Properly accounting for subsequent events is important because investors’ opinions could be dramatically altered by the events and transactions that occur after year end. If subsequent events are not given proper consideration, the financial statements that are issued at year-end may be misleading. Accounting Standards Codification (ASC) 855 provides guidance on the proper accounting for and disclosure of subsequent events. Due to the potential impact subsequent events may have on the financial statements, accountants must give consideration to events and transactions that occur after the balance sheet date up through the date of financial statement issuance. Similarly, auditors must review subsequent events and transactions up to the date of the report. Background Information
The current information about subsequent events under ASC 855 is based upon a Statement of Financial Accounting Standards that was originally released by the Financial Accounting Standards Board in May of 2009. The statement was FAS No. 165, Subsequent Events, and it pertained to financial periods ending after June 14, 2009. It was later codified into ASC 855. On February 24, 2010, the FASB finalized an Accounting Standards Update (ASU 2010-09) after concerns were raised from SEC filers about recognition and disclosure requirements. The current ASC 855 guidance contains the amendments presented in the Accounting Standards Update.
A subsequent event is an event or transaction that occurs after the balance sheet date but before the financial statements are issued or are available to be issued. It is important to note that there is a difference between when the financial statements are issued and when they are available to be issued. Financial statements are considered to be issued when they are widely distributed to shareholders and other users in a format that complies with GAAP. Financial statements are considered available to be issued when they are completed in a format that complies with GAAP and when all approvals necessary for issuance have been obtained, such as members of management and Board members. The need to differentiate between the two comes into play because not all companies have a policy of widely distributing their financial statements. The companies that don’t should evaluate subsequent events through the date the financial statements are available to be issued, rather than the date they are actually issued.
Two Types of Subsequent Events
There are two types of subsequent events. The first type is recognized events and consists of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing the financial statements. So, essentially, a recognized subsequent event is just additional information about something that was already known about when the financial statements were prepared. Companies have to recognize these types of subsequent events in the financial statements, hence the name recognized events. The second type of subsequent event is nonrecognized subsequent events and consists of events that provide evidence about conditions that did not exist at the date of the balance sheet. So, these are transactions are events that arose after the balance sheet date. Entities should not directly recognize these types of events in the financial statements, but they should sometimes be mentioned in the notes to the statements to prevent litigation that might stem from presenting misleading financial statements.
Regarding the disclosure for subsequent events, if an entity is not an SEC filer, it is required to disclose the date through which subsequent events have been evaluated. They also have to disclose whether this date is the date the financial statements were issued or the date the financial statements were made available to be issued. For non-SEC filers, this disclosure is important because it informs investors and other users of the financial statements of the cutoff date after which subsequent events were no longer evaluated.
The original guidance, before the Accounting Standards Update was released in 2010, required all companies, SEC filers included, to disclose the date through which the subsequent events had been reviewed. The FASB received many questions and concerns from SEC filers about this disclosure requirement, which ultimately resulted in the Financial Accounting Standards Board releasing the Accounting Standards Update in 2010 and the amendment of subsequent event disclosure requirements for SEC filers.
For SEC filers, disclosing the date through which subsequent events have been evaluated is not a concern because the SEC has specific requirements regarding the identification and disclosure of subsequent events. Specifically, the SEC requires companies to evaluate subsequent events up until the date the financial statements are actually filed with the SEC, rather than the date of financial statement issuance. Requiring SEC filers to disclose the date through which they have evaluated subsequent events would create a conflict because the company’s financial statements may be issued on June 1st and then the statements may not be filed with the SEC until a month later. So, because SEC filers tend to issue financial statements and file the statements with the SEC on different days, they are not required to disclose the date through which subsequent events have been evaluated.
Revised Financial Statements
In the event that a company needs to reissue financial statements, ASC 855 states that there is no need to recognize events that occurred between the original issuance and the reissuance, unless those events would be required to be recognized by GAAP or other regulatory requirements. For revised financial statements that have been corrected for errors or experienced a retrospective application of GAAP, non-SEC-filing entities have to disclose the dates through which subsequent events have been evaluated in the issued or available-to-be-issued financial statements or the revised financial statements.
A current application of accounting for subsequent events occurred earlier this year, when ten banks reached an 8.5 billion dollar settlement stemming from the 2010 robo-signing scandal in which mortgage servicers were signing foreclosure documents like robots without actually reviewing the paperwork. Subsequent events accounting was considered when making the decision to settle. The idea behind the timing of the settlement was for the banks to be able to shove the losses into their fourth-quarter 2012 results so that they could present a cleaner financial picture for the current year. Because the settlement occurred after the end of the fiscal year but before the release of the financial statements, and pertained to claims that originated before year end, this would be considered a recognized subsequent event and would result in an adjustment to the 2012 financial statements. Specifically, Wells Fargo reported a 645 million dollar loss, JP Morgan a 700 million dollar loss, and Bank of America a 2.5 billion dollar loss; however, by taking advantage of subsequent events accounting, they won’t have those blemishes on their current year financials.
From an auditing perspective, an auditor has a responsibility to investigate certain subsequent events up until the date that the report is issued. The auditor determines if subsequent events exist by examining post balance sheet transactions, by obtaining a rep letter from management, by inquiring of management or executives, by reviewing board minutes, and by examining the latest available interim financial statement. For those companies that do not have interim financial statements, the auditor should examine the available books and records, including bank statements.