In financial reporting, “subsequent events” are major events or transactions that occur after the reporting period ends but before financial statements are finalized. These events may include cyberattacks, natural disasters, regulatory changes, and the loss of a large business contract.
Whether or not you should report these subsequent events is something of a gray area, but the following guidance from the AICPA can help you make your decision.
Recognized and unrecognized subsequent events
Financial statements are a reflection of a company’s financial position at a specific date, as well as the operating results and cash flows for the period ending on that date.
Since completing financial statements takes time, there’s often a gap between the financial statement date and the date when financial statements are ready to be issued. In some cases, unforeseeable events may occur during this time frame.
The AICPA classifies subsequent events into two groups in chapter 27 of their Financial Reporting Framework for Small- and Medium-Sized Entities:
1. Recognized subsequent events
These subsequent events offer further evidence of conditions that already existed on the financial statement date. For example, a major customer may declare bankruptcy due to the risk associated with its accounts receivable. In this case, there are often indicators of financial distress—such as rising staff turnover or late payments—for some time before the customer finally files for bankruptcy.
2. Nonrecognized subsequent events
Nonrecognized subsequent events are due to conditions that arose after the financial statement date. For example, if a business is severely damaged by an earthquake or a major storm, they’ll usually have no way of forseeing this disaster before it occurs.
Generally speaking, recognized subsequent events must be recorded in your company’s financial statements. Nonrecognized subsequent events don’t need to be recorded, but you may need to disclose the details of the event in the footnotes.
Understanding disclosure requirements
As a general rule, you should disclose nonrecognized subsequent events in the footnotes if omitting information about them might mislead investors, lenders, or other stakeholders. At a minimum, your disclosures should describe the event and provide an estimate of its financial impact, if possible.
In certain extreme cases, a subsequent event may have an effect pervasive enough that it puts your company’s viability in question. If so, your CPA may choose to re-evaluate the going concern assumption underlying your financial statements.
We can help you make disclosure decisions
If you’re unsure whether you need to report or disclose a subsequent event, contact us. We can offer you guidance and help you eliminate the guesswork.
© 2022