posted August 23, 2016

Identifying Subsequent Events

by James Shankland, CPA, Audit Manager

Those of you who either prepare or review financial statements have almost certainly heard the term subsequent event. If you’re an auditee, you have most likely been asked if you know of any such events, prior to your financial statements being issued. Auditing standards define subsequent events as “events or transactions [that]…occur subsequent to the balance sheet date, but prior to the issuance of the financial statements, [and] that have a material effect on the financial statements and therefore require adjustment or disclosure in the statements.” Below are a few steps to help you identify subsequent events and how to determine if your financial statements need to be adjusted to incorporate them.

There are two types of subsequent events. The first, known as recognized events, are those that arise from conditions that existed as of the balance sheet date. The resolution of litigation often falls under this type; for example, a lawsuit occurs as a result of events that took place before the balance sheet date, but a settlement was made after the balance sheet date. Typically, this type of subsequent event requires adjustment of the financial statements. The second type, also known as non-recognized events, includes events that were not ongoing during the audit period, and occurred after the balance sheet date. An example of this type would be entering into a significant borrowing commitment (such as the issuance of bonded debt), a financial loss due to fire or flood, or the acquisition of large capital items. Non-recognized subsequent events usually require disclosure in the notes to the financial statements, but no adjustment to the actual statements themselves.

To identify subsequent events that you might need to disclose, summarize the significant events that have occurred between the fiscal year end date and the date of the financial statements. It might be helpful to go back through the meeting minutes of your governing body, make a call to your entity’s legal representation, and review your capital budget.Try to think of things that, if you were the reader of the financial statements, you would want to know. Remember that only significant events need to be evaluated. Discuss your summary with your auditor, who will be able to help you determine the significance of each event and whether it warrants adjustment or disclosure.


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