Definition
A Subsequent Event refers to any event or transaction that occurs after the balance sheet date but before the financial statements are officially released. These events must be analyzed to determine if they provide more information about the conditions at the balance sheet date or if they are indicative of conditions that arose subsequently.
Importance
The identification and reporting of subsequent events are crucial as they can have substantial effects on the financial statements under generally accepted accounting principles (GAAP). For instance, a significant business deal or event occurring after the balance sheet date but prior to the issuance of financial statements can influence an entity’s financial position and require disclosure or adjustment in the financial statements.
Relevant Regulations
U.S. GAAP, specifically under the Accounting Standards Codification (ASC) 855, ‘Subsequent Events’, addresses guidelines concerning recognition and disclosure of events that occur after the balance sheet date but before financial statements are available to be issued.
Similarly, the International Financial Reporting Standards (IFRS) deal with such events under IAS 10, ‘Events after the Reporting Period’.
These regulations require that entities evaluate subsequent events, and depending on their nature (either adjusting or non-adjusting) extensive disclosures may be needed to provide a fair reflectance of the financial sutaition of the entity and adapt accordingly.
Example
An example of an adjusting subsequent event could be settling a lawsuit with consequences determined prior to the balance sheet date.
An example of a non-adjusting subsequent event might be a natural disaster occurring after the balance sheet date which may substantially influence future operations but does not affect the concretely reported numbers in the related statements at the point of the disaster.
Subsequent Event reporting ensures that financial disclosures remain comprehensive, up-to-date, following both the letter and the spirit of applicable accounting frameworks.
