Definition
In finance, a Subsequent Event refers to a significant occurrence or transaction that happens after the end of a company’s reporting period but before the financial statements for that period have been finalized. These events may provide additional insight into conditions that existed at the balance sheet date, or they may point out significant occurrences which happened after that date. It is important to disclose these events as they could have a material effect on the financial information presented.
Key Takeaways
- Subsequent events refer to significant occurrences or transactions that happen after a company’s fiscal year-end but before the financial statements for that year have been issued or are available to be issued.
- There are two types of subsequent events: recognized subsequent events that provide additional evidence about conditions that existed at the balance sheet date, and non-recognized subsequent events that provide evidence about conditions that arose after the balance sheet date.
- The responsibility of management is to evaluate the impact of subsequent events up until the date that the financial statements are issued, and if necessary, adjust the financial statements to accurately represent the company’s financial position.
Importance
The finance term ‘Subsequent Event’ is critically important as it refers to a significant occurrence that happens after a company’s financial year ends, but before the financial statements for that year are issued or available to be issued.
These events can provide crucial insights about the financial health and future of a company, especially if they are of a material nature.
Even though these events happen after the year-end, they may need to be reflected in the financial statements depending on their nature, thus impacting financial ratios and investment decisions.
Understanding and recognizing subsequent events, therefore, is crucial for stakeholders in order to make informed decisions based on the company’s true financial position.
Explanation
Subsequent events, also known as events after the reporting period, represent significant occurrences that dramatically impact a company’s affairs or financial status after an accounting period but before the financial statements for the period have been issued or are available to be issued. These can include changes in the company’s resources, obligations, revenues, or expenses.
They may also involve changes in the economic circumstances around an organization that have a potential effect on the valuation, estimation, and judgment used in the creation of these financial statements. The main purpose of assessing subsequent events is to ensure that the financial statements provide a true and fair view of the company’s financial position at the reporting date, that they cover all significant financial changes, and that they are not misleading.
In this regard, two types of subsequent events are considered. The first type involves events that provide evidence about conditions that existed at the balance sheet date, such as the resolution of a court case that confirms a liability existed at the balance sheet date.
The second type is events that provide evidence about conditions that arose after the balance sheet date, like a loss from a natural disaster. It’s important for auditors, investors, and other financial statement users to be aware of these events as they provide additional insights into the status of the company and whether adjustments or disclosures in the financial statements are required.
Examples of Subsequent Event
Acquisition After Fiscal Year End: Imagine a company’s fiscal year ends on December 31st, but in February they acquire another company. This acquisition would significantly affect their financial standing. Even though it doesn’t change the statements relating to the fiscal year that closed on December 31st, it would still be important for stakeholders to be aware of such significant event. This is a subsequent event because it has occurred after the annual reporting period.
Legal Settlements: Say a company that has been involved in a major legal dispute for months has its year end in March, and the case is settled in April with a large payout. The settlement might significantly affect the company’s economic condition, and would hence needs to be reported as a subsequent event.
Natural Disaster: Suppose a company’s year ends in June, and a significant portion of its production facilities are destroyed in a hurricane in July. The event would significantly impact the company’s ability to generate revenue, thus would be identified as a subsequent event. This would be crucial information for investors, lenders, and other stakeholders, providing them a more complete understanding of the company’s financial and operational condition beyond the reporting date.
FAQs on Subsequent Event
What is a Subsequent Event?
A Subsequent Event, also referred to as events after the reporting period or post-balance sheet events, are events that occur after the balance sheet date but before the financial statements are issued or available to be issued.
What are the Types of Subsequent Events?
There are two types of subsequent events: recognized and non-recognized. Recognized subsequent events provide additional evidence with respect to conditions that existed at the date of the balance sheet. Non-recognized subsequent events provide evidence with respect to conditions that did not exist at the date of the balance sheet but arose subsequent to that date.
How are Subsequent Events disclosed in the financial statements?
Recognized subsequent events are reflected in the financial statements. Non-recognized subsequent events are disclosed in the notes to the financial statements. The nature of the event and an estimate of its financial effect are typically disclosed.
Who is responsible for evaluating the impact of Subsequent Events?
The entity’s management is typically responsible for evaluating the impact of subsequent events. They do this by applying procedures that identify events that may obligate the entity to adjust the financial statements or to disclose certain information.
What is the timeframe for consideration of Subsequent Events?
The timeframe extends to the date the financial statements are issued or available to be issued, which is usually determined by applicable law, regulation or professional standards.
Related Entrepreneurship Terms
- Post Balance Sheet Events
- Auditor’s Responsibility
- Contingent Liabilities
- Financial Statements Adjustments
- Recognized Subsequent Events
Sources for More Information
- Investopedia: Investopedia provides trusted finance and investing resources for both professionals and consumers, including information on subsequent events.
- AccountingTools: AccountingTools provides resources related to accounting topics, including subsequent events.
- American Institute of CPAs (AICPA): As the world’s largest member association representing the accounting profession, AICPA offers a large cache of informative materials on various topics, inclusive of subsequent events.
- IAS Plus: Produced by Deloitte’s IFRS Global Office, IAS Plus is a comprehensive resource of news and information about International Financial Reporting Standards and activities of the International Accounting Standards Board (IASB). This can include information about subsequent events.
