Events that occur after a company’s year-end period but before the release of its financial statements
Subsequent events are events that occur after a company’s year-end period but before the release of the financial statements. In other words, subsequent events are events that happen between the cut-off date and the date in which the company issues its financial statements. Depending on the situation, subsequent events may require disclosure in a company’s financial statements.
Understanding Reporting Period, Cut-off, and Subsequent Events
The typical reporting period for a company is 12 months. However, a reporting period does not need to match the calendar year from January 1 to December 31. Typically, companies will choose a year-end corresponding to a period of low activity. For example, retailers usually follow a year-end at the end of January when inventory is low (post-holiday season).
The cut-off date refers to the end of the reporting period and the start of the new reporting period. It is important in accrual accounting because cash cycles may not be complete. Therefore, it is necessary to understand which events will be during the current reporting period and which events will be recorded in the next reporting period. Transactions and events are recognized up to the cut-off date.
Between the period of the cut-off date and the authorization of financial statements issuance is the subsequent events period. Depending on the type of subsequent event, it may or may not require an adjustment to the financial statements. Transactions and events that change the measurement of transactions before the cut-off date are recognized.
Example
After the cut-off period (after the company’s year-end) and before the issuance of financial statements, Company A’s major client unexpectedly goes bankrupt. It is determined that the company will only get 10% of its outstanding accounts receivable from the major client. The event will require an adjustment to the financial statements of Company A.
Types of Subsequent Events
There are two types of subsequent events:
1. Adjusting events
An event that provides additional information about pre-existing conditions that existed on the balance sheet date.
2. Non-adjusting events
A subsequent event that provides new information about a condition that did not exist on the balance sheet date.
Accounting for Subsequent Events
For subsequent events that provide additional information about pre-existing conditions that existed on the balance sheet date, the financial statements are adjusted to reflect this additional information.
For example:
- If the company faced a lawsuit before the balance sheet date and the lawsuit is settled during the subsequent-events period, the company would adjust the contingent loss amount to match the actual settlement loss.
- Assume that, due to new technology, there is a significant reduction in the market price of Company A’s inventory. This will require an adjustment to the financial statements, with inventory valued at the lower of cost or market value.
For subsequent events that are new events and thus do not provide additional information about pre-existing conditions that existed on the balance sheet, these events are not recognized in the financial statements. However, a subsequent event footnote disclosure should be made so that investors know the event occurred.
For example:
- A labor strike that could potentially threaten the company into bankruptcy should be disclosed in the financial statements.
- A fire in the company’s warehouse that destroys inventory and assets is not recognized (but disclosure is required) because the conditions did not exist prior to the balance sheet date.
Related Readings
CFI offers the Financial Modeling & Valuation Analyst (FMVA)® certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:
September 04, 2022 September 04, 2022/ Steven Bragg
A subsequent event is an event that occurs after a reporting period, but before the financial statements for that period have been issued or are available to be issued. Depending on the situation, such events may or may not require disclosure in an organization's financial statements. The two types of subsequent events are noted below.
Additional Information
An event provides additional information about conditions in existence as of the balance sheet date, including estimates used to prepare the financial statements for that period.
New Events
An event provides new information about conditions that did not exist as of the balance sheet date.
Subsequent Event Reporting
Generally accepted accounting principles state that the financial statements should include the effects of all subsequent events that provide additional information about conditions in existence as of the balance sheet date. This rule requires that all entities evaluate subsequent events through the date when financial statements are available to be issued, while a public company should continue to do so through the date when the financial statements are actually filed with the Securities and Exchange Commission. Examples of situations calling for the adjustment of financial statements are:
Lawsuit. If events take place before the balance sheet date that trigger a lawsuit, and lawsuit settlement is a subsequent event, consider adjusting the amount of any contingent loss already recognized to match the amount of the actual settlement.
Bad debt. If a company issues invoices to a customer before the balance sheet date, and the customer goes bankrupt as a subsequent event, consider adjusting the allowance for doubtful accounts to match the amount of receivables that will likely not be collected.
If there are subsequent events that provide new information about conditions that did not exist as of the balance sheet date, and for which the information arose before the financial statements were available to be issued or were issued, these events should not be recognized in the financial statements. Examples of situations that do not trigger an adjustment to the financial statements if they occur after the balance sheet date but before financial statements are issued or are available to be issued are:
A business combination
Changes in the value of assets due to changes in exchange rates
Destruction of company assets
Entering into a significant guarantee or commitment
Sale of equity
Settlement of a lawsuit where the events causing the lawsuit arose after the balance sheet date
A company should disclose the date through which there has been an evaluation of subsequent events, as well as either the date when the financial statements were issued or when they were available to be issued. There may be situations where the non-reporting of a subsequent event would result in misleading financial statements. If so, disclose the nature of the event and an estimate of its financial effect. If a business reissues its financial statements, disclose the dates through which it has evaluated subsequent events, both for the previously issued and revised financial statements.
Consistency in Disclosing Subsequent Events
The recognition of subsequent events in financial statements can be quite subjective in many instances. Given the amount of time required to revise financial statements at the last minute, it is worthwhile to strongly consider whether the circumstances of a subsequent event can be construed as not requiring the revision of financial statements.
There is a danger in inconsistently applying the subsequent event rules, so that similar events do not always result in the same treatment of the financial statements. Consequently, it is best to adopt internal rules regarding which events will always lead to the revision of financial statements; these rules will likely require continual updating, as the business encounters new subsequent events that had not previously been incorporated into its rules.
Example of a Subsequent Events Disclosure
The following is an example of a typical disclosure of a subsequent event:
The following events and transactions occurred subsequent to December 31, 20XX:
The company concluded acquisition discussions with ABC Corporation, and paid $10,000,000 in cash to the shareholders of ABC on February 28, 20XX to acquire 100% of the outstanding shares of ABC.
A jury found that the company was not liable in a lawsuit brought by Smith.
The company's largest customer, Jones & Company, declared bankruptcy on February 10, 20XX. Given this new information, the company increased its reported allowance for doubtful accounts by $100,000, which is included in these financial statements.
September 04, 2022/ Steven Bragg/