Tonoma
Corporation, a public company that follows IFRS, is preparing its December 31,
2011 financial statements. The following two events occurred between December
31, 2011, and March 10, 2012, when the statements were completed and authorized
for issue. (a) A liability, estimated at $140,000 at December 31, 2011, was
settled on February 26, 2012, at $190,000.
(b)
A flood loss of $80,000 occurred on March 1, 2012.
What
effect do these subsequent events have on 2011 net income?
(a) Net income will decrease by $50,000 as a result
of the adjustment of the liability. The settlement of the liability is the type
of subsequent event that provides additional evidence about conditions that
existed at the balance sheet date, so the financial statements are adjusted
accordingly.
(b) The flood loss ($80,000) is an event that
provides information about conditions that did not exist at the balance sheet
date but are subsequent to that date. It does not require adjustment of the
financial statements.
