2.9 Subsequent-Event Considerations
Entities should have processes in place to capture and evaluate events
that occur after the balance sheet date, but before the financial statements are issued
or are available to be issued, to determine whether the events should be recognized in
current-period or subsequent-period financial statements.
The recognition, measurement, and disclosure principles related to loss
contingencies described in this chapter apply to the period after the balance sheet date
but before the financial statements are issued or are available to be issued.
ASC 450-20 includes guidance on accounting for subsequent events.
ASC 450-20
25-2 An estimated
loss from a loss contingency shall be accrued by a charge to
income if both of the following conditions are met:
- Information available before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25) indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. Date of the financial statements means the end of the most recent accounting period for which financial statements are being presented. It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss.
- The amount of loss can be reasonably estimated.
The purpose of those conditions is to require
accrual of losses when they are reasonably estimable and relate
to the current or a prior period. Paragraphs 450-20-55-1 through
55-17 and Examples 1–2 (see paragraphs 450-20-55-18 through
55-35) illustrate the application of the conditions. As
discussed in paragraph 450-20-50-5, disclosure is preferable to
accrual when a reasonable estimate of loss cannot be made.
Further, even losses that are reasonably estimable shall not be
accrued if it is not probable that an asset has been impaired or
a liability has been incurred at the date of an entity’s
financial statements because those losses relate to a future
period rather than the current or a prior period. Attribution of
a loss to events or activities of the current or prior periods
is an element of asset impairment or liability incurrence.
25-6 After the date
of an entity’s financial statements but before those financial
statements are issued or are available to be issued (as
discussed in Section 855-10-25), information may become
available indicating that an asset was impaired or a liability
was incurred after the date of the financial statements or that
there is at least a reasonable possibility that an asset was
impaired or a liability was incurred after that date. The
information may relate to a loss contingency that existed at the
date of the financial statements, for example, an asset that was
not insured at the date of the financial statements. On the
other hand, the information may relate to a loss contingency
that did not exist at the date of the financial statements, for
example, threat of expropriation of assets after the date of the
financial statements or the filing for bankruptcy by an entity
whose debt was guaranteed after the date of the financial
statements. In none of the cases cited in this paragraph was an
asset impaired or a liability incurred at the date of the
financial statements, and the condition for accrual in paragraph
450-20-25-2(a) is, therefore, not met.
The guidance in ASC 450 indicates that entities should consider
information available before the financial statements are issued or are available to be
issued when determining whether it is probable that an asset has been impaired or a loss
event has occurred as of the balance sheet date. ASC 450 does not specifically address
events occurring after the balance sheet date that provide additional information
related to the measurement of a loss contingency; however, entities should consider the
subsequent-event guidance that is codified in ASC 855-10.
ASC 855-10
Recognized Subsequent
Events
Evidence About Conditions
That Existed at the Date of the Balance
Sheet
25-1 An entity shall
recognize in the financial statements the effects of all
subsequent events that provide additional evidence about
conditions that existed at the date of the balance sheet,
including the estimates inherent in the process of preparing
financial statements. See paragraph 855-10-55-1 for examples of
recognized subsequent events.
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.
Nonrecognized Subsequent
Events
Evidence About Conditions
That Did Not Exist at the Date of the Balance
Sheet
25-3 An entity
shall not recognize subsequent events that provide evidence
about conditions that did not exist at the date of the balance
sheet but arose after the balance sheet date but before
financial statements are issued or are available to be issued.
See paragraph 855-10-55-2 for examples of nonrecognized
subsequent events.
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.
50-2 Some
nonrecognized subsequent events may be of such a nature that
they must be disclosed to keep the financial statements from
being misleading. For such events, an entity shall disclose the
following:
- The nature of the event
- An estimate of its financial effect, or a statement that such an estimate cannot be made.
Connecting the Dots
ASC 450 and ASC 855 provide guidance on how to evaluate events
occurring after the balance sheet date. The period through which subsequent
events must be evaluated differs for (1) SEC filers and “conduit bond obligor[s]
for conduit debt securities that are traded in a public market (a domestic or
foreign stock exchange or an over-the-counter market, including local or
regional markets)” and (2) entities that are neither SEC filers nor conduit bond
obligors. SEC filers and conduit bond obligors should evaluate events that occur
through the date on which the financial statements are issued, whereas entities
that are neither SEC filers nor conduit bond obligors should evaluate events
that occur through the date on which the financial statements are available to
be issued. To determine whether an entity is a conduit bond obligor, entities
should refer to the definitions of “SEC filer” and “conduit debt securities” in
the ASC master glossary.
If an event takes place after the balance sheet date but before the
financial statements are issued or are available to be issued, and the event indicates
that it is probable that an asset has been impaired or a liability has been incurred as
of the balance sheet date, the event is considered a recognized subsequent event. The
event provides additional evidence of the loss incurred before the balance sheet date
and should be reflected in the financial statements.
Examples of events that provide additional information about conditions
that existed as of the balance sheet date and therefore should be accounted for as
recognized subsequent events include the following:
- An unfavorable court ruling in a lawsuit. The company had previously determined that the likelihood of an unfavorable outcome would be remote or reasonably possible but now considers it probable.
- A litigation settlement that indicates a loss amount different from that previously recognized in the financial statements.
- The identification of asset misappropriation that occurred on or before the balance sheet date and for which no loss had previously been recognized.
If events constitute additional information that an asset had been
impaired or a liability had been incurred as of the balance sheet date, but the amount
of the loss cannot be reasonably estimated before the financial statements are issued or
are available to be issued, the entity should consider whether disclosures are provided
in accordance with Section
2.8.1.
A loss should be recognized only when events confirm that an asset had
been impaired or a liability existed as of the balance sheet date. If a loss contingency
that did not exist as of the balance sheet date occurs after the balance sheet date but
before the financial statements are issued or are available to be issued, the entity
would not recognize the loss as of the balance sheet date but may need to disclose it as
a subsequent event to keep the financial statements from being misleading.
The enactment of a law that gives rise to a liability after the balance
sheet date but before the financial statements are issued or are available to be issued
is a nonrecognized subsequent event. The newly enacted law does not provide evidence of
conditions that existed as of the balance sheet date. However, the entity should
consider whether it is required to disclose the event to keep the financial statements
from being misleading. For additional information on the enactment of a law or
legislation, see Section
2.3.1.3.
Example 2-19
Legislation Enacted After
the Balance Sheet Date
Company A, a public entity with a December 31,
20X1, year-end, operates in the banking industry and is subject
to proposed legislation that will impose a fee on deposits that
existed as of June 30, 20X1. The legislation is expected to be
enacted after year-end but before the issuance of the financial
statements. Company A believes that because enactment of the
legislation is probable and is related to balances as of a date
before the balance sheet date, an accrual should be made.
However, the obligating event in this case is the enactment of
the legislation, before which A did not incur a liability even
though a fee was assessed on preexisting balances; thus, no
accrual should be made as of December 31, 20X1. Instead, the
impact of the new legislation is a nonrecognized subsequent
event, and A should consider whether it is required to disclose
the event in its December 31, 20X1, financial statements to keep
them from being misleading.
If a recognized contingent liability is settled after the balance sheet
date but before the financial statements are issued or are available to be issued, a
contingent liability should be reversed as of the balance sheet date to the extent that
the recognized liability exceeds the settlement amount. The settlement constitutes
additional evidence of conditions that existed as of the balance sheet date and would be
considered a recognized subsequent event.