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Accounting & Audit

Subsequent Events: When Do I Record and When Do I Disclose?

By October 21, 2015No Comments

When should subsequent events, that occur after the balance sheet date but before the financial statements are issued, be recognized in the financial statements or, rather, merely be disclosed in the notes to the financial statements?  In order to answer this question, it is important to first define what is a subsequent event?  Per the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 855-10-20, Subsequent Events are defined as events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued.

There are two types of subsequent events. The first type of subsequent events are events or transactions that provide additional evidence about conditions that existed at the balance sheet date. The second type are events that provide evidence about conditions that did not exist at the balance sheet date but arose subsequent to that date.

When should subsequent events be recognized in the financial statements? 

Events that provide additional evidence about conditions that existed at the balance sheet date should be recognized in the financial statements. Some examples of recognized subsequent events are:

  • Settlement of litigation related to an event occurring before the balance sheet date for an amount different from the liability recognized in the financial statements.
  • Events that affect the realization of receivables due to conditions that existed at the balance sheet date. This may occur when trade accounts receivable becomes uncollectible due to a customer filing for bankruptcy after the balance sheet date but before the financial statements are issued. Even though the filing for bankruptcy occurred after the balance sheet date, the customer’s deteriorating financial condition at the time of the balance sheet date is indicative of conditions existing at the balance sheet date.

Events that provide evidence about conditions that did not exist at the balance sheet date, but arose after the balance sheet date but before the financial statements are issued should not be recognized. Some examples of unrecognized subsequent events are:

  • Sale of a bond or capital stock issued after the balance sheet date;
  • A business combination that occurs after the balance sheet date;
  • Settlement of litigation when the event giving rise to the claim took place after the balance sheet date;
  • Loss of plant or inventories as a result of fire or natural disaster that occurred after the balance sheet date.

Disclosure Requirements

In accordance with FASB ASC 855-10-50, if an entity is a non-SEC filer, the entity shall disclose the date through which subsequent events have been evaluated. That date is either the date the financial statements were issued or the date the financial statements were available to be issued.

Additionally, certain unrecognized subsequent events must be disclosed if they are in such nature that omitting them would cause the financial statements to be misleading. For these events, the nature of the event and an estimate of its financial effect, or a statement that an estimate cannot be made, must be disclosed. Some unrecognized subsequent events may best be disclosed by supplementing the financial statements with pro forma information that reports the event as if it occurred at the financial statement date.

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