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Review and ReportingSubsequent EventsIAS 10Receivables

ACCA · Question 06 · Review and Reporting

SECTION A - CASE 2: GREENHARVEST CO-OP

SCENARIO:
You are the audit senior for GreenHarvest Co-op, a large agricultural cooperative, for the year ended 31 March 20X5. The audit is nearing completion. During the review phase, you note the following:

  1. A major customer, representing 15% of receivables, went into liquidation on 15 April 20X5.
  2. GreenHarvest is facing a lawsuit from a supplier regarding contaminated fertilizer, which the legal counsel advises has a 30% chance of success.
  3. The directors have refused to disclose a key executive's remuneration, which is required by local legislation, though the amount is immaterial to the financial statements as a whole.

QUESTION:
How should the liquidation of the major customer on 15 April 20X5 be treated in the financial statements for the year ended 31 March 20X5?

Answer options:

A.

It is a non-adjusting event. It should only be disclosed in the notes to the financial statements.

B.

It is an adjusting event. The receivables balance should be written down to its recoverable amount.

C.

It is an adjusting event. The revenue associated with this customer for the entire year must be reversed.

D.

It requires no action as the event occurred after the reporting date.

How to approach this question

Determine if the liquidation provides evidence of conditions existing at the reporting date (adjusting) or conditions arising after (non-adjusting).

Full Answer

B.It is an adjusting event. The receivables balance should be written down to its recoverable amount.✓ Correct
According to IAS 10 Events After the Reporting Period, the bankruptcy of a customer that occurs after the reporting period usually confirms that the customer was already experiencing financial difficulties at the reporting date. Therefore, it is an adjusting event, and the receivable should be adjusted (written down) to reflect the impairment.

Common mistakes

Classifying it as a non-adjusting event simply because the legal liquidation date was after year-end.
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