Publications

• 30 Second Ideas
• Accounting Updates
• Alerts
• Articles
• Business Surveys
• Construction Edge
• Healthcare Edge
• Insurance Edge
• Legal Talent
• Manufacturing Edge
• Not-for-Profit Edge
• Quick Links & Good Ideas
• SEC Edge
• Strategy Insights Blog
• Surviving the Upturn
• Tax Highlights

How Subsequent Events Affect Your Financial Statements

Financial statements provide a snapshot of your company’s financial condition on the balance sheet date. But in the real world, a company’s assets, liabilities and net worth are in a constant state of flux. What happens when, after your financial statements are prepared, events occur that have a material impact on the numbers?

Historical treatment
For many years, auditing standards have addressed the treatment of events that occur between the date of the financial statements and the date of the auditor’s report. Recently, however, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 165, Subsequent Events, incorporating these concepts into the accounting literature.

SFAS 165 — now known as Accounting Standards CodificationTM (ASC) Topic 855,  Subsequent Events — doesn’t make significant changes to the principles that apply to subsequent events. But it does underscore management’s responsibility for identifying and disclosing such events.

To recognize or not to recognize
SFAS 165 defines “subsequent event” as one that occurs after the balance sheet date but before the financial statements are issued (or, for nonpublic companies, “available to be issued”). Statements are considered “issued” when they’re widely distributed to shareholders and other financial statement users in a format compliant with U.S. Generally Accepted Accounting Principles.

There are two types of subsequent events:

1. Recognized. These are events that provide additional evidence about conditions that existed on the balance sheet date.
2. Nonrecognized. These are events that provide evidence about conditions that didn’t exist on the balance sheet date, but arose after it.

The first type must be recorded in the financial statements. The second type need not be recorded, but may have to be disclosed in the footnotes to ensure that financial statements aren’t misleading.

Here’s an example: Suppose a major customer files for bankruptcy after your balance sheet date but before you issue your financial statements. That’s a recognized subsequent event you should consider in determining the amount of uncollectible trade accounts receivable in your financial statements. If, instead, a devastating fire occurring after your balance sheet date puts the customer out of business, it’s considered a nonrecognized subsequent event (assuming the customer was financially healthy on the balance sheet date).

Monitor events
Financial statements must now contain disclosure of the date through which subsequent events have been reviewed and included in the financial statements. To be sure that subsequent events are treated properly in your financial statements, monitor events between the balance sheet date and the issuance date. Then evaluate those events for potential recognition or disclosure.
 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.