Hi, Else here, and today we'll be talking
about subsequent events.
What is a subsequent event?
It's an event that occurs between a business'
year-end date and the date that the financial statements are
approved for issue.
What does that mean?
Let's look at a timeline to see.
A fiscal year has a start date and a year-end date.
The fiscal year lasts either one year or an operating cycle
whichever is longer.
I made this fiscal year one year ending December 31st.
Note that 2/3 of all companies have a year-end date that's
December 31st or close to it.
So it makes sense that you frequently
see this date as a year-end date for companies in textbooks.
Between the start and end dates of the fiscal year
is the reporting period.
All transactions that take place during this period
must be reported in the financial statements.
That's the basis of accrual accounting, which is
required under IFRS and ASPE.
The year-end date is the cut off point
for recognizing transactions in that fiscal period.
The cut off date is the point when one reporting period
ends and the next one starts.
However, after the year-end, several weeks or months
may pass before the board of directors
approves the financial statements for issue.
During that time the business will
do things like count and price inventory,
prepare adjusting entries, ensure
the accounting records are complete,
and have the financial statements audited.
This period between the cut off date
and the date when the financial statements are approved
is called the subsequent events period.
During this period, events that impact the company's business
in a significant way may occur.
If material, should these events be
reflected in the financial statements
even though they happened after the cut off date?
The simple answer is yes.
If the events are material, the stakeholders
would need this information to help them predict the future
and make decisions.
Without this information, the financial statements
may be misleading.
However, the answer is far more complicated than that.
It actually depends on what the event is and when it happened.
Subsequent events are divided into two types--
adjusting events and non-adjusting events.
Let's cover each individually.
Events in the subsequent event period
are adjusting events if the actual condition existed
before the cut off date but in the subsequent period,
additional evidence comes to light
that allows the company to improve the measurement
of a previous estimate.
This includes information that would
have been recorded in the accounts
if it had been known at the cut off date.
This means that with regards to measurement
the preparer should use the best information available,
including information available during the subsequent events
period as long as the condition existed during the reporting
period.
That's critical.
Let's clarify this concept with a few examples using
the timeline.
Assume there is a major technological change
and you find out about it during the subsequent event period,
say February 12th.
This change will make your inventory worth far less,
because few customers will want to buy it anymore.
You found out about that change in the subsequent events
period.
But what if that technological change actually
occurred on November 21st?
Note that the condition, the technological change,
existed before the cut off date.
Even though the evidence of the change
was found during the subsequent events period,
the measurement of the inventory owned at year-end
must be adjusted, written down, to the lower of cost
or net realizable value.
This meets the requirements of an adjusting event, which
means that the adjusting entry must be recorded
in the accounting system.
And the updated value of inventory
must be reported on the financial statements
even though the evidence was discovered
during the subsequent events period.
Let's do another example.
Say that a customer declares bankruptcy on March 12th
before the financial statements are approved for issue.
Would this fact be reflected in the year
in financial statements by adjusting the accounts?
The answer is yes.
The financial statements would be adjusted.
For estimates, such as the allowance for doubtful
accounts, information during the subsequent events period
is used to determine the allowance including
actual collections and defaults.
Why?
Because it's likely the customer was already
in financial difficulty before the cut off date.
We can adjust the measurement of the AFDA.
This is also true for accounts, such as sales returns
and allowances, which are often estimated at period end.
Let's do one more example.
Say that a lawsuit was settled during the subsequent events
period.
On January 31st, was your company
on the hook for $2 million of damages?
If the event that caused the lawsuit happened
within the reporting period, say in June of the reporting
period, then the settlement of the lawsuit
must be reported in the year-end financial statements
by recording a loss on the income statement
and a liability on the balance sheet.
This is, again, because the condition existed
before the year-end date.
The evidence, in the form of the settlement,
was available in the subsequent events period.
And that affects the way you would measure the impact
of the lawsuit on the company.
Let's now turn our attention to non-adjusting events.
These are events where the condition did not
exist before the cut off date.
An example would be an accident that destroys
a factory on January 28th.
Although the factory definitely existed before the cut
off date, the destruction did not happen before the cut
off date.
The evidence is, again, available in
the subsequent events period.
But this new evidence would never affect the amounts
on the financial statements.
There would be no adjustment to the account balances.
Why not?
Let's look at an example using the timeline
to see why there are no adjustments necessary.
Say that on February 9th there is a severe decline
in financial markets.
And suddenly, the investment your company
made in the shares of Apple Inc take a dive.
Your investment, a long-term asset on your balance sheet,
is now worth half of what it was at year-end.
Should the value of your investment
be adjusted on the December 31st financial statements?
The answer is absolutely not.
Why not?
Because the condition of the market changed after the cut
off date not before.
Even though the evidence, which would
be the decline in the market, happened
in the subsequent events period, it
would never impact the measuring of the accounts
on the financial statements at year-end.
Why not?
Because the condition did not exist before the cut off date.
Other examples of non-adjusting events
would be the loss of assets due to fire, flood, hurricane, et
cetera; a lawsuit where the event, such as the patent
infringement, happened after the cut
off date in the subsequent period;
or the sale of a company shares, the purchase
of another company, the issue of new debt, the list goes on.
So can we totally ignore all non-adjusting events?
Absolutely not.
If the event materially affects the assets, liabilities,
or future operations of the business,
it must be disclosed in the notes
to the financial statements at a minimum.
It may also result in supplemental schedules.
Or if very material, it may require
supplemental financial statements.
These would be prepared to show what the financial position
would be if the event had occurred before the balance
sheet date--
anything necessary to ensure that stakeholders clearly
understand the impact of the subsequent events
on the business's financial position or profitability
in the future--
this is required to ensure the company is
following full disclosure.
Let's just summarize everything we've learned.
In both adjusting and non-adjusting events,
the evidence is always available in the subsequent events
period.
But for adjusting events, the condition
existed before the cut off date in the reporting period,
which is why the event affects the measurement
of the estimates and is recorded as an adjustment
in the financial statements of the reporting period.
This is very different than non-adjusting events
where the condition exists after the cut off date,
after the reporting period, which
is why the financial statements are never
adjusted for measurement.
Let's check your understanding just
to be sure you got the idea.
Remember to pause the video and answer the question
before I do it for you.
Your company purchased a property in downtown Toronto
for $1.2 million.
The property used to be a gas station,
and your company plans to develop it
as a rental property.
During the subsequent event period,
you discover that the soil on the property is contaminated
and the value of the land is severely impaired.
Is this a subsequent event that requires
an adjustment or a non-adjusting subsequent event?
The answer is A, an adjusting event.
The land should be written down because the contamination
existed before the cut off date, and it materially
affects the measurement of the land value.
The land should be written down, and the new lower value
would be reported on the year-end financial statements.
That's it for subsequent events.
Thank you so much for watching my video.
I hope you found it helpful for your learning.