What is a Subsequent Event? Kinds of Subsequent Event
Subsequent events are events that occur after a company’s year-end period
but before the release of the financial statements. In other words,
subsequent events are events that happen between the cut-off date and the date
in which the company issues its financial statements. Depending on the
situation, subsequent events may require disclosure in a company’s financial
statements.
There are two types of
subsequent events:
1.
Adjusting events
It is an event that provides additional
information about pre- existing conditions that existed on the balance
sheet date.
Say for example,
- If the company faced a lawsuit before the balance
sheet date and the lawsuit is settled during the subsequent-events period,
the company would adjust the contingent loss amount to match the actual
settlement loss.
- Assume that, due to new technology, there is a
significant reduction in the market price of Company A’s inventory. This
will require an adjustment to the financial statements, with inventory
valued at the lower of cost or market value.
- 2.
Non-adjusting events
It is an event that provides new information
about a condition that did not exist on the balance sheet date.
Say for example,
A labor strike that could potentially threaten the
company into bankruptcy should be disclosed in the financial statements.
A fire in the company’s warehouse that destroys
inventory and assets is not recognized (but disclosure is required) because the
conditions did not exist prior to the balance sheet date.