Financial statements reflect a company’s financial position at a particular date and the operating results and cash flows for a period ended on that date. However, major events or transactions sometimes happen after the reporting period ends but before financial statements are finalized. Do your financial statements need to address these so-called “subsequent events”? This is one of the gray areas in financial reporting. Fortunately, the American Institute of CPAs (AICPA) offers some guidance.
Financial statements often are not available to be issued for a few months after the close of the reporting period, because it takes time to schedule and complete fieldwork. Unforeseeable events may happen during this period in the normal course of business. Examples include disasters such as fires, buyouts, and changes in foreign exchange rates.
Chapter 27 of the AICPA’s Financial Reporting Framework for Small- and Medium-Sized Entities classifies subsequent events into two groups:
- Recognized subsequent events: these provide further evidence of conditions that existed on the financial statement date — for example, a major customer files for bankruptcy, highlighting the risk associated with its accounts receivable.
- Nonrecognized subsequent events: these reflect conditions that arise after the financial statement date, such as a natural disaster that severely damages the business.
Generally, the former must be recorded in the financial statements. The latter are not required to be recorded, but may have to be disclosed in the footnotes.
To decide which events to disclose in the footnotes, consider whether omitting the information about them would mislead investors, lenders, and other stakeholders. Disclosures should, at a minimum, describe the nature of the event and estimate the financial effect, if possible.
In some extreme cases, the effect of a subsequent event may be so pervasive that your company’s viability is questionable. This may cause your CPA to re-evaluate the going concern assumption that underlies your financial statements.
We offer audit and assurance services that can help take the guesswork out of reporting subsequent events. To find out how we can partner with you, contact us today.