FASB Statement 165, Subsequent Events (#91)
/In this podcast episode, we discuss the new requirement for the reporting of subsequent events in the financial statements. Key points made are noted below.
FASB Statement 165
Statement 165 runs through the reporting requirements for subsequent events. It covers three main areas. First, it describes the period after the balance sheet date when company managers have to evaluate whether a subsequent event needs to be included in the financial statements, or disclosed along with the financials.
Second, the Statement notes the circumstances under which that recognition has to occur. And finally, it states very generally the types of disclosures that have to be made for subsequent events.
Of these items, the key factors are the time period and circumstances for a subsequent event.
The Recognition of Subsequent Events
The first point in the Standard is that you have to recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet.
So for example, if you have a lawsuit that’s settled after the balance sheet date but before the financial statements are issued, and the settlement amount varies from the liability recorded in the balance sheet, then you really should be considering putting the settlement amount in that liability.
However, you don’t recognize subsequent events that provide evidence about conditions that DID NOT exist at the date of the balance sheet. For example, if you settle a lawsuit where the claim arose after the balance sheet date, that is a nonrecognized subsequent event.
Another example of a nonrecognized event is a change in the fair value of an asset or liability that arises after the balance sheet date.
Now you might be scratching your head about this nonrecognition item. It just means that you don’t recognize the monetary impact of the event in the financial statements. You still have to disclose it.
If you’re just disclosing it, then you need to disclose the nature of the event and an estimate of its financial effect, or a statement that you can’t make such an estimate.
If a nonrecognized subsequent event is really significant, then you should consider including pro forma financial information along with the regular financial statements.
And also, the Standard requires that you identify the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued or were available to be issued.
You may have noticed that I just mentioned the “available to be issued” date. What’s that all about? Well, the Standard defines it as whenever the financials are complete in form and format, and they comply with GAAP, and all approvals necessary for issuance have been obtained.
This definition really applies to private companies. Publicly-held companies have a fixed release date for their financials, but private ones may not issue their financials to anyone, so you don’t want them to keep updating their financials for subsequent events for potentially a long time.
If you look at the end of the Standard, where they list all of the preceding accounting standards that have to be modified because of this new Standard, the same item occurs several dozen times, which is that the “issuance date” is being replaced with the date when the financial statements are issued or available to be issued. So, based on the modification of past pronouncements, that appears to be the key change in this Standard.
And finally, the Standard applies to both interim and year-end financial statements.
My interpretation of this Standard is that it’s by no means monumental. It’s more of a conceptual document, so they’re clarifying how you deal with subsequent events, and how long you need to deal with them.