The Accounting Treatment of Subsequent Events

A subsequent event in accounting refers to a development that takes place after the close of a company’s financial reporting period but before the company officially releases its financial statements. These events can have a material impact on the accuracy and relevance of the financial data presented. Properly identifying and accounting for these events is a fundamental step in ensuring that the financial statements provide a fair and complete picture of the company’s financial position. The guiding principles for this process are outlined in U.S. Generally Accepted Accounting Principles (GAAP), specifically under Accounting Standards Codification (ASC) 855.

Defining the Subsequent Event Period

This period begins on the balance sheet date, which is the final day of the fiscal period being reported on (for example, December 31 for a calendar-year company). The period concludes on the date the financial statements are either issued or are available to be issued. This end date is when the financial statements are complete in a format that complies with GAAP and have received all necessary internal approvals for release.

The specific definition of this end date can differ slightly depending on the type of entity. For publicly traded companies that file with the Securities and Exchange Commission (SEC), the evaluation period extends to the date the financial statements are officially issued. For private companies and other entities, the period ends when the statements are considered “available to be issued,” even if they have not yet been distributed to external parties.

Recognized Subsequent Events

A recognized subsequent event provides new information or evidence about conditions that were already in place at the balance sheet date. These are sometimes referred to as adjusting events. The core principle is that the event confirms or clarifies a situation that existed, even if unknown, at the end of the reporting period. The accounting treatment for such events is to adjust the amounts reported on the financial statements to reflect this new information.

Consider a company facing a lawsuit that began before its December 31 year-end. At year-end, the company estimated and recorded a liability for the potential loss. If, in February, before the financial statements are issued, the lawsuit is settled for a different amount, this settlement is a recognized subsequent event. The event provides a more precise measurement of a liability that already existed on the balance sheet date. The company must adjust its financial statements to reflect the actual settlement amount.

Another common example involves accounts receivable. A company may have a large outstanding receivable from a customer at the end of the year. If that customer declares bankruptcy in January, before the financial statements are issued, this event provides strong evidence that the receivable was impaired and likely uncollectible as of December 31. This requires an adjustment to the allowance for doubtful accounts and bad debt expense on the year-end financial statements, as the customer’s financial distress was an existing condition.

Non-Recognized Subsequent Events

In contrast, non-recognized subsequent events pertain to conditions that did not exist at the balance sheet date but emerged entirely within the subsequent event period. These are often called non-adjusting events. Since the underlying conditions were not present at the close of the reporting period, they do not result in adjustments to the figures on the balance sheet or income statement. Their significance, however, means they must be communicated to financial statement users.

The proper accounting treatment for these events is disclosure in the notes to the financial statements. This ensures that users of the financial statements are not misled about major changes that could affect the company’s future financial position or performance. The goal is to provide relevant information without altering the historical financial data for conditions that did not exist at that time.

A clear example of a non-recognized event is a natural disaster, such as a fire or flood, that destroys a company’s manufacturing facility after the balance sheet date. Because the facility was fully operational on December 31, adjusting the financial statements would be inappropriate. Other examples include issuing a significant amount of new stock or debt, or entering into a major business acquisition after the year-end.

Disclosure Requirements for Subsequent Events

For each material non-recognized event, the company must disclose two key pieces of information. The first is a description of the nature of the event itself, explaining what happened. The second is an estimate of the financial effect of the event on the company. If it is not possible to make a reasonable estimate of the financial impact, the company must include a statement to that effect.

In addition to event-specific details, disclosure requirements regarding the evaluation period itself vary. Private companies and other entities that are not SEC filers must disclose the date through which they have evaluated subsequent events. They must also specify whether this is the date the financial statements were issued or the date they were available to be issued. This disclosure provides users with a clear cutoff point for the information contained within the financial report. Publicly traded companies that file with the SEC, however, are not required to disclose this specific date in their financial statements.