What is a Subsequent Event?
Subsequent events are events that occur after a company’s year-end period but before the release of the financial statements. In other words, subsequent events are events that happen between the cut-off date and the date in which the company issues its financial statements. Depending on the situation, subsequent events may require disclosure in a company’s financial statements.
There are two types of subsequent events:
1. Adjusting events
it is An event that provides additional information about pre- existing conditions that existed on the balance sheet date.
2. Non-adjusting events
it is An event that provides that provides new information about a condition that did not exist on the balance sheet date.
Accounting for Subsequent Events
For subsequent events that provide additional information about per-existing conditions that existed on the balance sheet date, the financial statements are adjusted to reflect this additional information.
For example:
- If the company faced a lawsuit before the balance sheet date and the lawsuit is settled during the subsequent-events period, the company would adjust the contingent loss amount to match the actual settlement loss.
- Assume that, due to new technology, there is a significant reduction in the market price of Company A’s inventory. This will require an adjustment to the financial statements, with inventory valued at the lower of cost or market value.
For subsequent events that are new events and thus do not provide additional information about pre-existing conditions that existed on the balance sheet, these events are not recognized in the financial statements. However, a subsequent event footnote disclosure should be made so that investors know the event occurred.
For example:
- A labor strike that could potentially threaten the company into bankruptcy should be disclosed in the financial statements.
- A fire in the company’s warehouse that destroys inventory and assets is not recognized (but disclosure is required) because the conditions did not exist prior to the balance sheet date.