Reporting subsequent events: When, why and how

Major events or transactions can happen after a reporting period ends but before financial statements are finalized. Deciding whether to report these so-called subsequent events is one of the gray areas in financial reporting. Here’s some guidance from the American Institute of Certified Public Accountants (AICPA) that CPAs use to determine the appropriate accounting treatment.

When to report it

Financial statements reflect a company’s financial position at a particular date and the operating results and cash flows for a period ended on that date. However, because it takes time to complete financial statements, there might be a gap between the financial statement date and the date the financials are available to be issued. During this period, unforeseeable events — such as a natural disaster, a cyberattack, a regulatory change or the loss of a large business contract — may happen in the normal course of business.

Guidance from the AICPA is the standard used by CPAs to make that call. The AICPA’s Financial Reporting Framework for Small- and Medium-Sized Entities classifies subsequent events into two groups:

1. Recognized subsequent events. These provide further evidence of conditions that existed on the financial statement date. An example would be the bankruptcy of a major customer, highlighting the risk associated with its accounts receivable. There are often signs of a company’s financial distress — such as late payments or staff turnover — months before its bankruptcy filing.
2. Unrecognized subsequent events. These reflect conditions that arise after the financial statement date. An example could be a tornado or earthquake that severely damages the business. There’s usually little or no advanced notice that a natural disaster is going to happen.

Generally, the former must be recorded in the financial statements. The latter events aren’t required to be recorded, but the details may have to be disclosed in the footnotes.

When to disclose it

When deciding which events to disclose in the footnotes, consider whether omitting the information about them might mislead investors, lenders and other stakeholders. Disclosures should describe the nature of the event and, if possible, estimate the financial effect.