Adjusting Events:

1 Resolutions relating to proposed dividends and amounts appropriated to reserves 2 The effects of changes in taxation rates 3 The declaration, by subsidiaries or associated companies, of dividends relating to periods prior to the balance sheet date of the holding company. 4 The subsequent determination of the purchase price or of sale proceeds of assets purchased or sold before the year end. 5 The valuation of a property which provides evidence of a permanent diminution in value 6 The receipt of a copy of the financial statements or other information in respect of an unlisted company which provides evidence of a permanent diminution in the value of a long-term investment. 7 The receipt of proceeds of a sale or other evidence after the balance sheet date concerning the net realizable value of stock 8 The receipt of evidence that the previous estimate of accrued profit on a long term contract was materially inaccurate 9 The renegotiation of amounts owing by debtors, or the insolvency of a debtor 10 Amounts received or receivable in respect of insurance claims which were in the course of negotiation at the balance sheet date. 11 The discovery of errors or frauds which show that the financial statements were incorrect Non-Adjusting Events 1 Issue of Shares and debentures 2 Purchases and sales of fixed assets and investments 3 Losses of fixed assets or stocks as a result of a catastrophe such as fire or flood 4 Opening new trading activities or extending existing trade activities 5 Closing a significant part of the trading activities if this was not anticipate at the year end 6 Decline in the value of property and investments held as fixed assets, if it can be demonstrated that the decline occurred after the year end 7 Government action, such as nationalization 8 Strikes and other labor disputes.

Provisions, Contingent Liabilities and Contingent Assets

As with the requirements of all financial reporting standards, financial statements must provide all the information necessary for an understanding of the companys financial position, in order for them to present a true and a fair view of the companys affairs. As a continuation to the previous standards, such as FRS 3, the statement of principles and SSAP 17, FRS 12 takes things further by tackling the subject of provisions, contingent liabilities and contingent assets. According to FRS 12, a provision is a: a) Liability of uncertain timing or amount. b) Liability is an obligation of an entity to transfer economic benefits as a result of past transactions or events. According to ME, or in laymans terms, a provision is a liability that we are uncertain of, which we may be obliged to settle. E.g. If a company is obliged to incur clean up costs for environmental damage thathas already been cause, should a provision be made? Yes, because we incurred the liability of the cleaning costs during a period of time inthe past, and we are now obliged to settle it, but we dont know when or its amount. Thus a provision should be made. But, when are provisions recognized? 1) When a business has a PRESENT obligation as a result of a past event. 2) It is probable that a transfer of economic benefits will be required to settle the obligation. 3) A reliable estimate can be made of the obligation.

Good, now we know when to recognize them, but what is their accounting treatment? Well, once a provision is recognized, the company can do one of three things, one is to provide for the provision and disclose it in our accounts, the next choice is simply disclose it by way of notes, or to simply ignore it. If there is a high probability of a transfer of economic benefits and a reliable estimate could be made for the amount, the company should provide for the provision. Otherwise, whether there is a remote transfer of economic benefits or not, the inability to provide a reliable estimate, means that we could do is to disclose the provision byway of notes.

Worked Example This example is provided by FRS 12 concerning the costs of restructuring, and it defines it as a program that is planned and controlled by management and materially changes either: a) The scope of a business undertaken by an entity b) The manner in which the business is conducted. Such as: Sale or termination of a line of business Closure of business locations Changes in the management structure. Well, should a provision be made for any of these events, knowing that FRS 12 was mainly introduced to target abuses of provisions for restructuring? If there is a present obligation, in a form of a contract or a sale agreement, in which a reliable estimate can be made for the provision, then a provision should be provided for, but the costs of the following items should NOT be included: Marketing Costs Retraining of New Staff The cost of investing in new systems. FRS 12: Provisions, Contingent Liabilities and Contingent Assets FRS 12 refers to n obligation that arises from a past event, which we discussed earlier, as a Contingent Liability. FRS 12 takes the definition further to include the following: 1) 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 entitys control, OR 2) A present obligation that arises from past events but is not recognised because, a) It is not probable that a transfer of economic benefits will be required to settle the obligation. b) Or the amount of the obligation cannot be measured with sufficient reliability. In other words, a contingent liability is an event that may occur subject to uncertain events beyond the companys control or it arises from a present obligation from past events, but couldnt be recognised due to points 2 a) and 2 b) above.

This means that contingent liabilities should not be recognised in financial statements, they should only be disclosed. The required disclosures for a contingent liability are: A brief description of the nature of the contingent liability An estimate of its financial effect An indication of the uncertainties that exist The possibility of any reimbursement. FRS 12: Provisions, Contingent Liabilities and Contingent Assets

A contingent asset, as a oppose to a contingent liability is: A possible asset, which arises from past events and whose existence will be confirmed by the occurrence of one or more uncertain future events not wholly within the entitys control. Therefore, a contingent asset should not be recognized at all, in fact they could only be disclosed. In conclusion, one can obviously see the application of the prudence concept in dealing with provisions, contingent liabilities and contingent assets, and as such there is no surprise as to the accounting treatment of these items. One must also note that the accounting limitations of the prudence concept also apply.