What are adjusting events?
IAS 10.8 provides the rule: if an event after the reporting period provides evidence about a condition that existed at the balance sheet date, the entity adjusts the financial statements. The entity does not merely disclose it. The amounts change.
The practical question is always "when did the condition originate?" An event can occur in February, but if the underlying condition existed in December, the financial statements reflect the February information as if it were known at year end. IAS 10.9 gives specific examples. The resolution of a court case after the reporting period confirms that a present obligation existed at the balance sheet date. Bankruptcy of a customer after year end, when that customer was already in financial difficulty at year end, confirms that a loss existed on the trade receivable at the balance sheet date.
The auditor's role under ISA 560.8 is to evaluate whether management has correctly identified these events and adjusted the financial statements accordingly. ISA 560.9 requires the auditor to obtain sufficient appropriate evidence that all adjusting events have been identified. The procedures in ISA 560.7 — reading minutes, inquiring of management, reviewing subsequent interim financial statements — are designed to catch exactly these items.
Key Points
- The test is whether the condition existed at the balance sheet date, not whether the event occurred before or after it. The event date is irrelevant; the condition date determines classification.
- Adjusting events change the numbers, not just the disclosures. An explanatory note is not sufficient when the amounts in the financial statements need revision.
- The settlement of a court case after year end that confirms a liability at the balance sheet date is the textbook adjusting event under IAS 10.9.
- Getting the classification wrong (adjusting vs. non-adjusting) can produce a material misstatement that the auditor must report under ISA 450.
Why it matters in practice
Consider a technology company whose second-largest customer files for insolvency in February. The receivable balance at 31 December was over a million euros, with a significant portion more than 90 days overdue at year end. The company's own credit team had flagged the overdue balance in November. The insolvency filing confirms a condition that was present at the balance sheet date — the customer's financial difficulties existed throughout Q4. This is an adjusting event under IAS 10.3(a) and IAS 10.9(b), and the expected credit loss provision must be revised in the year-end financial statements.
Teams frequently apply the expected credit loss model mechanically at year end and then treat post-year-end insolvency filings as non-adjusting events because "the filing happened in February." IAS 10.9(b) is explicit: bankruptcy of a customer after the reporting period usually confirms a loss on the trade receivable that existed at year end. The filing date is not the condition date.
Under-documentation of the "condition existed at year end" conclusion is equally common. The file records the event but does not record the evidence that the underlying condition pre-dated the balance sheet date. ISA 560.9 requires the auditor to document the link between the subsequent event and the year-end condition. Without it, a reviewer cannot assess whether the classification is defensible.
Key standard references
- IAS 10.3(a): Definition of adjusting events — events providing evidence of conditions that existed at the end of the reporting period.
- IAS 10.8: Requirement to adjust the amounts recognised in the financial statements to reflect adjusting events.
- IAS 10.9: Examples of adjusting events, including settlement of court cases and bankruptcy of customers with pre-existing financial difficulty.
- ISA 560.8: The auditor's obligation to evaluate whether management has correctly identified and accounted for adjusting events.
- ISA 560.9: Requiring sufficient appropriate evidence to support the classification of subsequent events.
Related terms
Related reading
Frequently asked questions
What is the test for classifying an event as adjusting?
The test is whether the condition existed at the balance sheet date, not whether the event itself occurred before or after it. An event can occur in February, but if the underlying condition existed in December, the financial statements reflect the February information as if it were known at year end. IAS 10.3(a) defines this explicitly: adjusting events provide evidence of conditions that existed at the end of the reporting period.
Does an adjusting event change the financial statement numbers or just the disclosures?
Adjusting events change the numbers. IAS 10.8 requires the entity to adjust the amounts recognised in the financial statements. A disclosure note alone is not sufficient. For example, if a customer files for insolvency in January but the financial difficulties existed at 31 December, the expected credit loss provision must be revised in the year-end financial statements, not merely disclosed.