Liquidity Ratios: Current Ratio, Quick Ratio, and Working Capital (In-Depth Analysis)
Liquidity Ratios: Current Ratio, Quick Ratio, and Working Capital (In-Depth Analysis)
Imagine your warehouse burns down one week after the year-end but before the financial statements are signed. Do you record this loss in the previous year (because the report isn’t out yet), or in the current year? This is the core question of IAS 10. The standard draws a clear line between events that require Adjustment (changing the numbers) and those that require Disclosure (adding a note). In this guide, we master this distinction to ensure your reports are compliant and accurate.
- The definition of the Subsequent Period and the “Authorization Date.”
- The Golden Rule: Difference between Adjusting vs. Non-adjusting events.
- Visual Timeline (SVG) mapping the flow of events and decisions.
- Practical Examples: Court cases, Bankruptcy, Natural disasters, and Dividends.
- The Going Concern exception: When a non-adjusting event changes everything.
- Interactive Decision Tool: Answer 2 questions to know if you should adjust or disclose.
- A “Copy-Paste” template for disclosing non-adjusting events.
1) What are Subsequent Events?
According to IAS 10, they are events, favorable and unfavorable, that occur between the end of the reporting period (usually Dec 31) and the date when the financial statements are authorized for issue (signed by the Board).
2) The Timeline: The Critical Window
The “Authorization Date” is key. Any event happening after this date belongs to the next year. Any event before this date must be evaluated under IAS 10.
3) Adjusting vs. Non-adjusting Events
| Type | Adjusting Event | Non-adjusting Event |
|---|---|---|
| Definition | Provides evidence of conditions that existed at the end of the reporting period. | Indicative of conditions that arose after the reporting period. |
| Action | Change the Numbers in the financial statements. | Disclose in Notes (Nature + Estimate of effect). |
| Key Question | “Did the root cause exist on Dec 31?” -> Yes. | “Did the root cause exist on Dec 31?” -> No. |
4) Visual Logic: The Decision Tree
5) Practical Examples & Scenarios
Scenario A: Court Case Verdict
Event: On Feb 15, the court ruled against you in a case that started 2 years ago. You have to pay $50k.
Analysis: The case (condition) existed on Dec 31. The ruling just confirmed the amount.
Action: Adjusting Event. Record the $50k provision in the Dec 31 accounts.
Scenario B: Fire in Warehouse
Event: On Jan 20, a fire destroyed inventory worth $100k.
Analysis: On Dec 31, the inventory was fine. The fire is a new condition.
Action: Non-adjusting Event. Do NOT change Dec 31 inventory. Disclose the loss in the Notes.
FS Notes Template - Editable Word File
6) Interactive Decision Tool
Answer two questions to determine the treatment:
7) The Going Concern Exception
There is one major exception: If a non-adjusting event (like a massive fire or government ban) occurs after year-end and destroys the company’s ability to continue as a Going Concern, you must change the basis of accounting from Going Concern to Liquidation Basis. This is an Adjusting Event regardless of the timing.
8) Template: Disclosure Note (For Non-adjusting Events)
Use this text for significant events like acquiring a company or a natural disaster after year-end:
9) Frequently Asked Questions
Are Dividends declared in Jan adjusting?
No. Dividends declared after the reporting period are NOT recorded as a liability at Dec 31 because no obligation existed at that date. They are disclosed in the notes.
What if a customer goes bankrupt in Jan?
If the bankruptcy confirms the customer was insolvent at Dec 31 (which is usually the case), it is an Adjusting Event. You must write off the receivable in Dec 31 accounts.
10) Conclusion
The summary is simple: IAS 10 ensures that financial statements reflect the most accurate picture possible before they are published. If the event clarifies the past, Adjust. If it predicts the future, Disclose. Mastering this distinction protects the company from misleading investors and ensures full compliance with IFRS.