards.
• Regulatory Compliance: For publicly listed companies and other entities mandated to follow Ind AS, compliance with Ind AS 10 is a legal requirement. Non-compliance can lead to penalties, reputational damage, and loss of investor trust.
• Risk Management: By requiring management to assess events post-reporting period, the standard indirectly encourages better risk identification and management, especially regarding potential impacts on going concern or asset valuations.

Real-World Scenarios: Applying Ind AS 10 in Practice

Consider the following practical applications:

• Litigation Outcomes: A company is facing a lawsuit. As of March 31st, the outcome is uncertain, and a provision for a potential loss is estimated. In April, before the financial statements are authorised, the court rules against the company, confirming a higher liability. Under Ind AS 10, this is an adjusting event, requiring an increase in the provision for the liability in the March 31st financial statements.
• Asset Impairment: A significant portion of a company’s machinery is damaged due to a fire in April, after the reporting date of March 31st. This is a non-adjusting event, as the damage occurred after the balance sheet date. The financial statements for March 31st would not be adjusted, but a detailed disclosure about the fire and its estimated financial impact (e.g., loss of assets, business interruption) would be required.
• Major Contracts: A company secures a large, transformative contract in May, after its fiscal year-end of March 31st. This is a non-adjusting event, as the contract was not in existence at the reporting date. While it will not change the March 31st financial figures, its significance warrants disclosure to inform users about the company’s future prospects.

Connecting the Dots: Related Accounting Standards and Principles

Ind AS 10 does not operate in isolation. It interlinks with several other accounting standards and fundamental principles:

• Ind AS 1 (Presentation of Financial Statements): This standard outlines the overall requirements for the presentation of financial statements, including disclosures related to significant accounting policies and judgments, which are often influenced by events after the reporting period.
• Ind AS 37 (Provisions, Contingent Liabilities and Contingent Assets): Ind AS 10 frequently interacts with Ind AS 37, especially when an event after the reporting period confirms an existing contingent liability or provides new information about the measurement of a provision.
• Ind AS 36 (Impairment of Assets): Events occurring after the reporting period can provide evidence of impairment that existed at the reporting date (adjusting event) or impairment that occurred after the reporting date (non-adjusting event, requiring disclosure).
• Going Concern Assumption: This fundamental accounting assumption is directly addressed by Ind AS 10, requiring reassessment if events after the reporting period suggest the entity may no longer be a going concern.
• Materiality: The concept of materiality is paramount. Only events that are material enough to influence the economic decisions of users of financial statements warrant adjustment or disclosure under Ind AS 10.

Staying Current: Recent Updates and Interpretations

While Ind AS 10 itself is a mature standard derived from IAS 10, interpretations and clarifications can arise, often influenced by emerging economic conditions or specific industry challenges. For instance, the COVID-19 pandemic led to significant discussions and guidance on applying Ind AS 10, particularly regarding whether the impacts of the pandemic (e.g., supply chain disruptions, government lockdowns, market crashes) constituted adjusting or non-adjusting events for reporting periods ending early in the pandemic. Generally, the broad economic impact of a global event like a pandemic would be considered a non-adjusting event for periods ending before the event’s significant onset, but specific confirmations of existing conditions (like a customer’s confirmed bankruptcy) would be adjusting. Companies must continually monitor pronouncements from the Institute of Chartered Accountants of India (ICAI) and the Ministry of Corporate Affairs (MCA) for any new interpretations or amendments relevant to their specific situations.

Who Needs to Know? Impact Across Business Functions

Ind AS 10’s implications extend beyond just the accounting department:

• Finance and Accounting Departments: These are the primary custodians of compliance, responsible for identifying, evaluating, and correctly applying Ind AS 10 to financial statements. This includes preparing necessary adjustments and disclosures.
• Management and Board of Directors: They are ultimately responsible for the integrity of the financial statements and for authorising their issue. They need to understand the implications of Ind AS 10, especially regarding adjusting events, the going concern assessment, and the materiality of non-adjusting events requiring disclosure.
• Legal Department: Often involved in assessing the financial impact of litigation outcomes, contract changes, or regulatory developments that might qualify as events after the reporting period.
• Internal Audit: Ensures that the company’s processes for identifying and accounting for events after the reporting period are robust and compliant.
• Investor Relations: Plays a crucial role in communicating the impact of significant non-adjusting events to investors and other stakeholders transparently.
• Operational Management: While not directly involved in accounting, operational managers may provide key information about events like asset damage, production disruptions, or significant post-period sales that need to be considered under Ind AS 10.

The Road Ahead: Future Implications for Financial Reporting

The core principles of Ind AS 10 are fundamental and unlikely to undergo radical change. However, future trends in financial reporting could influence its application:

• Increased Emphasis on Forward-Looking Information: While Ind AS 10 primarily deals with historical financial statements, the increasing demand for forward-looking information might lead to more robust disclosure requirements for non-adjusting events that signal future performance or risk.
• Digital Reporting and AI: Advancements in digital financial reporting (e.g., XBRL) and the use of Artificial Intelligence could streamline the identification and assessment of events after the reporting period, potentially leading to faster analysis and more consistent application.
• ESG Reporting Integration: As Environmental, Social, and Governance (ESG) factors become more integral to financial reporting, significant ESG-related events occurring after the reporting period (e.g., a major environmental incident, a new sustainability policy announcement) may require careful consideration under Ind AS 10, particularly in terms of non-adjusting disclosures.
• Regulatory Scrutiny: Post-crisis environments often lead to increased regulatory scrutiny, particularly around areas like going concern assessment and adequate disclosure of material events, reinforcing the importance of diligent application of Ind AS 10.

In essence, Ind AS 10 remains a critical standard for ensuring the timeliness and reliability of financial information, adapting as the business and regulatory landscape evolves.