Definition
ASC 855 splits subsequent events into two types and sets the evaluation period: through the date the statements are issued for SEC filers, and through the date they are available to be issued for other entities. Recognized events give more evidence about conditions that existed at the balance sheet date and are booked in the statements. Nonrecognized events arise from conditions that came after the date and are only disclosed if they are significant enough to keep the statements from misleading.
Why it matters in an audit or review
AU-C 560 has the auditor perform procedures through the date of the report, such as reading minutes, inquiring of management and reviewing later bank and legal activity. Missing a significant event can mean an unmodified opinion on misleading statements.
Example
Illustrative: a customer owing $90,000 files for bankruptcy on February 10 after a December 31 year-end. The receivable was likely impaired at year-end, so the allowance is adjusted. A fire at a warehouse in February is disclosed, not booked.
Common mistakes
- Stopping procedures at the end of fieldwork instead of the report date.
- Confusing the two types and adjusting for a pure post-year-end event.
- Not reading board minutes for the gap period.
FAQ
What is the difference between a Type 1 and a Type 2 subsequent event?
Type 1 reflects conditions existing at the balance sheet date and requires adjustment. Type 2 reflects conditions arising afterward and is generally disclosed only.
Sources
- FASB ASC 855-10-25 and 855-10-50, Subsequent Events
- AICPA, AU-C Section 560, Subsequent Events and Subsequently Discovered Facts
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error