F2 M5 Subsequent Events Flashcards
When must a company accrue for a subsequent event in the financial statements as well as disclose it in the notes?
When the actual amount of the subsequent event is known, material, and related to conditions that existed before the balance sheet date.
Example:
Acme gets sued on Nov. 1, Year 1. On Dec. 31, Year 1, Acme accrues for an estimated $10,000,000 settlement, which it believes is probable. On Jan. 15, Year 2, Acme settles for $20,000,000. On Feb. 10, Year 2, Acme releases its Dec. 31, Year 1 financial statements, which contain a $20,000,000 accrued liability for the settlement and a note disclosing that the lawsuit was filed on Nov. 1, Year 1 and settled on Jan. 15, Year 2.
When must a company disclose a subsequent event with an estimated amount in the notes but without accruing for the amount in the financial statements?
When the subsequent event relates to conditions that existed only after the balance sheet date but the nature and financial impact of the event are known and material.
Example: On Jan. 15, Year 2, a fire destroys Acme’s warehouse, causing an estimated $1,200,000 loss. On Feb. 10, Year 2, Acme releases its Dec. 31, Year 1 financial statements, which contain a note disclosing the nature and timing of the event and the estimated amount of the loss. The Dec. 31, Year 1 financial statements do not contain an accrual for the loss because the loss was incurred in Year 2.
For companies that do not file with the SEC, what is the period over which subsequent events must be evaluated?
Through the date the financial statements are available to be issued, which is the date when the financial statements are in a form and format that comply with GAAP and by which all approvals for issuance have been obtained.
For companies that file with the SEC, what is the period over which subsequent events must be evaluated?
Through the date the financial statements have been issued, which is the date when the financial statements are in a form and format that comply with GAAP and by which the financial statements have been widely distributed to financial statement users.
What must companies that do not file with the SEC disclose in their financial statements about their subsequent events evaluation period?
The date through which subsequent events were evaluated and whether that is also the date the financial statements were issued or the date the financial statements were available to be issued.
Example: Acme, which does not file with the SEC, received all approvals necessary to issue its GAAP-compliant Dec. 31, Year 1, financial statements by Jan. 27, Year 2, and distributed the financial statements to all interested parties by Feb. 5, Year 2. In the notes to the financial statements, Acme disclosed that its subsequent event evaluation period ended Jan. 27, Year 2.
What must companies that file with the SEC disclose in their financial statements about their subsequent events evaluation period?
Nothing.
