Ind AS 10 'Events After the Reporting Period' 14. H Ltd. constructed a warehouse at a cost of 10 lakhs in 20X1. It first became available for use by…

CA Final · Financial Reporting · RTP · November 2024
Ind AS 10 'Events After the Reporting Period' 14. H Ltd. constructed a warehouse at a cost of 10 lakhs in 20X1. It first became available for use by H Ltd. on 1 st April, 20X2. On 29 th April, 20X6, H Ltd. discovered that its warehouse was damaged. During early May 20X6, an investigation revealed that the damage was due to a structural fault in the construction of the warehouse. The fault became apparent when the warehouse building leaked severely after heavy rainfall in the week ended 27 th April 20X6. The discovery of the fault is an indication of impairment. So, H Ltd. was required to estimate the recoverable amount of its warehouse at 31 st March 20X6. This estimate was - 6,00,000. Furthermore, H Ltd. reassessed the useful life of its warehouse at 20 years from the date that it was ready for use. Before discovering the fault, H Ltd. had depreciated the warehouse on the straight-line method to a nil residual value over its estimated 30-year useful life. Seepage of rain-water through the crack in the warehouse caused damage to inventory worth about - 1,00,000 (cost price) and became un-saleable. The entire damaged inventory was on hand as at 31 st March, 20X6. H Ltd. has not insured against any of the losses. It accounts for all its property, plant and equipment under the cost model. H Ltd.'s annual financial statements for the year ended 31 st March, 20X6 were approved for issue by the Board of Directors on 28 th May, 20X6. You are required to : (i) Prepare accounting entries to record the effects of the events after the end of the reporting period in the accounting records of H Ltd. for the year ended 31 st March, 20X6. Kindly ignore tax impact. (ii) Discuss disclosure requirement in above case as per relevant Ind AS. (iii) Will your answer be different if there was no structural fault and damage to the warehouse had been caused by an event that occurred after 31 st March, 20X6?

Suggested Answer and Working Notes:

(a) (i) Journal Entries on 31 st March, 20X6 ₹ ₹ Depreciation expense A/c (W.N.1) Dr. 19,608 To Warehouse or Accumulated depreciation A/c 19,608 (Being additional depreciation expense recognised for the year ended 31 st March 20X6 arising from the reassessment of the useful life of the warehouse) Impairment loss A/c (W.N.2) Dr. 2,47,059 To Warehouse or Accumulated depreciation A/c 2,47,059 (Being impairment loss recognised due to discovery of structural fault in the construction of warehouse at 31 st March, 20X6) (ii) (a) The damage to warehouse is an adjusting event (occurred after the end of the year 20X6-20X6) for the reporting period 20X5-20X6, since it provides evidence that the structural fault existed at the end of the reporting period. It is an adjusting event, in spite of the fact that fault has been discovered after the reporting date. The effects of the damage to the warehouse are recognised in the year 20X5-20X6 reporting period. Prior periods will not be adjusted because those financial statements were prepared in good faith (eg. regarding estimate of useful life, assessment of impairment indicators etc.) and had not affected the financials of prior years. (b) Damage of inventory due to seepage of rainwater - 1,00,000 occurred during the year 20X5-20X6. It is a non-adjusting event after the end of the 20X5-20X6 reporting period since the inventory was in good condition at 31 st March 20X6. Hence, no accounting has been done for it in the year 20X5-20X6. H Ltd. must disclose the nature of the event (i.e. rain-damage to inventories) and an estimate of the financial effect (i.e.1,00,000 loss) in the notes to its 31 st March 20X6 annual financial statements. (iii) If the damage to the warehouse had been caused by an event that occurred after 31 st March 20X6 and was not due to structural fault, then it would be considered as a non-adjusting event after the end of the reporting period 20X5-20X6 as the warehouse would have been in a good condition at 31 st March 20X6. Working Notes: 1. Calculation of additional depreciation to be charged in the year 20X5-20X6 Original depreciation as per SLM already charged during the year 20X5-20X6 = 10,00,000/ 30 years = 33,333. Carrying value at the end of 20X4-20X5 = 10,00,000 – (₹ 33,333 x 3 years) = 9,00,000 Revised depreciation = 9,00,000 / 17 years = 52,941 Additional depreciation to be recognised in the books in the year 20X5-20X6 = 52,941 - 33,333 = 19,608 2. Calculation of impairment loss in the year 20X5-20X6 Carrying value after charging depreciation for the year 20X5-20X6 = 9,00,000 - 52,941 = 8,47,059 Recoverable value of the warehouse = 6,00,000 Impairment loss = Carrying value - Recoverable value = 8,47,059 -6,00,000 = 2,47,059

Topics: Ind AS 10

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