The year ends on 31 December, but financial statement preparation continues through January and February. During that interval, goods sell at a low price, a technical report identifies damage, and a new warehouse incident occurs. Should all these events affect the closed year because they became known before issue? Or should all be excluded because their dates are later? Either shortcut can be wrong.
IAS 10 distinguishes information evidencing conditions already present at period end from events indicating conditions arising later. The review window extends to the date the financial statements are authorised for issue, not merely the first draft's printing date or the day users lose access to the ledger. Document that authorisation date and who has authority to approve issue.
January reveals a problem that began in December
In an educational case, documented December complaints concern a defective batch of 200 units, each costing SAR 100. Before authorisation, January testing confirms that the defect existed at year end. Estimated selling proceeds are now SAR 90 per unit, with SAR 5 of necessary selling costs and no new market movement explaining the reduction.
Under these assumptions, net recovery is SAR 85, a SAR 15 difference from cost per unit, totalling SAR 3,000. The later report did not create the defect in January; it provided stronger evidence of a December condition. Its effect is therefore assessed as an adjustment to inventory measurement in the closed year's financial statements, considering the relevant facts and information.
Retain earlier complaints, test results, batch specifications and pricing evidence. Looking only at the report's arrival date could exclude important evidence, while connecting the facts explains why the assessment relates to the prior year end. That does not mean every January discount belongs in December: the reason for the lower price matters.
A new incident does not rewrite an earlier condition
Instead, suppose the inventory was intact at year end and a fire originating on 20 January destroys it. Assuming no relevant pre-existing conditions, the incident does not establish that December inventory was damaged. Assess it as a non-adjusting event for period-end amounts, while considering disclosure if material.
“Non-adjusting” does not mean ignored. Readers may need to understand a significant event affecting operations and liquidity, with an estimate of its financial effect or an explanation that estimation is not possible, as required. If the business's ability to continue operating is itself in doubt, that requires a broader assessment than classifying an inventory incident and cannot be addressed through a token sentence in the notes.
Keep three dates in one record
Rather than sending disconnected messages to accounting, maintain a register distinguishing when a condition arose, when it was discovered and when management obtained evidence. Add the event description, affected item or batch, estimated amount, supporting documents and the reviewer approving its classification and treatment.
- Ask sales why substantial post-year-end discounts occurred: an earlier condition or a new campaign?
- Ask warehouse staff to distinguish discovery from estimated occurrence, with support for that estimate.
- Review subsequent credit notes and returns without assuming they all represent prior-year errors.
- Keep the register current until authorisation; completion of physical counting is not the end of evidence gathering.
A single sales price may reflect two causes, such as an old defect and a new market decline. Automatically transferring the entire difference to the previous period would then be inappropriate. Separate the supported effect of the condition existing at close, documenting information limits and professional judgment instead of inventing an unsupported numerical allocation.
The value of this work is not the number of adjusting entries produced. It protects the explanation of the year's results. A good review neither reconstructs the past as though everyone possessed all later knowledge nor ignores later evidence about an existing condition. It connects each piece of information with what it reveals, then decides whether the reported amounts need adjustment or the reader needs disclosure.
Sources & further reading
Visit the original source to explore the concept and its wider context.
General educational content. Appropriate treatment depends on your business and accounting policies; consult your accounting professional when applying it to business records.
