Subsequent Events Disclosure for the CPA FAR Exam

Overview of ASC 855: Subsequent Events

ASC 855 establishes the requirements for evaluating, recognizing, and disclosing events that occur after the balance sheet date but before the financial statements are issued (or are available to be issued). Subsequent events questions appear on the CPA FAR exam and test your ability to distinguish between events that require adjustment of the financial statements and events that require disclosure only.

The Subsequent Events Period

The subsequent events period begins on the day after the balance sheet date and extends through the date the financial statements are issued (for SEC filers) or are available to be issued (for non-SEC filers). An entity must evaluate subsequent events through this date and disclose the date through which subsequent events have been evaluated.

For example, if a company has a December 31 fiscal year-end and issues its financial statements on March 15, the subsequent events period runs from January 1 through March 15. Events occurring after March 15 are not considered.

Types of Subsequent Events

Recognized Subsequent Events (Type I)

Recognized subsequent events provide additional evidence about conditions that existed at the balance sheet date. These events require adjustment of the financial statements because they provide information that was inherently uncertain at the balance sheet date but becomes clarified by events occurring after that date.

Examples of Type I events include:

• Settlement of litigation that was pending at the balance sheet date, confirming a loss existed at that date
• Bankruptcy of a customer with an outstanding receivable at the balance sheet date, indicating the receivable was impaired as of that date
• Sale of inventory after the balance sheet date at a price below cost, indicating a net realizable value write-down was needed at the balance sheet date
• Resolution of a tax dispute for a different amount than accrued at the balance sheet date

For recognized events, the entity adjusts the financial statements to reflect the new information. The goal is to present the financial statements as if the entity had known the outcome at the balance sheet date.

Nonrecognized Subsequent Events (Type II)

Nonrecognized subsequent events provide evidence about conditions that did not exist at the balance sheet date but arose after that date. These events do not require adjustment of the financial statements but may require disclosure if the event is significant enough that nondisclosure would make the financial statements misleading.

Examples of Type II events include:

• A fire or natural disaster that destroys a significant portion of the entity's assets after the balance sheet date
• Issuance of debt or equity securities after the balance sheet date
• A business combination completed after the balance sheet date
• Changes in the fair value of assets or liabilities after the balance sheet date due to changed market conditions
• Loss of a major customer or a significant change in a key business relationship after the balance sheet date

For nonrecognized events, the financial statements are not adjusted. However, the entity should disclose the nature of the event and an estimate of its financial effect, or a statement that an estimate cannot be made.

Reissuance of Financial Statements

If financial statements are reissued (for example, in an SEC filing that includes previously issued financial statements), the entity does not need to evaluate subsequent events beyond the original issuance date. However, if the reissuance is specifically to correct an error or reflects a new event, the entity evaluates subsequent events through the new issuance date for that specific matter only.

Going Concern Considerations

ASC 205-40 requires management to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern within one year after the date the financial statements are issued (or available to be issued). While going concern is addressed in a separate codification topic, it is closely related to subsequent events because management must consider all information available through the issuance date, including events that occur after the balance sheet date.

If management identifies conditions or events that raise substantial doubt, it must evaluate whether its plans to mitigate those conditions are sufficient. If substantial doubt is alleviated by management's plans, the entity discloses the conditions and the plans. If substantial doubt is not alleviated, the entity discloses the conditions, the plans, and a statement that there is substantial doubt about the entity's ability to continue as a going concern.

Disclosure Requirements

All entities must disclose the date through which subsequent events have been evaluated. For Type II events requiring disclosure, the entity discloses the nature of the event and an estimate of its financial effect (or a statement that an estimate cannot be made). Some Type II events may be so significant that the best way to inform users is to supplement the financial statements with pro forma financial data showing the effect of the event as if it had occurred on the balance sheet date.

Exam Preparation Tips

• The key distinction is whether the condition existed at the balance sheet date (Type I, adjust) or arose after the balance sheet date (Type II, disclose only).
• Know the evaluation period: through the date financial statements are issued (SEC filers) or available to be issued (non-SEC filers).
• Settlement of litigation pending at the balance sheet date is the classic Type I example.
• A natural disaster after the balance sheet date is the classic Type II example.
• Going concern evaluation uses a 12-month look-forward period from the date of issuance, not from the balance sheet date.