Basis of Conclusion and Dissenting Opinions

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^{Lucubrate Magazine, Issue 37, August 17th, 2018}

Within each accounting standard there contains the official pronouncement along with cross-references and implementation issues. However, accounting standards also include ‘basis of conclusion’ and often ‘dissenting opinions’. 

• Accounting Series – article No: 18
• Accounting Theory – Advanced Part 8

By Peter Welch, Georgia, CEO GlobalCfo.LLC.

Concluding IAS 10, with reference to a going concern and disclosure requirements. “Relative to the IASB para 14, 21 and 22:

“Going concern

14 An entity shall not prepare its financial statements on a going concern basis if management determines after the reporting period either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so.

“Disclosure requirements:

21 If non-adjusting events after the reporting period are material, non-disclosure could influence the economic decisions that users make on the basis of the financial statements. Accordingly, an entity shall disclose the following for each material category of a non-adjusting event after the reporting period:

1. the nature of the event; and
2. an estimate of its financial effect, or a statement that such an estimate cannot be made.

22 the following are examples of non-adjusting events after the reporting period that would generally result in disclosure:

1. a major business combination after the reporting period (IFRS 3 Business Combinations requires specific disclosures in such cases) or disposing of a major subsidiary;
2. announcing a plan to discontinue an operation;
3. major purchases of assets, classification of assets as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. other disposals of assets, or expropriation of major assets by the government;
4. the destruction of a major production plant by a fire after the reporting period;
5. announcing, or commencing the implementation of, a major restructuring (see IAS 371:
6. major ordinary share transactions and potential ordinary share transactions after the reporting period (IAS 33 Earnings per Share requires an entity to disclose a description of such transactions, other than when such transactions involve capitalization or bonus issues, share splits or reverse share splits all of which are required to be adjusted under IAS 33)
7. abnormally large changes after the reporting period in asset prices or foreign exchange rates changes in tax rates or tax laws enacted or announced after the reporting period that have a significant effect on current and deferred tax assets and liabilities (see IAS 12 Income Taxes):
8. entering into significant commitments or contingent liabilities, for example, by issuing significant guarantees;
9. commencing major litigation arising solely out of events that occurred after the reporting period.

Picture: Pete Johnson

Examples:

Adjusting Events (subsequent information)

• Your company has been sued for anticompetitive behavior. This has been denied by your company, and no provision was made in your financial statements on 31^st December 2011.
• On January 14^th, 2012, the court awards $5 million in damages against you.
• If your financial statements have not been approved, you create a provision for $5 million in your financial statements to 31^st December 2011.

Adjusting Events (subsequent information)

Impairment

• At 31^s* December 2011, part of your computer system is being repaired. It has a carrying value of $2 million in your financial statements.
• On January 16^th, 2012, you are informed that the part is irreparable, and the scrap value is only $0.4 million.
• If your financial statements have not been approved, you reduce the carrying value of the part to $0.4 million in your financial statements to 31^st December 2011.

Adjusting Events (Existing loss)

• Your company has a client that owes you $8 million on 31^st December 2011.
• On January 9^th, 2012, your client goes into liquidation. You are informed that you will receive nothing from the liquidation.
• If your financial statements have not been approved, you reduce the carrying value of financial statements receivable by $8 million in your financial statements to 31^st December 2011

Picture: Pixaby

Non-Adjusting Events (Decline in value of investments)

• Your company has invested heavily in Far-Eastern stocks that have performed well in the period to 31st December 2011.
• On January 14th, 2012, a series of earthquakes have hit the region, causing major industrial devastation. Stock markets plummet and remain very depressed until the date of approval of your financial statements.
• You do not change the figures in your financial statements to 31st December 2012, but note the post-balance-sheet decline of investments, and amounts involved.

As we move through these accounting standards and of course these particular articles, you may notice a certain pattern emerging. The approach we are using is to identify for each of the standards certain key technical issues. We will either obtain these through eIFRS or using other sources and of course with full acknowledgment. As indicated earlier in previous articles it is not the intent to replicate in full the accounting standards but to draw attention to the recommended or codified approach that must be complied with, and often in just one or two ‘bolded’ paragraphs. Each and every accounting standard comes with a set of examples and implementation details that must be read very thoroughly and understood. It is also critical to understand that the entities policy and procedures manuals must reflect not only the key technical issues but also implementation issues contained within the accounting standards. These implementation issues and examples provided can be referenced within the policy and procedures manuals using summaries and/or bullet-points. Certainly, the entire accounting standard is not to be replicated within the policy procedures manual. It is recommended to access the Annotated Issued Standards (Red Book).

Within each accounting standard there contains the official pronouncement along with cross-references and implementation issues. However, accounting standards also include ‘basis of conclusion’ and often ‘dissenting opinions’. These should all be read very thoroughly as all accounting standards as much as they comply with the framework aren’t always as an approach agreed by all. These dissenting opinions will express reasons why they decided not to comply with the majority. Does not mean that the accounting standards are incorrect but merely that alternative approaches do exist and could have been applied. For example consider the Supreme Court, the ultimate ruling on points of law. It is quite common for rulings to be passed but not supported by all appointees.

Conclusion next week and begin IAS 16.

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(Illustration on top: Pixaby)

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