FAR 1 Module 5 Flashcards
How should a company report a litigation settlement that occurred after year-end, but before financial statements are issued, if the final settlement differs significantly from the estimated liability?
DISCLOSE and ACCRUE
The company should accrue the liability based on the final settlement amount and disclose the nature of the event and its impact on the financial statements, as the settlement is material and provides additional information about conditions existing at year-end.
How should a company report an event that occurs after the balance sheet date but before the financial statements are issued, when the event’s nature and financial impact are known?
Disclose and estimate?
DISCLOSE: Nature of event along with the ESTIMATED FINANCIAL IMPACT
The nature and estimated financial impact were known before statements issued
A company issues its financial statements for a prior year, and shortly before the issuance, a significant event (such as a fire) occurs.
On March 15, Year 2, a company issued its Year 1 financial statements.
A fire destroyed its manufacturing plant on March 1, Year 2. How should this loss be treated in the Year 1 financial statements?
Disclosed? Recognized?
Loss should be DISCLOSED and NOT RECOGNIZED in the Y1 financials
Disclosed: Because the loss from the fire occurred in Year 2, considered a NON recognized subsequent event
If a lawsuit was filed against a company on 10/12/y1 and settled on 1/2/y2.
Would this impact the company’s debt to equity ratio on the company’s balance sheet for the year ended 12/31/y1?
YES
Since the lawsuit was filed before December 31, Year 1, it was an existing condition.
When the lawsuit was resolved before the financial statements were issued, the outcome should be reflected in the Year 1 balance sheet
What is the debt to equity ratio?
The debt-to-equity ratio measures how much debt a company has compared to its equity (ownership)
shows the balance between money borrowed (debt) and money invested by shareholders (equity).
High ratio: More debt, higher financial risk.
Low ratio: Less debt, lower risk.
= Total DEBT
________________
Total Equity
What is a subsequent event?
an event that occurs after the end of a company’s fiscal period but before the financial statements are issued or available to be issued
Will only be recognized on the financial statements if it relates to a condition that existed as of the balance sheet date.
What is the appropriate accounting treatment for a lawsuit filed with payment involved after the balance sheet date but related to a condition that existed before the balance sheet date?
ACCRUE and DISCLOSE
The amount would be accrued if the legal team believes it is likely payment will be made for the lawsuit
The amount PROBABLY and ESTIMABLE
Disclosures would be in the notes to the financial statements
Expenses that is considered reasonably possible but not probable would be disclosed in the notes
Financial statements are considered to be “available to be issued” and “issued” for subsequent event evaluations when:
How does the subsequent event evaluation period differ for SEC filers vs. non-SEC filers?
What is the subsequent evaluation period?
The subsequent event evaluation period is the time after the balance sheet date during which a company assesses events that may impact its financial statements.
When does the subsequent event evaluation period end for SEC filers and non-SEC filers?
