A controller closes the books on December 31. Two weeks later, the largest customer files Chapter 7. Three weeks later, a fire destroys the main warehouse. The auditor signs the report on March 15. Which of these go in the December 31 financial statements, and which do not?
ASC 855 governs the period between the balance sheet date and the date the financial statements are issued. Things keep happening at the entity, the auditor learns about them, and the question is whether the December 31 financial statements should reflect what was learned. The answer turns on a single question: did the condition exist at the balance sheet date?
HIGH-FREQUENCY: Every subsequent event is either Type I or Type II. The classification drives the accounting.
Type I. Recognized subsequent events. The underlying condition existed at the balance sheet date. The post-year-end information confirms or refines an amount that was already there. You adjust the financial statements.
The mental model: at year-end, you booked an estimate. After year-end, you got better information about that same estimate. You update the books.
Common mistakes
- Treating a post-year-end fire as Type I. The factory was intact at December 31. The condition (fire) arose after year-end. Type II. Disclose the loss; do not write down the factory in the year-end balance sheet. Trap: writing down PP&E by the uninsured portion in the prior year.
- Treating a customer bankruptcy as Type II. The customer's financial distress existed at year-end even if the legal filing came after. Type I. Adjust the allowance. Trap: leaving the receivable at full carrying value because the bankruptcy date is after December 31.
- Treating a new lawsuit filed after year-end as Type I. The litigation is the condition. If filed after year-end, the condition did not exist at the balance sheet date. Type II. Disclose only. Trap: accruing $2M because the underlying product was sold in the prior year.
Bottom line
- ASC 855 governs subsequent events: things that happen between the balance sheet date and the issuance date.
- Type I (recognized): condition existed at the balance sheet date. Adjust the financial statements.
- Type II (nonrecognized): condition arose after the balance sheet date. Disclose only, do not adjust.
- SEC filers evaluate through the issuance date. Non-SEC filers evaluate through the available-to-be-issued date and must disclose that date.
Exam shortcut
When a question gives you a specific date for a post-year-end event, ask one question only: did the condition exist at the balance sheet date? Customer bankruptcy = financial distress existed = Type I, adjust. Fire, flood, debt issuance, business combination = arose after = Type II, disclose. The "Already There" test: condition existed at year-end → Type I → adjust. Condition arose after → Type II → disclose.
The full lesson (about 2,743 words, 18 min read) adds 2 worked examples, all 7 common mistakes, a self-check, free in the app.
Learning objectives
- III.G1
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