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ACCA Strategic Professional · Strategic Business Reporting (International) · Provisions, contingencies and events after the reporting period

Orchard Co has a 30 September 20X5 year end. Before the financial statements were authorised, the finance director, who is paid a bonus linked to profit, suggested delaying recognition of a $1.2 million inventory write-down arising from a customer's cancellation on 20 October 20X5 of an order for bespoke goods, so that it falls into the following year. The goods were completed before 30 September and the buyer was already in financial difficulty then. Which response is most appropriate?

Orchard should adjust inventory to net realisable value in the year to 30 September 20X5. The cancellation confirms conditions that existed at year end, making it an adjusting event. Deferring it to protect a profit-linked bonus would compromise integrity and objectivity.

  1. AAgree, since the cancellation occurred after the reporting period and is non-adjusting
  2. BDisclose the cancellation only and leave inventory unchanged to avoid misleading the market
  3. CAdjust inventory to net realisable value in the year to 30 September 20X5; delaying it for bonus reasons would breach integrity and objectivityCorrect
  4. DDefer the write-down to the interim period as it is below overall materiality

Explanation

The goods existed and the buyer's difficulties pre-dated year end, so the cancellation provides evidence of net realisable value at the reporting date. IAS 2 and IAS 10 therefore require the write-down as an adjusting event. Delaying it to affect a profit-linked bonus would be a breach of the ethical principles of integrity and objectivity.

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