4.10 Subsequent-Event Considerations
Entities should 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 the current-period financial
statements or in the subsequent-period financial statements. The recognition,
measurement, and disclosure principles related to loss recoveries that are 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.
After the balance sheet date, there may be a recovery of a loss that
exceeds the amount of a loss previously recognized on or before the balance sheet
date, resulting in a gain after the balance sheet date. The recovery should be
treated as two separate units of account:
- Loss recovery — The amount of the recovery equal to the previously recognized loss.
- Gain contingency — The amount of the recovery in excess of the previously recognized loss.
The recognition of these two units of account will differ in a
manner that is consistent with the different loss recovery models described in this
chapter. A recovery asset (e.g., a receivable) for the amount of the recovery equal
to the previously recognized loss should be accounted for as a recognized or
nonrecognized subsequent event in a manner that is consistent with the recognition
threshold for loss contingencies.
If an event occurs after the balance sheet date but before the
financial statements are issued or are available to be issued, and the event
indicates that a loss recovery is probable (or the loss recovery has been received)
for a loss incurred on or before the balance sheet date, the event provides
additional evidence of the recovery and should be accounted for as a recognized
subsequent event. Examples might include (1) the probable receipt of insurance
proceeds equaling the loss incurred related to a plant that was destroyed on or
before the balance sheet date or (2) proceeds from a lawsuit settlement in the
amount of a previous loss incurred for litigation that arose on or before the
balance sheet date.
The amount of the recovery in excess of the previously recognized
loss would be accounted for as a nonrecognized subsequent event because to realize
the gain recovery would be to recognize income before it is realized, as described
in ASC 450-30-25-1. Accounting for the two units of account by using separate
recognition thresholds is consistent with the subsequent-event treatment of loss
contingencies and gain contingencies discussed earlier in this Roadmap. Further, the
treatment of the loss recovery and the gain contingency as two separate units of
account is consistent with the guidance in Section 4.2 on involuntary conversions.
Example 4-8
Accounting for Insurance
Proceeds Comprising a Loss Recovery and a Gain
Contingency
Company P is a public company with a
calendar year-end of December 31, 20X8. On December 24,
20X8, a flood severely damages P’s operating plant. Company
P determines that it has incurred a loss of $500,000 because
of the flood damage and therefore recognizes the $500,000
loss as of December 31, 20X8. On February 19, 20X9, before
the issuance of P’s financial statements, the insurance
company notifies P that it will pay insurance proceeds in
the amount of $750,000, subject to the completion of the
insurance company’s investigation process.
Company P has previously received insurance
proceeds from this insurance company in connection with
other damages and is therefore familiar with the ongoing
investigation process. Company P determines that it is
probable that the investigation will not change the
anticipated recovery of $750,000. Therefore, as of December
31, 20X8, P recognizes a loss recovery asset as a recognized
subsequent event in the amount of $500,000, which is the
amount equal to the previously recognized loss. The
remaining $250,000 is subject to the gain contingency
guidance; therefore, the notion of probability is
irrelevant. Since there are unresolved contingencies as of
the balance sheet date of December 31, 20X8 (i.e., the
ongoing investigation), the $250,000 does not reach the gain
contingency recognition threshold described in Chapter
3; therefore, the $250,000 constitutes a
nonrecognized subsequent event and should not be recorded as
of December 31, 20X8.