Financial 2 - Subsequent Events

Question 1

Footnote Disclosure Required - Subsequent Events

Answer 1

• Footnote disclosure is required for a “reasonably possible” loss. The nature of the contingency (event) should be disclosed as well as the nature of the possible loss or range of loss
• When a litigation exists at the end of the reporting period, and a settlement is reached before the FS are issued, a subsequent event disclosure is required , along with an accrual. Accrual is necessary because the amount of the settlement is known. Therefore, it must be recorded

Note: If the event occurs after the date of the FS (Dec 31, Year 1), disclosure is still required if the FS are NOT issued

Question 2

Determining Period to Evaluate the Subsequent Event

Answer 2

For entities that do not file with the SEC, the subsequent event evaluation period runs through the date the financial statements are available to be issued

• That date is defined as the date when the FS are in a form and format that comply with GAAP and by which all approvals for issuance have been obtained.
• It is not necessary that the FS have actually been issued

For entities that file FS with the SEC, the subsequent event evaluation period runs through the date the FS are issued.

• FS are considered issued on the date when the FS are in a form and format that comply with GAAP and by which the FS have been widely distributed to the FS users
• No requirement for any shareholders to acknowledge receipt of the FS
• ** Under GAAP, entities that file FS with the SEC are not required to disclose the date through which subsequent events have been evaluated
• ** Under GAAP, entities that do not file with the SEC are required to disclose both the date through subsequent event has been evaluated and whether the date is the date of issuance or available to be issued

Question 3

Subsequent Event Impact to the Balance Sheet

Answer 3

• When an event exists in the entity’s Balance Sheet balance as of the end of the reporting period, the effects of the resolution must be taken into account in determining the amount of the asset or liability the be recognized at the end of the reporting period
• If the subsequent event does not affect the Balance sheet amount as of the balance sheet date, the amount should NOT be adjusted. If the subsequent event does involve a material change, it must be disclosed in the footnotes.
• **Failure to disclose a material event would make the financial statements misleading

Question 4

Recognizing Subsequent Events

Answer 4

• An entity should not recognize subsequent events in the financial statements that provide information about events that did not exist at the FS date
• **Example: Loss from fire occurs in Year 2, this is a non-recognized subsequent event. Disclosure required, but NO FS impact in Year 1

***Example 2: If a company has a note payable existing at the balance sheet date, and the refinancing occurs before the FS are issued, the liability should be recognized as non-current and a note disclosure should be added to the FS