Amongst the various sections in a set of financial statements, the disclosures contain key information and additional details about the face statements numbers. One disclosure that we can usually find at the very end relates to subsequent events. The meaning is pretty straightforward but you may wonder why subsequent events are required to be disclosed and what type of information is considered subsequent events. That’s what we will discover in this article.
Subsequent Events [Definition]
Every company has a specific financial period that is called the reporting period which is essentially the activity period reported on the financial statements. It’s usually a period of 12 months and not necessarily matching the calendar year. Subsequent events are situations that happen after the year end of an entity, meaning in the following reporting period, but before the issuance of the financial statements.
Why Include Subsequent Events in Financial Statements?
In an ideal world, financial statements would be issued right after the end of a reporting period. However, this ideal is nearly impossible since financial statements require preparation and adjustments to books and records before they can be released. For a lot of companies, they also need to go through an audit before the final financial statements can be released to the relevant parties. Since there is a delay between the year end and the issuance date of financial statements, events could occur during that period which can affect the prior reporting period.
The goal of financial statements is to present as accurately as possible an image of the operations and activities of a company so that stakeholders can make proper decisions on the company. As such, events happening after the end of a reporting period, before the issuance of financial statements, that can potentially affect how stakeholders make decisions need to be included as disclosure in the financial statements or adjusted on the face statements. Fortunately, not all types of events need to be adjusted in the financial statements. We will have a deeper look of what type of subsequent events need to be adjusted or included in the financial statements in the next section.
Read More:
What is Materiality in Auditing? (Explained for Beginners)
What Is Considered Subsequent Events?
Subsequent events can be classified in two categories:
- New events or new information: This means any situation that happened after the year end date and prior to the issuance of the financial statements that is not related to anything that existed as at the year end date.
These events are considered to be non-adjusting events meaning that any monetary effect won’t be recorded on the face statements and no adjustments to the numbers are needed. However, anything significant that could impact stakeholders’ decisions need to be described and disclosed in the footnotes.
Examples of significant events could be natural disasters that affect the specific company or its industry, a pandemic, employees threatening a strike or a global war, just to name a few.
It should be noted that subsequent events included in disclosures shouldn’t be related to anything that is common in a company’s operations or as part of the normal course of business. Subsequent events are generally events affecting the company that are out of the ordinary.
- Additional information on existing events known at year end: The second type of subsequent events relates to situations happening after the year end date and prior to the issuance of the financial statements that provides additional information on events that were known or existed as at the year end date.
These types of events providing additional information on existing events at year end need to be adjusted and any monetary effect needs to be reflected on the face statements.
A good example of this type of events would be a provision that a company has taken at year end for a lawsuit where the outcome of the lawsuit becomes known after year end but before the issuance of the financial statements. The accountant will need to go back and adjust the provision for loss in order to match the actual settlement amount.
Read More:
Audited Financial Statements for Small Business| A Must Have?
The Bottom Line: Subsequent Events
It’s good to remember that the ultimate goal of financial statements is to present an accurate picture of the financial situation of a company. As such, even if events happen after the year end of an entity, that doesn’t mean it necessarily needs to be reported in the next financial period only.
If events happen before the issuance of the financial statements, they may need to be adjusted on the face statements or included in the disclosures so that stakeholders know and understand what is going on in the company. When trying to determine whether a subsequent event should be adjusted or not, always ask yourself if it relates to an existing event known at year end. If it is, chances are adjustments will be needed and if it’s a completely new event that no one could have predicted or known at year end, consider including a description of the event in the disclosures if it can impact stakeholders decisions.
