Which events lead to adjustments in financial statements?

Adjustments in financial statements are made to ensure that they accurately reflect the financial position and performance of an entity as of the reporting date. Events that provide evidence of conditions that existed at the reporting date are considered adjusting events. These events can include favorable or unfavorable outcomes that further clarify the situation of assets and liabilities, allowing for a more accurate depiction of the entity's financial status.

For instance, if a company has a customer that is known to be in financial difficulty as of the reporting date, and subsequently this customer goes bankrupt, this event provides evidence of the conditions that were in place at the reporting date. Consequently, the company must adjust the valuation of its receivables to reflect the likelihood of collecting the amount owed.

Events that indicate changes after the reporting period or those related to general market conditions do not justify adjustments because they do not reflect the circumstances as they stood at the reporting date. Similarly, adjustments that are unrelated to the entity’s operations do not impact the financial statements in a meaningful way relevant to the reporting period in question. Therefore, only those events that confirm conditions existing as of the reporting date warrant adjustments to financial statements, ensuring they provide a true and fair view of the entity's financial health.