Subsequent Events
Lesson:
It takes considerable time and effort to prepare a firm's financials.
This means that there is a good deal of time (perhaps months) between when a period ends and when the financials are released.
What should a firm do when something happens in this time period?
Accountants call such happensings subsequent events. They occur after the financial statement's date, but before the issuance of financials (for public firms) / the availability of financials to be issued issuance (for private firms).
There are two types of subsequent events:
- Type 1 (recognized events) - The cause existed prior to period end. This requires recognition in the financial statement (restatement). Disclosure in footnotes is optional.
- Type 2 (non-recognized) - The cause did not exist prior to period end. This requires disclosure in footnotes.
Sierra inc., the profitable computer importer, closed its books on January 31, 2026 but is still working on finishing the financials. The accountants noticed one issue and weren't sure if it should be recognized or footnoted in the financial report.
This is what you've been told:
- Internal documents show that the firm suffered significant damage from a tornado on February 13, 2026.
What needs to be done?
Answer:
- Footnotes would be sufficient.