Case 12-2 To Recognize or Not to Recognize, That Is the Question Inc. (Shakespea

Question

Case 12-2 To Recognize or Not to Recognize, That Is the Question Inc. (Shakespeare or the "Company") is a privately held book printing and ng company with a December 31 year-end. The summary balance sheet as of Shakespeare December 31, 2011, included: S 6,500,000 Current assets Noncurrent assets Total assets $34.750,000 Current liabilities Noncurrent liabilities Total liabilities s 4,500,000 13.750,000 $18,250,000 Total shareholder equity $16.500,000 The summary results of operations for the year ended December 31, 2011, included revenue of $10.7 million and net income of $1.2 million. Shakespeare is planning to issue its financial statements on March 20, 2012. On March 18, 2012, Shakespeare's management will evaluate new information about one of its accruals and two subsequent events to determine if this information or events represent items that should be recognized or disclosed in the December 31, 2011, financial statements. Medical Benefits Payable For the past several years, Shakespeare has self-insured medical benefits (health and dental) for its employees. The Company records the costs of medical care in the period in which covered events occur and includes its best estimate of the costs that have been incurred but not yet reported (IBNR) in its estimate of the medical benefits payable Shakespeare looks to the FASB Accounting Standards Codification, which defines IBNR in the Master Glossary as "[lJosses incurred by the insured entity that have not yet been reported to the insurance entity." Shakespeare's management estimates its liability with the assistance of third-party experts using actuarial techniques, assumptions, and observations that are based on past experience of claims paid through the balance sheet date. The Company monitors the continued reasonableness of the assumptions and methods used to estimate the IBNR liability each reporting period. Management's process for estimating its medical benefits payable is disclosed in its "Significant Accounting Policies" footnote. Management has a history of accurately estimating the IBNR liability using these techniques as validated by the actual claims received Historically, all claims are received by Shakespeare within two months of the medical services being provided to its employees. Using this process, anagement estimated an IBNR liability of S1.25 million as of December 31, 2011. As of management's review on March 18, 2012, Shakespeare had Copyright 2011 Deloitte Developmoe LLC All Rights Reserved

Explanation / Answer

1. Medical benefits Payable :

This is a subsequent event which should be recognized as this was a condition that existed before the balance sheet date

The liability should be adjusted to the $.75 Million

2. The modification to the line of credit should be disclosed as a subsequent event, however since the condition for modification did not exist at the balance sheet date, this is a not recognized event.

The modification of LOC will have be disclosed and all the key modifications will need to be disclosed in the notes to accounts

3. The acquistion is not complete and is still under discussion, no agreement has been entered into. The condition was not present on the date of balance sheet, hence this is not a recognized event. The plan for acquisition will have to be disclosed in the notes to accounts along with the withdrawal from funds from the modified LOC. It will also need to be stated that the agreement is pending as well as the final pricing.

4. If Shakespeare is not a SEC filer, the date of disclosure would be March 18, upto this date the subsequent events have been evaluated

If the company is a SEC filer, the date would be March 20, on the date when Financials are issued or available to be issued. Upto this date, the subsequent events will have to be evaluated.

5. The guidance under IFRS is IFRS 10 - Events after the reporting period.

All the events that occur between the date of balance sheet and the date that the financial statements are authorise to issue are to be considered. They will be categorised as adjusting events and non adjusting events.

Adjusting events are those which gives further evidence to an event which was already an existing condition on the date of balance sheet. This might include events which indicate that the going concern assumption is not appropriate. The financial statements will need to be adjusted for these events.

Non adjusting events are those which are indicative of events ariring after the balance sheet date, the condition was not present on the balance sheet date. The financial statements will not need any adjustments in these, however they should be disclosed if they affect the evaluation of financial statements by the users. The required disclosure will be nature of event, an estimate of the financial effect or a statement that such estimate cannot be made

If going concern issues arise after the reporting period, then the financials will need to be adjusted. The company cannot prepare the financials under going concern assumption in this case.

A Company must update the disclosures as well, to include any new information available after the reporting date

Dates: On which Financials were authorise for issue, who gave that authotisation.

If the owners have powers to amend the financials after issuing, this fact will need to disclosed

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