Question

Question 1 (Marks: 10) Isomin Ltd has a year-end date of 31 March 2021. They have been in the business of textile design and production for fifteen years and are well respected in their industry. Before the final financial statements were authorised for issue on 31 May 2021, but after the reporting date, the following situations arose: (3) Q.1.1 The government announced a change to the tax law which will have a significant effect on the value of current tax expense that the company will pay in future years. (3) Q.1.2 Isomin Ltd holds shares in another listed company. The share price of this company dropped unexpectedly by 35%. These shares make up 5% of the total investment portfolio held by Isomin Ltd. (4) Q.1.3 During the previous financial year, a competitor began litigation against Isomin Ltd regarding a dispute over a design. On 10 April 2021, a judge decided that Isomin Ltd should pay the competitor R45 000 without leave to appeal. Isomin Ltd had treated this matter as a contingent liability in the 31 March 2020 financials. Required: For each of the events described above, discuss whether an adjusting or non-adjusting event occurred. In order to get the mark allocated you will need to justify why you believe the event is either an adjusting or non-adjusting event. Where the events are adjusting, describe the adjustment that must be made as well as the amount and where the events are non-adjusting, discuss whether any disclosure needs to be made in the notes to the financial statements. Justify your answers.

Answer 1

1) The government announced a change to the tax law which will have a significant effect on the value of current tax expense that the company will pay in future years is a non adjusting event. Non-adjusting events should be disclosed if they are of such importance that non-disclosure would affect the ability of users to make proper evaluations and decisions. As this are sufficient important disclosure must be given.

2) Isomin Ltd shares in another listed company. The share price of this company dropped unexpectedly by 35%. These shres makeup %of the total investment portfolio held by isomin Decline in the fair value of investments between the end of the reporting period and the date when the financial statements are authorised for issue, is a non adjusting event

The decline in fair value does not normally relate to the condition of the investments at the end of the reporting period. Instead, it reflects circumstances that have arisen subsequently. The entity does not, therefore, adjust the amounts recognised in its financial statements for the investments. Similarly, amounts disclosed for the investments at the end of the reporting period are not updated but additional disclosure may be required under IAS 10:21

3) It is an adjusting event ,as it affect the current level of provision , ie, liability of the company .

In the financial statements for the year ended 31 march 2021. The court decided that case against Isomin Ltd on 10 april 2021. The company should record the provision by 45000 because the judgment has confirmed the amount and existence of present obligation as at 31 march 2021