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ACCA Applied Knowledge · Financial Accounting · Events after the reporting period

Delta Co has a year end of 31 March 20X6. Before the financial statements were authorised for issue, a court case outstanding at the year end, for which no provision had been made, was settled on 20 May 20X6 with Delta paying $80,000. Delta had previously disclosed only a contingent liability. What is the correct treatment in the year ended 31 March 20X6?

Delta should recognise a provision of $80,000 in the year ended 31 March 20X6, because the court settlement after the year end confirms an obligation existing at the reporting date. It is an adjusting event, not a non-adjusting disclosure.

  1. AMake no adjustment and disclose the $80,000 as a non-adjusting event
  2. BRecognise a provision of $80,000 as an adjusting eventCorrect
  3. CRecognise the $80,000 in the year ending 31 March 20X7 only
  4. DIgnore it because the settlement happened after the year end

Explanation

The settlement confirms an obligation that existed at the reporting date, so it is an adjusting event. Dr Profit or loss $80,000, Cr Provision (liability) $80,000. Treating it as non-adjusting ignores that the obligation arose from a past event before the year end.

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