November 24, 2003 -- While this question has not been around since dinosaurs ruled the earth, it sometimes seems like it. What are subsequent events? What are the criteria as to the proper treatment?  

The key is the nature of the event. Obviously, it must be something discovered after the end of the fiscal year. Otherwise, there would be nothing “subsequent” about the event. If it is the discovery of a condition that existed before year’s end, an adjustment to the basic financial statements is a real possibility. Examples are contingencies that are likely to result in the company or organization making cash payments to other parties, e.g., patent infringements or torts that are not fully insured. Management’s estimate of the damages is permitted. All of the facts need not be ascertainable, but the probable minimum loss must be recorded as a liability.

But what if the underlying event did not occur until after year’s end? In that case, disclosure in the notes to financial statements is required.

What transactions or events fall into this category? Following is a list of the more common items:

• New debt

• Refinanced debt

• Treasury stock purchased

• Major commitments to purchase inventory, fixed assets or to lease assets

• Purchase of a business or new product line

• Loss on receivables due to a condition arising after the balance sheet date

• (However, a customer’s bankruptcy filing after the balance sheet date is likely the result of a condition existing before.)

Occasionally, an event may be so significant that the best way to convey the effect to the users of the financial statements is to provide, as a supplement to the historical financial statements, pro forma statements showing the effects as if the event occurred before year’s end.

For more information, please contact Mike Byrnes or via phone at 215-940-7801.