302240 Flashcards
Carl Company was a defendant in a lawsuit brought against it by an employee. By the end of 20X1, the lawsuit had proceeded to the point where Carl Company determined a loss to be probable. The amount of the loss can be reasonably estimated and so Carl Company recorded a contingent liability related to the lawsuit. In January of 20X2, the judge determined the damages to be paid by Carl Company. How should this event be reported by Carl Company in 20X1?
The event should not be accrued but it should be disclosed.
The event should both be accrued and disclosed.
The event should be neither accrued nor disclosed.
The event should be accrued but not disclosed.
The event should both be accrued and disclosed
The event occurring in January provided new information about a financial statement item that existed at the end of the prior year. Therefore, the effect of this event needs to be recorded in the financial statements to be issued later in the year.
Because the amount of damages that must be paid is now known, an entry should be made to adjust the litigation loss and the litigation liability. Additional information about this event should also be disclosed in the notes to the financial statements.
Subsequent Event
A subsequent event is an event occurring after the balance sheet date but prior to the issuance of the auditor’s report, which has a material effect on the financial statements and therefore requires adjustment or disclosure in the statements. (AU-C 560)
Two types of events require consideration:
Events that provide additional evidence with respect to conditions that existed at the balance sheet date and which affect estimates in the financial statements require adjustment.
Events that provide additional evidence with respect to conditions that did not exist at the balance sheet date but arose subsequent to that date do not require adjustment but may require disclosure.
2370.05
An entity must recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. The following are examples of recognized subsequent events:
If the events that gave rise to litigation had taken place before the balance sheet date and that litigation is settled, after the balance sheet date but before the financial statements are issued or are available to be issued, for an amount different from the liability recorded in the accounts, then the settlement amount should be considered in estimating the amount of liability recognized in the financial statements at the balance sheet date.
Subsequent events affecting the realization of assets, such as receivables and inventories or the settlement of estimated liabilities, should be recognized in the financial statements when those events represent the culmination of conditions that existed over a relatively long period of time. For example, a loss on an uncollectible trade account receivable as a result of a customer’s deteriorating financial condition leading to bankruptcy after the balance sheet date but before the financial statements are issued or are available to be issued ordinarily will be indicative of conditions existing at the balance sheet date. Thus, the effects of the customer’s bankruptcy filing shall be considered in determining the amount of uncollectible trade accounts receivable recognized in the financial statements at the balance sheet date.
2370.06
An entity must not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date but before financial statements are issued or are available to be issued. The following are examples of nonrecognized subsequent events:
Sale of a bond or capital stock issued after the balance sheet date but before financial statements are issued or are available to be issued
A business combination that occurs after the balance sheet date but before financial statements are issued or are available to be issued
Settlement of litigation when the event giving rise to the claim took place after the balance sheet date but before financial statements are issued or are available to be issued
Loss of plant or inventories as a result of fire or natural disaster that occurred after the balance sheet date but before financial statements are issued or are available to be issued
Losses on receivables resulting from conditions (such as a customer’s major casualty) arising after the balance sheet date but before financial statements are issued or are available to be issued
Changes in the fair value of assets or liabilities (financial or nonfinancial) or foreign exchange rates after the balance sheet date but before financial statements are issued or are available to be issued
Entering into significant commitments or contingent liabilities, for example, by issuing significant guarantees after the balance sheet date but before financial statements are issued or are available to be issued
2370.07
An entity must disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued or the date the financial statements were available to be issued.
2370.08
Some nonrecognized subsequent events may be of such a nature that they must be disclosed to keep the financial statements from being misleading. For such events, an entity shall disclose the following:
- The nature of the event
- An estimate of its financial effect, or a statement that such an estimate cannot be made
2370.09
An entity shall consider supplementing the historical financial statements with pro forma financial data. Occasionally, a nonrecognized subsequent event may be so significant that disclosure can best be made by means of pro forma financial data. Such data shall give effect to the event as if it had occurred on the balance sheet date. In some situations, an entity also shall consider presenting pro forma statements, usually a balance sheet only, in columnar form on the face of the historical statements.
2370.10
Under certain circumstances an entity may have to reissue financial statements. After the original issuance of the financial statements, events or transactions may have occurred that require disclosure in the reissued financial statements to keep them from being misleading. An entity must not recognize events occurring between the time the financial statements were issued or available to be issued and the time the financial statements were reissued unless the adjustment is required by GAAP or regulatory requirements. Similarly, an entity shall not recognize events or transactions occurring after the financial statements were issued or were available to be issued in financial statements that are later reissued in comparative form along with financial statements of subsequent periods unless the adjustment meets the criteria stated in this paragraph. An entity must disclose the date through which subsequent events have been evaluated in both the originally issued financial statements and the reissued financial statements.
