Significant events or transactions may occur after the reporting period has ended but before the completion of financial statements. Examples of these events or transactions include natural disasters, cyberattacks, changes in regulations, or the loss of a significant business contract. An unclear area of financial reporting is whether or not to mention these so-called “subsequent events.” The AICPA has provided some advice to aid in your decision-making.

Recognition

Financial statements show the state of a company’s finances as of a specific date and its operational performance and cash flow for the fiscal period that concluded on that date. The financial statement dates and when the financials are ready to be issued could differ, though, because it takes time to finish financial statements. In addition, unexpected incidents may occur during this time in the regular course of business.

Subsequent events can be one of two categories in Chapter 27 of the AICPA’s “Financial Reporting Framework for Small- and Medium-Sized Entities:”

1. Recognized subsequent events offer additional proof of the circumstances present on the financial statement date. For example, the bankruptcy of a significant client would illustrate the risk involved with its accounts receivable. Typically, a customer shows signals of financial trouble months before declaring bankruptcy (such as late payments or staff turnover).
2. Nonrecognized subsequent events take place after the financial statement’s date. An illustration would be a storm or earthquake that causes significant damage to the company. Typically, a firm receives little to no warning before a natural calamity.

The financial statements must include a disclosure of the former. The details of the latter events should be in the footnotes even though reporting them is not required.

Disclosure

It would be best to consider whether leaving out information about specific events might deceive investors, lenders, or other stakeholders when choosing which events to mention in the footnotes. Disclosures should, at the very least, describe the event’s nature and, if possible, estimate its financial impact.

In some extreme situations, the impact of a subsequent incident can be so significant that it casts doubt on the future viability of your business. Accordingly, your CPA might reconsider the going concern assumption that supports your financial statements as a result.

Subsequent events

We can take the uncertainty out of handling a subsequent event if you’re unsure how to proceed. Contact our RRBB accountants and advisors for further details.

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