4.9 Subsequent Events
ASC 855-10
55-1 The following are examples of
recognized subsequent events addressed in paragraph
855-10-25-1:
- If the events that gave rise to litigation had taken place before the balance sheet date and that litigation is settled after the balance sheet date but before the financial statements are issued or are available to be issued, for an amount different from the liability recorded in the accounts, then the settlement amount should be considered in estimating the amount of liability recognized in the financial statements at the balance sheet date.
- Subsequent events affecting the realization of assets, such as inventories, or the settlement of estimated liabilities, should be recognized in the financial statements when those events represent the culmination of conditions that existed over a relatively long period of time.
55-2 The following are examples of
nonrecognized subsequent events addressed in paragraph
855-10-25-3:
- Sale of a bond or capital stock issued after the balance sheet date but before financial statements are issued or are available to be issued
- A business combination that occurs after the balance sheet date but before financial statements are issued or are available to be issued (Topic 805 requires specific disclosures in such cases.)
- Settlement of litigation when the event giving rise to the claim took place after the balance sheet date but before financial statements are issued or are available to be issued
- Loss of plant or inventories as a result of fire or natural disaster that occurred after the balance sheet date but before financial statements are issued or are available to be issued
- Changes in estimated credit losses on receivables arising after the balance sheet date but before financial statements are issued or are available to be issued
- Changes in the fair value of assets or liabilities (financial or nonfinancial) or foreign exchange rates after the balance sheet date but before financial statements are issued or are available to be issued
- Entering into significant commitments or contingent liabilities, for example, by issuing significant guarantees after the balance sheet date but before financial statements are issued or are available to be issued.
Although ASU 2016-13 did not significantly amend the guidance in ASC
855-10 on subsequent events, it did make conforming amendments to reflect the change
from an incurred loss model to the CECL expected loss model. However, given the change
to an expected loss model that incorporates forward-looking information, questions have
arisen about whether an entity is required to consider certain events that occur or
information that arises after the reporting date when estimating its expected credit
losses as of the reporting date. While we believe that an entity must exercise
significant judgment when evaluating whether information that arises after the balance
sheet date should be included in the entity’s estimate of expected credit losses, a
recent speech by the SEC staff is informative in this regard and provides a framework
for an entity’s evaluation of subsequent events.
Specifically, at the 2018 AICPA Conference on Current SEC and PCAOB
Developments, OCA Senior Associate Chief Accountant Kevin Vaughn addressed the staff’s observations about a recent consultation
related to a registrant’s evaluation of subsequent events after its adoption of ASU
2016-13. The consultation addressed the following three scenarios in which information
(1) is received after the balance sheet date but before the financial statements are
issued or available to be issued and (2) significantly differs from that expected by
management:
- Scenario 1 — An entity receives a loan servicer report that includes loan activity (e.g., delinquencies and prepayments) that occurred on or before the balance sheet date.
- Scenario 2 — An entity receives an appraisal report detailing the fair value of loan collateral as of the balance sheet date.
- Scenario 3 — The government announces unemployment rates for a period that includes the balance sheet date.
The SEC staff indicated that in the first two scenarios, it would object to the
registrant’s exclusion of the information from its process for estimating expected
credit losses. The staff noted that in both scenarios, an important consideration “was
that this information was loan-specific information about factual conditions that
existed at the balance sheet date.” By contrast, because the information in Scenario 3
is used to make projections for periods that extend beyond the balance sheet date and is
not loan-specific, the SEC staff would not object if such information is included in, or
omitted from, the registrant’s estimation process.
In addition, Mr. Vaughn acknowledged that if other facts and circumstances become known
after the balance sheet date, a registrant will need to evaluate whether such
information should be incorporated into the estimate of expected credit losses. He
shared the following views on how an entity should perform subsequent-event evaluations
in estimating expected credit losses:
- Category 1 — A registrant receives loan-specific information related to facts that exist on the balance sheet date. The registrant should include such information in its estimation process.
- Category 2 — A registrant receives information related to forecasting before it completes its estimation process. The registrant is permitted but not required to include such information in its estimation process (unless the information indicates a material weakness or a deficiency in the registrant’s CECL process, in which case the registrant must include such information).
- Category 3 — A registrant receives information related to forecasting after it completes its estimation process. The registrant would not include such information in its process (unless the information indicates a material weakness or a deficiency in the registrant’s CECL process, in which case the registrant must include such information).