Non-Adjusting Events

Definition

Non-Adjusting Events are events that occur between the balance-sheet date and the date on which the financial statements of an organization are approved by the board of directors. These events do not relate to conditions that existed at the balance-sheet date but must be disclosed if they are sufficiently material. The disclosure is pertinent because these events could affect a user’s understanding of the financial statements.

Examples

Example 1: Natural Disaster

A company’s warehouse is destroyed by a hurricane after the balance-sheet date but before the approval of the financial statements. This destruction is a non-adjusting event because the hurricane did not exist at the balance-sheet date. However, if the event is material, it must be disclosed in the notes to the financial statements.

A company issues new shares after the balance-sheet date but before the approval of the financial statements. The issuance affects the company’s capital structure but is a result of actions taken after the balance-sheet date. If material, this event should be disclosed in the notes accompanying the financial statements.

Example 3: Legal Settlement

A significant legal settlement is agreed upon after the balance-sheet date. If the agreement indicates a potentially harmful financial impact on liquidity, even though it did not exist at the balance-sheet date, it qualifies as a non-adjusting event that requires disclosure.

Frequently Asked Questions

What differentiates non-adjusting events from adjusting events?

Non-adjusting events occur after the balance-sheet date and do not reflect conditions that existed at that date. Adjusting events occur post balance-sheet date but relate to conditions that were present before or on that date.

When must non-adjusting events be disclosed?

Non-adjusting events must be disclosed if they are material enough that their non-disclosure could affect the users’ understanding of the financial statements.

What are the implications if a non-adjusting event challenges the going-concern concept?

If a non-adjusting event suggests the going-concern assumption is no longer valid, it may necessitate changes in the amounts reported in the financial statements or the preparation of the financial statements on a different basis (e.g., liquidation basis).

Is a subsequent dividend declaration a non-adjusting event?

Yes, dividends declared after the balance-sheet date are non-adjusting events. These events should be disclosed in the financial statement notes if they are material.

Adjusting Events: Events that occur after the balance-sheet date that provide additional information about conditions that existed at the balance-sheet date.
Balance-Sheet Date: The date on which an entity reports its financial condition.
Financial Statements: Documents that provide an overview of an entity’s financial condition, including the balance sheet, income statement, and cash flow statement.
Materiality: The significance of financial information to the decision-making process of users of financial statements.
Going-Concern Concept: The assumption that an entity will continue its operations for the foreseeable future.

Online References

Suggested Books for Further Studies

“Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
“Financial Accounting and Reporting” by Barry Elliott and Jamie Elliott
“IFRS: Practical Implementation Guide and Workbook” by Abbas A. Mirza, Graham Holt, and Magnus Orrell

Accounting Basics: “Non-Adjusting Events” Fundamentals Quiz

### Does a non-adjusting event require changes to the values in the financial statements? - [ ] Yes, always. - [x] No, only disclosure is required if material. - [ ] Yes, but only if it affects the balance sheet. - [ ] No, it never affects the financial statement preparation. > **Explanation:** Non-adjusting events do not necessitate changes in the financial statement values but must be disclosed if they are significant enough to affect a user's understanding of the financial statements. ### How soon can a non-adjusting event occur after the balance-sheet date? - [ ] Within a month. - [ ] Within a year. - [x] Any time before the financial statements are approved. - [ ] Only with external auditor's approval. > **Explanation:** Non-adjusting events can occur any time after the balance-sheet date but before the formal approval of the financial statements. ### If a significant non-adjusting event indicates the going-concern concept might not apply, what action should be taken? - [x] Disclose the event and reassess the financial statements. - [ ] Ignore the event. - [ ] Only disclose if the company has a loss. - [ ] Defer the approval of financial statements indefinitely. > **Explanation:** Significant non-adjusting events affecting the going-concern assumption must be disclosed, and the financial statements may need to be prepared on an appropriate basis considering the company's financial condition. ### Which of the following is a non-adjusting event? - [x] Issuance of new shares after the balance-sheet date. - [ ] Discovery of fraud affecting prior periods. - [ ] Correction of an error from a previous period. - [ ] Adjustment of inventory valuation. > **Explanation:** The issuance of new shares after the balance-sheet date does not relate to pre-existing conditions and is considered a non-adjusting event. ### When should a non-adjusting event be mentioned in the financial statement notes? - [ ] Only if it has a positive effect. - [ ] No need unless specifically asked by stakeholders. - [x] If it is material to the financial statements. - [ ] Only for listed companies. > **Explanation:** Non-adjusting events that are material should be mentioned in the notes to ensure users have a complete understanding of their impact. ### Are dividends declared after the balance-sheet date considered an adjusting event? - [ ] Yes, always. - [x] No, they are non-adjusting events. - [ ] Only if they directly affect cash flow. - [ ] Only for public companies. > **Explanation:** Dividends declared post balance-sheet date are non-adjusting events and typically require disclosure if material. ### Which document primarily discusses non-adjusting events? - [x] Notes to the financial statements. - [ ] The income statement. - [ ] The statement of cash flows. - [ ] The balance sheet. > **Explanation:** Non-adjusting events are commonly disclosed in the notes to the financial statements to provide adequate information to stakeholders. ### What is an example of a non-adjusting event that impacts the financial statements’ notes? - [ ] A previous year's tax return amendment. - [x] Settlement of a significant lawsuit after the balance-sheet date. - [ ] Correction of incorrect asset depreciation. - [ ] Inventory write-down post-balance sheet. > **Explanation:** A significant lawsuit settlement after the balance-sheet date is an example of a non-adjusting event that should be disclosed in the notes if it materially impacts the company. ### If a company’s main manufacturing plant is destroyed by a fire after the balance-sheet date, what is it classified as? - [ ] Adjusting Event - [x] Non-Adjusting Event - [ ] Non-Material Event - [ ] Unreported Event > **Explanation:** The fire destroying the manufacturing plant is a non-adjusting event as it occurred after the balance-sheet date and must be disclosed if material. ### Why is the timing of financial statement approval relevant for non-adjusting events? - [ ] It affects the tax reporting period. - [x] It determines the cut-off for non-adjusting events. - [ ] It defines the start of the next fiscal year. - [ ] It influences dividend declarations. > **Explanation:** The timing of financial statement approval sets the cut-off point for identifying non-adjusting events, which must occur before the approval date to be disclosed.

Thank you for exploring the intricate world of non-adjusting events within financial accounting. Your dedication to understanding these nuances enhances your comprehension and application of financial reporting standards.