Addressing Your Frequently Asked Questions Regarding Subsequent Event Reporting
Subsequent events are currently under review. The Public Company Accounting Oversight Board (PCAOB) has launched a project to update outdated auditing standards. These standards have not kept up with changes in financial reporting, risk assessment methods, and technology, causing inconsistencies in how companies report post-balance-sheet developments. Reporting these events can be challenging for public and private entities. Below are answers to some common questions about reporting subsequent events.
Read Also: Now Or Later? When To Report Subsequent Events
What Are Considered Subsequent Events?
Financial statements provide an overview of a company’s financial position as of a specific date, along with the operational outcomes and cash flows for the corresponding period. Given the time required to prepare these statements, there is often a delay between the statement date and when the financials are issued. During this interim period, unforeseen events may occur within the ordinary course of business.
The term “subsequent events” refers to significant events or transactions that occur after the reporting period ends but before financial statements are finalized. Examples include natural disasters, cyberattacks, regulatory changes, and the loss of key customers.
When Are Subsequent Events Recognized On The Financials?
Subsequent events are classified into two groups for accounting purposes:
- Recognized subsequent events. These conditions exist on the financial statement date and must be recorded in account balances. For example, if a major customer suddenly goes bankrupt, adjust the outstanding accounts receivables accordingly. Signs of distress, such as late payments or staff turnover, often appear months before bankruptcy.
- Nonrecognized subsequent events. These reflect conditions that occur after the financial statement date. Examples include a tornado or earthquake that significantly damages the business. Typically, a business has little or no advance notice of natural disasters. The details of such events may need to be disclosed in the footnotes.
When & How Are Subsequent Events Disclosed In The Financials?
When deciding which events to disclose in footnotes, consider if omitting them would mislead stakeholders. Disclosures should include:
- The nature of the event
- The estimated financial impact, if possible
- Potential business implications
In some cases, a subsequent event may significantly affect your company’s viability. This could lead your CPA to reassess the going concern assumption underlying your financial statements. Public companies should also consider whether subsequent events influence management’s discussion and analysis disclosures. Additionally, they need to determine if more risk factors should be included in filings with the U.S. Securities and Exchange Commission.
The PCAOB is reviewing information to propose updates on subsequent events guidance. While it sets audit standards, not financial reporting standards, any new audit standard could increase auditor scrutiny, indirectly affecting financial reporting. Companies might need to improve internal controls and documentation to meet updated expectations. PCAOB updates could also impact future financial reporting standard discussions related to subsequent events.
For the latest developments, please get in touch. GBQ assists in accurately reporting subsequent events and ensuring compliance with accounting rules.
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