A court case settled after year end
Whether a court ruling after year end, but before the statements are authorised, adjusts the provision or is only disclosed, and how to post it.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
The year end has passed, the trial balance is in, and the draft statements carry a contingent liability note for a former employee's unfair dismissal claim. Then the client's attorney calls: the court has ruled, and the client must pay. The statements are not yet signed. Do the figures change, or does the note simply gain a new paragraph?
Under IAS 10 and IAS 37 the answer is usually that the figures change.
Why a later judgment usually adjusts the statements
IAS 10 describes adjusting events as events after the reporting period that provide evidence of conditions that existed at the end of the reporting period. A ruling on a dispute that began before year end does exactly that. The obligation, if there was one, already existed at the reporting date; the court has now confirmed it.
ACCA explains that IAS 10 requires the result of a court case decided after the reporting date to be taken into account in determining whether a provision should be recognised at year end under IAS 37. The ruling is evidence, and evidence that arrives before the statements are authorised for issue is used.
Timing matters. Once the statements have been authorised, a later ruling is a matter for next year's set. The wider rules on that window are covered in events after the reporting period.
From contingent liability to provision
Before the ruling, the claim may well have been a contingent liability. Under IAS 37 a contingent liability is not recognised but is disclosed, unless the possibility of an outflow is remote, and IAS 37 gives litigation as an example where it is uncertain whether the entity has done wrong and settlement is not probable.
Under IAS 37, a provision is recognised if it is probable that an outflow of resources will be needed to settle it; if an outflow is not probable, the item is a contingent liability.
The ruling moves the claim across that line. Once a court has found against the client, an outflow is at least probable, so the contingent liability becomes a provision at the year-end date, even though the ruling came later.
Appeals complicate the picture. If the client intends to appeal and has real grounds, an outflow may still be probable while its amount becomes less certain. The attorney's written view on the appeal is part of the evidence, and so is the client's own track record: a client that announces an appeal in every case but rarely pursues one deserves a sceptical reading.
Measuring the provision once the amount is known
Under IAS 37, a provision is measured at the amount the entity would rationally pay to settle the obligation at the end of the reporting period, or to transfer it to a third party at that time. IAS 37 also says that risks and uncertainties are taken into account, and that a provision is discounted to its present value.
Where the court has set an amount, that amount is strong evidence of what the client would rationally have paid at year end. Include any costs the order places on the client, such as the other side's legal costs. Where payment will fall due well into the future, consider discounting. Measurement in general is covered in measuring provisions.
Posting the entry without losing edited wording
In Achekam's Financials Studio, the draft set is built from the mapped trial balance with every figure calculated in code. Staff can post a year-end adjusting entry, debiting the relevant expense and crediting a provision line, and a wrong adjusting entry is reversed with who and why, never deleted.
After posting, rebuild the draft. A block a person edited is kept when the draft is rebuilt, so the directors' report paragraph the partner rewrote last week survives the rebuild. The figures themselves update: profit falls, the provision appears in the statement of financial position, and the tax charge may need another look.
That combination is worth thinking about. Edited text is preserved, which is what the firm wants, but it does not rewrite itself to match the new figures. A directors' report that says "results improved on last year" may no longer be true once a large provision has gone in. Re-read every edited block after the rebuild.
Updating the notes
The old contingent liability note now describes a matter that is a provision. Take it out of the contingent liabilities note and add it to the provisions note, explaining the nature of the obligation and any uncertainty about an appeal or the timing of payment.
A working checklist:
- Obtain the court order and the attorney's written view on appeal and timing.
- Confirm that the dispute existed at year end, which makes the ruling an adjusting event.
- Measure the provision, including costs awarded, and consider discounting.
- Post the adjusting entry with the order attached.
- Rebuild the draft and re-read every edited block.
- Move the matter from contingent liabilities to provisions in the notes.
- Update the tax computation if the expense affects it.
The distinction between provisions and contingencies is set out in provisions and contingent liabilities.
ACCA's technical article on subsequent events uses a case study to show how events after the reporting period, including a court case decided after year end, affect the statements under IAS 10.
When a client's attorney calls with news between year end and signing, the right reflex is to ask one question first: did the dispute exist at the reporting date? If it did, the figures are about to change.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
