Subsequent Event

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21 Aug, 2024

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A subsequent event is an event that occurs after the balance sheet date but before the financial statements are issued. Such events can significantly impact an organization's financial position and, therefore, must be considered when preparing financial statements.

Subsequent events are typically present in the footnotes of the financial statements. The notes provide information about the nature of the event, the impact on the financial statements, and any adjustments made as a result. This information is important for stakeholders, such as investors and creditors, to make informed decisions about the organization.

What Is a Subsequent Event?

Subsequent events are events that occur between the balance sheet date and the date of financial statement issuance.
An organization's management team is responsible for identifying and evaluating the events to determine if they have a material impact on the financial statements.
If it is found to have a material impact, it should be reflected in the financial statements or disclosed in the notes to the financial statements.
Auditors play a crucial role in the subsequent events process as they evaluate it and determine whether adjustments or disclosures are necessary.

Subsequent Event Explained

Subsequent events occur between the balance sheet date and the financial statement issuance date. It is the responsibility of an organization's management team to identify and evaluate subsequent events to determine if they have a material impact on the financial statements. If a subsequent event is found to have a material impact, it should be reflected in the financial statements or disclosed in the notes to the financial statements.

The organization's auditors evaluate subsequent events and determine whether adjustments or disclosures are necessary. In addition, they perform procedures to identify subsequent events and evaluate their impact on the financial statements. In order to evaluate subsequent events, management, and auditors must consider the event's impact on the financial statements, assess the likelihood of the event occurring, and determine on the availability of information before the issue of financial statements.

The function of subsequent events involves several steps to ensure that any events occurring between the balance sheet date and the financial statement's issuance need identification and evaluation for their material impact on the financial statements.

The first step is to identify events. Once identified, they must be evaluated by management and auditors to determine their material impact. If an event has a material impact, it is classified as recognized or non-recognized. If classified as recognized, it must be reflected in the financial statements. And adjustments may be required to account for balances or disclosures in the notes. Even if an event isn't material enough to require recognition, it may still require disclosure in the notes. This is to provide relevant and up-to-date information to stakeholders. This process ensures that the financial statements are accurate and up-to-date. It also provides stakeholders with the most current information on the organization's financial position.

Disclosure Requirements

The disclosure requirements depend on the nature and impact of the event. The Financial Accounting Standards Board (FASB) guides the disclosure requirements for subsequent events in Accounting Standards Codification (ASC) Topic 855, "Subsequent Events."

Here are the disclosure requirements:

Recognized Subsequent Events: If the event has a material impact on the financial statements, the financial statements must recognize or disclose in the notes to the financial statements. The disclosure should include the nature of the event and an estimate of the financial impact, if possible.
Non-Recognized Subsequent Events: If the event is not material enough to require recognition in the financial statements, the financial statements must still disclose it if it is significant enough to be of interest to stakeholders.
Date of Evaluation: Management should disclose the date through which they have evaluated events in the notes to the financial statements.
Subsequent Event Occurring After the Date of the Financial Statements: If an event occurs after the date of the financial statements but before their issuance, the notes to the financial statements should disclose the nature of the event, the estimate of the financial impact if possible, and the management's plans to address the event.
Subsequent Event Occurring After the Date of the Issuance of Financial Statements: If an event occurs after the date of the financial statements issuance, one cannot make any adjustments to the financial statements. Still, the notes to the financial statements should disclose the nature of the event. It should also estimate the financial impact, if possible.

Types

There are two types of subsequent events:

Recognized: Recognized subsequent events have a material impact on an organization's financial position. The financial statements should be adjusted to reflect the impact of recognized subsequent events. Examples of recognized subsequent events include the settlement of a lawsuit or the bankruptcy of a major customer.
Non-recognized: Non-recognized subsequent events do not have a material impact on an organization's financial position. These events may not require adjustments to the financial statements, but representation in the notes is important. Examples of non-recognized subsequent events include minor changes in market conditions or the sale of a subsidiary.

Examples

Let us look at some examples to understand the concept better:

Example #1

A simple example can be quoted in the case of a natural disaster, such as a hurricane or earthquake. Suppose it occurs after a company's balance sheet date but before financial statements are issued. The company's facilities or assets are damaged or destroyed by a natural disaster. Thus it may need to adjust its financial statements to reflect any related losses or impairments. Similarly, suppose the disaster significantly impacts the company's operations or financial performance. This information must be disclosed to stakeholders in subsequent financial statements.

Example #2

The COVID-19 pandemic began in late 2019 and is a real-life example that impacted the global economy and financial markets. As it occurred after the balance sheet date but before financial statements were issued, it significantly impacted businesses worldwide. Companies had to adjust their financial statements to reflect the impact of the pandemic, with some experiencing significant revenue losses and taking impairment charges.

For instance, companies in the travel and hospitality industry wrote down the value of their assets, such as hotels and airplanes, while those in retail had to deal with inventory write-downs and store closures. This event highlights the importance of providing relevant and accurate information to stakeholders in response to events that can materially impact financial statements.

Frequently Asked Questions (FAQs)

1. What is a type 1 subsequent event?

It refers to an event that occurs after the balance sheet date but provides additional evidence about conditions that existed at the balance sheet date. In other words, it is an event confirming a condition that existed at the balance sheet date.

2. What is a type 2 subsequent event?

It refers to an event that occurs after the balance sheet date and provides evidence about conditions that did not exist at the balance sheet date. They are events that are indicative of conditions that arose after the balance sheet date.

3. What is a subsequent event audit?

It refers to auditing an organization's financial statements to determine whether subsequent events have been appropriately identified, evaluated, and disclosed. During this audit, auditors will review the procedures management uses to identify subsequent events, evaluate their impact on the financial statements, and disclose them in the financial statements. In addition, the auditors will review the disclosures made in the notes to the financial statements to ensure that they appropriately disclose all material subsequent events.