Subsequent Events Disclosure: Example & Analysis

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  • 0:04 What Are Subsequent Events?
  • 1:09 Recognized Subsequent Events
  • 2:12 Non-Recognized…
  • 3:03 Disclosures
  • 4:29 Lesson Summary
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Lesson Transcript
Instructor: Mark Koscinski

Mark has a doctorate from Drew University and teaches accounting classes. He is a writer, editor and has experience in public and private accounting.

In this lesson, you will gain an understanding of subsequent event disclosures and when they should be used. You will see how they are created and learn how they may require adjustments to your company's financial statements.

What Are Subsequent Events?

Your business had a wonderful year. Sales were up, and so were profits. Your accounting department prepared the annual financial statements for your investors. Before the financial statements are sent to the investors, one of your major customers declares bankruptcy! The customer defaults on the payment for the receivables from last year. After telling your auditors this dismal news, they respond by saying, 'You now have a subsequent event that you may need to account for.' Unsure of what that means, you do a little research.

A subsequent event is a real event occurring after the date of the balance sheet but before the issuance of the financial statements of a public company. In private companies, it's before the date the financial statements are available for issuance. The balance sheet date is the end of the accounting period and the date the balance sheet is presented. A subsequent event must be scrutinized to determine its impact on the financial statements, if any. The first step in the process is classifying the subsequent event into one of two mutually exclusive categories.

Recognized Subsequent Event

A subsequent event might be a recognized subsequent event. You may often hear this type of event referred to as a Type 1 subsequent event. A recognized subsequent event occurs after the balance sheet date but provides additional information about conditions and estimates made as of the balance sheet date. Recognized subsequent events generally require an adjustment to the financial statements.

In the example we looked at a moment ago, you review the reasons why your customer declared bankruptcy. Typically, default results from a decline in financial solvency, so the default gives you information about the collectability of the accounts receivable from this customer. The customer's financial weakness probably existed at your balance sheet date, so it's appropriate to go back and adjust the year-end financial statements to reflect the customer's default. The allowance for doubtful accounts will need to be adjusted upward as of year-end. Another common example of a recognized subsequent event would be a loss from litigation if the event giving rise to the litigation occurred prior to the balance sheet date.

Non-Recognized Subsequent Events

The second type of subsequent event is called a non-recognized subsequent event and is referred to sometimes as a Type 2 subsequent event. A non-recognized subsequent event occurs after the balance sheet date and provides evidence about events or conditions that didn't exist at the balance sheet date. To demonstrate, let's change the facts a little about your customer's bankruptcy. You discover its main production facility has been severely damaged by a tornado. The customer was not in financial distress at the time your balance sheet was dated. The stability of the customer was affected only by the severe weather and resulting damage. Since the event causing the default happened after your balance sheet date, there is no adjustment to your financial statements. It's important to study all the information available about your customer when researching the subsequent events.

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