A January lawsuit can change December financial statements even though no lawsuit existed at year-end. Management must identify a subsequent event by separating the underlying condition from the later filing, discovery or settlement.
A subsequent event is an event or transaction occurring after the balance-sheet date but before the applicable financial-statement evaluation endpoint. United States generally accepted accounting principles (U.S. GAAP) distinguish later evidence about an existing condition from a condition that first arises afterward.
Financial statements are available to be issued when they are complete under U.S. GAAP and every approval necessary for issuance has been obtained. Necessary approvals depend on the entity's governance arrangements, potentially involving management, directors or significant shareholders.
- Financial statements are issued when distributed broadly to financial-statement users for general use and reliance in a form complying with U.S. GAAP.
- For a Securities and Exchange Commission (SEC) registrant, issuance generally occurs upon the earlier of qualifying broad distribution or filing.
- An earnings announcement alone does not establish issuance of a complete set of financial statements.
Common mistakes
- Using the filing date. Lerrin's January filing can support a $240,000 Year 1 liability when the underlying injury occurred in December.
- Expensing the entire required balance. Marlow needs $180,000 additional allowance; recording $240,000 again would overstate expense by $60,000.
- Repeating settlement expense. Corvane needs $150,000 additional litigation loss, while the later $250,000 payment clears the completed accrual.
Bottom line
- Subsequent-event evaluation runs from the balance-sheet date through issuance for SEC filers and qualifying conduit bond obligors, and through availability for other entities.
- Non-SEC entities disclose their evaluation date and whether it represents issuance or availability, as applicable.
- Later evidence about an existing condition affects year-end measurement under the applicable accounting model; a later filing date does not establish when the condition arose.
- An adjustment equals the supported required balance less the amount already recorded; evidence confirming an adequate estimate requires no additional charge.
Exam shortcut
Build three date columns before calculating: condition, discovery and applicable endpoint. Add availability and issuance separately when both appear in the facts. For each exposure, write required balance, recorded balance and difference. A choice matching the settlement or total expected loss may ignore an existing accrual. Tie every proposed entry to a source document and an affected statement line. Preserve a no-entry row when the evidence confirms the ledger.
The full lesson (about 6,172 words, 41 min read) adds 5 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- III.G1
Browse all free CPA FAR lessons or jump into free CPA FAR practice questions.