When to Report Subsequent Events Show
Financial statements present a company’s financial position as of a specific date, typically the end of the year or quarter. But sometimes events happen shortly after the end of the period that have financial implications for the prior period or for the future. Here’s a look at what’s reportable and what’s not. Classifying Subsequent Events So-called “subsequent events” happen between the date of the financial statements and the date the financial statements are available to be issued. This lag usually lasts two or three months, because it takes time to record end-of-period journal entries, make estimates, draft footnotes and, if applicable, complete external compilation, review or audit procedures. The two types of subsequent events include: Recognized These events provide further evidence of conditions that existed on the financial statement date. For example, a major customer might file for bankruptcy. There was probably evidence of the customer’s financial distress in the prior period, such as a decrease in revenue or a buildup of receivables. The customer’s bankruptcy filing may trigger a write-off for bad debts to be recorded on the balance sheet in the prior period. Nonrecognized These subsequent events reflect unforeseeable conditions that didn’t exist at the end of the accounting period. Examples might include a change in foreign exchange rates, a fire or an unexpected natural disaster that severely damages the business. Generally, the former must be recorded in the financial statements. The latter type of subsequent event isn’t required to be recorded but may have to be disclosed in the footnotes. Disclosing Subsequent Events Nonrecognized subsequent events must be disclosed in the footnotes only if failure to disclose the details would cause the financial statements to be misleading to investors and lenders. Subsequent event disclosures should include 1) a description of the nature of the event, and 2) an estimate of the financial effect (or, if not practical, a statement that an estimate can’t be made). In some extreme cases, the effect of a subsequent event may be so pervasive that a company’s viability is questionable. This may cause the CPA to re-evaluate the going concern assumption that underlies its financial statements. Footnotes Add Value Subsequent events may not be reflected on a company’s balance sheet or income statement. But, when in doubt, companies typically disclose subsequent events to promote transparency in financial reporting. Contact us for more information about reporting and disclosing subsequent events. © 2019 Events that occur after a company’s year-end period but before the release of its financial statements Subsequent events are events that occur after a company’s year-end period but before the release of the financial statements. In other words, subsequent events are events that happen between the cut-off date and the date in which the company issues its financial statements. Depending on the situation, subsequent events may require disclosure in a company’s financial statements. Understanding Reporting Period, Cut-off, and Subsequent EventsThe typical reporting period for a company is 12 months. However, a reporting period does not need to match the calendar year from January 1 to December 31. Typically, companies will choose a year-end corresponding to a period of low activity. For example, retailers usually follow a year-end at the end of January when inventory is low (post-holiday season). The cut-off date refers to the end of the reporting period and the start of the new reporting period. It is important in accrual accounting because cash cycles may not be complete. Therefore, it is necessary to understand which events will be during the current reporting period and which events will be recorded in the next reporting period. Transactions and events are recognized up to the cut-off date. Between the period of the cut-off date and the authorization of financial statements issuance is the subsequent events period. Depending on the type of subsequent event, it may or may not require an adjustment to the financial statements. Transactions and events that change the measurement of transactions before the cut-off date are recognized. ExampleAfter the cut-off period (after the company’s year-end) and before the issuance of financial statements, Company A’s major client unexpectedly goes bankrupt. It is determined that the company will only get 10% of its outstanding accounts receivable from the major client. The event will require an adjustment to the financial statements of Company A. Types of Subsequent EventsThere are two types of subsequent events: 1. Adjusting eventsAn event that provides additional information about pre-existing conditions that existed on the balance sheet date. 2. Non-adjusting eventsA subsequent event that provides new information about a condition that did not exist on the balance sheet date. Accounting for Subsequent EventsFor subsequent events that provide additional information about pre-existing conditions that existed on the balance sheet date, the financial statements are adjusted to reflect this additional information. For example:
For subsequent events that are new events and thus do not provide additional information about pre-existing conditions that existed on the balance sheet, these events are not recognized in the financial statements. However, a subsequent event footnote disclosure should be made so that investors know the event occurred. For example:
Related ReadingsCFI offers the Financial Modeling & Valuation Analyst (FMVA)® certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:
Students of financial reporting and auditing papers will have to gain an understanding of how subsequent events (also known as ‘events after the reporting period’) affect the financial statements of an entity. This article will consider the financial reporting aspects concerning subsequent events using a case study type scenario, and will then discuss the auditing requirements that candidates of Paper F8, Audit and Assurance need to be aware of.
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