Capstone: going concern, events after the reporting period and the reporting issues memo

The final lesson brings the course together. Disclosure is where all the earlier judgments become visible to users, and three areas tie the year end together: the going concern assessment, events after the reporting period and related party transactions. The lesson then shows how Tamarind Bay's reporting team summarizes the year's significant judgments in a reporting issues memo for the audit committee, the document that connects the accounting to governance.

Going concern

Financial statements are prepared on a going concern basis unless management intends to liquidate the entity or cease trading, or has no realistic alternative but to do so. Management must assess the entity's ability to continue as a going concern, considering all available information about the future, at least twelve months from the end of the reporting period. When management is aware of material uncertainties related to events or conditions that may cast significant doubt on the entity's ability to continue as a going concern, those uncertainties must be disclosed. Since 2027, these requirements sit in IAS 8, as renamed by IFRS 18, rather than IAS 1, but they have not changed in substance. When significant judgment was required to conclude that no material uncertainty exists, a so-called close call, the IFRS Interpretations Committee's 2014 agenda decision and regulators expect disclosure of that judgment.

Tamarind Bay is a profitable company with access to credit, so no one expects a going concern problem. But the Frozen impairment, the recall and the loss of headroom in a segment are exactly the circumstances in which audit committees ask whether covenants are safe. The treasury team prepares a covenant stress test.

# Going concern support: covenant headroom under stress (invented figures, millions).
net_debt, ebitda, interest = 728.0, 268.4, 41.3
max_lev, min_cov = 3.50, 3.00
print(f"{'Scenario':<34}{'EBITDA':>8}{'Net debt':>10}{'Leverage':>10}{'Coverage':>10}  Result")
for name, d_e, d_debt in [("Base case (2026 actual)", 0.00, 0), ("Frozen volumes -10%", -0.06, 10),
                          ("Severe: recall repeat, input costs", -0.15, 35), ("Downside: lost major customer", -0.22, 45)]:
    e = ebitda * (1 + d_e); nd = net_debt + d_debt
    lev, cov = nd / e, e / interest
    ok = lev <= max_lev and cov >= min_cov
    print(f"{name:<34}{e:>8.1f}{nd:>10.1f}{lev:>10.2f}{cov:>10.1f}  {'compliant' if ok else 'BREACH'}")
breakeven = 1 - net_debt / max_lev / ebitda
print(f"\nEBITDA could fall {breakeven:.1%} (net debt unchanged) before the leverage covenant is breached.")
# Events after the reporting period (year end December 31, 2026; statements authorized March 4, 2027)
events = [("Jan 19: court settles a 2025 supplier dispute for 2.1 (provision was 1.5)", "adjusting"),
          ("Feb 3: fire destroys a warehouse; insured; operations relocated", "non-adjusting"),
          ("Feb 12: lab results show the October recall affected 2 more lots", "adjusting"),
          ("Feb 20: board approves acquisition of a Quebec bakery brand", "non-adjusting"),
          ("Feb 26: Frozen CGU's largest customer files for creditor protection", "adjusting (evidence of year-end conditions)")]
print()
for e, kind in events:
    print(f"{kind:<46}{e}")

Scenario                            EBITDA  Net debt  Leverage  Coverage  Result
Base case (2026 actual)              268.4     728.0      2.71       6.5  compliant
Frozen volumes -10%                  252.3     738.0      2.93       6.1  compliant
Severe: recall repeat, input costs   228.1     763.0      3.34       5.5  compliant
Downside: lost major customer        209.4     773.0      3.69       5.1  BREACH

EBITDA could fall 22.5% (net debt unchanged) before the leverage covenant is breached.

adjusting                                     Jan 19: court settles a 2025 supplier dispute for 2.1 (provision was 1.5)
non-adjusting                                 Feb 3: fire destroys a warehouse; insured; operations relocated
adjusting                                     Feb 12: lab results show the October recall affected 2 more lots
non-adjusting                                 Feb 20: board approves acquisition of a Quebec bakery brand
adjusting (evidence of year-end conditions)   Feb 26: Frozen CGU's largest customer files for creditor protection

The leverage covenant, net debt to covenant EBITDA of no more than 3.50 times, has headroom in the base case and in two downside scenarios, and is breached only in the severe case of losing a major customer, which would cut EBITDA by 22 per cent. The impairment does not affect the covenant, because covenant EBITDA adds back impairments. Management concludes that there is no material uncertainty about going concern and that the conclusion did not require significant judgment, because the breakeven decline of 22.5 per cent is far outside any reasonably possible scenario in the next twelve months and the company has an undrawn revolving credit facility of 250 million. The analysis is documented and shared with the auditor, who is required to evaluate management's assessment.

Covenants also affect classification. A liability is classified as current if the entity does not have the right at the end of the reporting period to defer settlement for at least twelve months, and a covenant breach at or before the reporting date can make long-term debt current unless the lender has agreed, before the reporting date under IFRS, to a waiver that gives at least twelve months' grace. Under US GAAP, a waiver obtained after the balance sheet date but before issuance can keep the debt non-current in some circumstances, a difference that matters to companies close to their limits. The IASB's 2020 and 2022 amendments to IAS 1, effective 2024, also require disclosure of information about covenants that must be complied with within twelve months, so that users can assess the risk that non-current liabilities could become repayable early. Tamarind Bay discloses its covenants and headroom.

Events after the reporting period

IAS 10 Events after the Reporting Period distinguishes adjusting events, which provide evidence of conditions that existed at the end of the reporting period, from non-adjusting events, which are indicative of conditions that arose after it. Adjusting events change the amounts recognized; non-adjusting events are disclosed if material, with an estimate of their financial effect or a statement that one cannot be made. The period runs to the date the financial statements are authorized for issue, which for Tamarind Bay is March 4, 2027, when the board approves them. The program classifies the events reported to the audit committee.

The settlement of the supplier dispute for 2.1 million confirms an obligation that existed at year end, so the provision is increased from 1.5 to 2.1 million. The laboratory results on the recall provide evidence about the extent of contamination that existed at year end, so the recall provision is updated. The customer's filing for creditor protection in February is evidence that the customer was already in financial difficulty at year end; IAS 10 gives this as an example of an adjusting event, so Tamarind Bay increases the credit loss allowance on that customer's receivable of 6.4 million and also reconsiders the Frozen impairment test, which assumed continuing sales to that customer. The warehouse fire and the bakery acquisition arose after year end; they are disclosed but do not change the 2026 amounts. Dividends declared after the reporting period are also non-adjusting and are not recognized as liabilities.

The customer bankruptcy shows how one event can touch several earlier judgments. Reopening the impairment test late in the year-end process is uncomfortable, but the standards require it: the test must reflect the best information available about conditions at the reporting date. Tamarind Bay's team reruns the Frozen model with the customer's volumes reduced by half and finds that the recoverable amount falls by a further 9 million. That increases the impairment and is recorded before the statements are authorized. The lesson is that year-end judgments are not final until the statements are issued.

Related party transactions

IAS 24 Related Party Disclosures requires disclosure of the nature of related party relationships and of transactions and outstanding balances, including commitments, needed for users to understand the potential effect of the relationships, together with key management personnel compensation in total and by category. Related party transactions are material by nature because of the risk that they are not conducted on arm's-length terms. Tamarind Bay buys about 3.4 million a year of organic berries from a farm owned by the chief executive's brother, a close family member and therefore a related party. The purchases are at prices comparable with those paid to other suppliers, but the relationship and amounts must be disclosed, and the company may state that the terms are equivalent to arm's-length terms only if that can be substantiated. Canadian securities law adds MI 61-101 for certain related party transactions, requiring formal valuations and minority approval in some cases.

Disclosure effectiveness

Over the course of this year end, Tamarind Bay's notes have grown: new IFRS 18 or DISE preparation, more segment information, expanded tax disclosures, supplier finance, crypto assets and the recall. Regulators and standard setters have for years urged companies to make disclosures more effective, not merely longer: to remove immaterial information, avoid boilerplate, organize notes logically, cross-refer rather than repeat, and tailor accounting policy disclosures to the entity's own material policies rather than reciting the standards. The IASB's 2021 amendments to IAS 1 require disclosure of material accounting policy information rather than significant accounting policies, and regulators have praised companies that have cut generic policy notes. Tamarind Bay's 2026 project removes about eight pages of generic policies and reorganizes its notes so that each significant judgment appears with the related amounts.

Disclosure in MD&A complements the notes. The MD&A explains results through management's eyes, covering trends, risks and uncertainties, liquidity and capital resources and critical accounting estimates, and it is where adjusted measures and key performance indicators appear, subject to the rules in lesson 3. The financial statements and MD&A must tell a consistent story: a regulator who reads about a struggling Frozen business in MD&A will check that the impairment test assumptions reflect it.

The reporting issues memo

Every year end, Tamarind Bay's chief financial officer presents a reporting issues memo to the audit committee. It lists each significant accounting judgment, the facts, the alternatives considered, the conclusion, the effect on the statements and the disclosure, and it records where management and the auditor disagreed and how the disagreement was resolved. The audit committee uses the memo to discharge its oversight responsibility, and the auditor's communication of key or critical audit matters, discussed in ACCT-431, typically mirrors its most significant items. The 2026 memo summarizes the course.

The late adjustment from the customer bankruptcy changes several figures: the impairment rises to about 55 million, profit and EPS fall, and the MPM reconciliation and EPS note must be updated before the statements are authorized. A good reporting process anticipates such changes by building the year-end model so that a change in one input flows through every affected note. The final check is consistency: the same numbers in the statements, the notes, the MD&A, the earnings release and the sustainability report.

Ethics and the reporting culture

The judgments in this course can be made well or badly. The difference often comes down to culture: whether the finance team feels able to tell the chief executive that an adjustment is not acceptable, whether the audit committee asks hard questions, and whether incentives reward accurate reporting or reported results. Professional accountants are bound by codes of conduct that require integrity and objectivity, and by securities law that holds the chief financial officer personally responsible for certifying the statements. ACCT-460 shows what happens when the culture fails. The best defence is the discipline this course has practised: identify the issue, find the requirements, weigh the alternatives against the evidence, decide without bias, document the reasoning and disclose what users need to know.