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As discussed in ASC 855-10-25-1, recognized subsequent events are reflected in the financial results of the reporting entity. The reporting entity should also evaluate the events for additional disclosures based on the applicable standards governing the events.
Figure FSP 28-2 includes some examples of subsequent events that reporting entities should evaluate to determine whether they need to be recognized in the financial statements and indicates where in this guide those examples are discussed.
Figure FSP 28-2
Examples of recognized subsequent events
Description
Reference
Settlements of litigation related to events giving rise to a claim that took place before the balance sheet date
Change in capital structure (stock dividends, splits, or reverse splits)
Changes in lower of cost or net realizable value considerations related to inventory valuation
Certain other postemployment benefit costs
Covenant violations occurring or anticipated after the balance sheet date
Refinancing short-term borrowings
The remainder of this section discusses considerations in recognizing certain types of subsequent events.

28.5.1 Litigation settlements

The settlement of litigation can result in loss contingencies or gain contingencies.

28.5.1.1 Loss contingencies

A settlement of litigation resulting in a loss related to events that took place prior to the balance sheet date is typically considered a recognized subsequent event.

28.5.1.2 Gain contingencies

As discussed in ASC 855-10-15-5(c), a settlement resulting from a claim that existed at the balance sheet date that results in a gain and the related receivable are typically not reflected as a recognized subsequent event. Rather, gain contingencies are recognized in the period the asset is realized or realizable. Therefore, the reporting entity would not adjust the financial statements for a gain contingency related to litigation, although disclosure may be appropriate.

28.5.2 Change in capital structure

SAB Topic 4.C (codified in ASC 505-10-S99-4) provides guidance on the recognition of a change in capital structure. A change in a registrant’s capital structure due to a stock dividend, stock split, or reverse split occurring after the date of the latest reported balance sheet, but before the issuance of the financial statements or the effective date of the registration statement, whichever is later, should be given retroactive effect on the balance sheet. There are two approaches to achieve the retroactive effect: retrospective adjustment or recording the change in the period consummated. Historically, the SEC has not objected to utilizing either approach, except in an IPO, when the reporting entity should give retrospective effect in the balance sheet.
If a reporting entity retroactively reflects a change in capital structure, it should disclose the retroactive treatment, explain the change made, and state the date that the change became effective in a footnote. If a reporting entity records the change in capital structure in the period consummated, it should consider disclosing the change.
Similarly, ASC 260-10-55-12 requires retrospective presentation and disclosure of such changes in capital structure in the calculation of earnings per share. See FSP 7.6.1 for further discussion.

28.5.3 Lower of cost or net realizable value of inventory

ASC 330-10-35 establishes the guidance related to losses from the subsequent measurement of inventory. A loss may be required, for example, due to damage, physical deterioration, obsolescence, changes in price levels, or other causes. Also, ASC 855-10-55-1(b), as amended by ASU 2016-13, provides the following guidance.

ASC 855-10-55-1(b)

Subsequent events affecting the realization of assets, such as inventories, or the settlement of estimated liabilities, should be recognized in the financial statements when those events represent the culmination of conditions that existed over a relatively long period of time.

Sales of inventory or other events after the balance sheet date may provide additional evidence about conditions that existed at the balance sheet date that could impact a reporting entity’s valuation of inventory at the lower of cost or net realizable value (NRV). Determining the net realizable value at the balance sheet date is a matter of judgment. A reporting entity should consider all data available, including future demand and subsequent changes in product prices that may provide additional information about the valuation at the balance sheet date. For example, increases in selling prices during the reporting entity’s subsequent events measurement period (see FSP 28.3) would likely demonstrate that a decline in selling prices at the balance sheet date was temporary, which may indicate that a lesser or no write-down is required.

28.5.4 Other postemployment benefit costs

ASC 712 prescribes the accounting for the estimated cost of other postemployment benefits provided by an employer to former or inactive employees after employment but before retirement. These benefits include salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits (including workers’ compensation), job training and counseling, and the continuation of benefits such as health care benefits and life insurance coverage. They are generally viewed as part of the compensation provided to employees in exchange for service.
If a post-balance sheet date event confirms that payment of a benefit covered by ASC 712 was probable at the balance sheet date, a reporting entity should record a reasonable estimate of the probable amount at the balance sheet date. The estimate should take into account all information available through the reporting entity’s subsequent events measurement period (see FSP 28.3), to the extent it reflects facts that existed at the balance sheet date.
Conversely, if a post-balance sheet date event confirms, and all other evidence similarly supports, that the payment of benefits was not probable at the balance sheet date, a reporting entity should not record an accrual at the balance sheet date.
Example FSP 28-1 illustrates when an event occurs after the balance sheet that does not relate to conditions that existed as of the balance sheet date.
EXAMPLE FSP 28-1
Unrecognized subsequent event
FSP Corp, a calendar year-end SEC filer, has a severance plan under which benefits do not accumulate or vest. The plan provides for a payment of $5,000 to each employee who is involuntarily terminated without cause. At December 31, 20X1, FSP Corp determined that it was not probable that severance benefits under the plan would be paid.
On January 13, 20X2, one of FSP Corp's facilities was destroyed by an earthquake.
On February 5, 20X2, FSP Corp’s board of directors decided that the facility would not be rebuilt and management decided to terminate all employees that worked at the site. The company intends to file its 20X1 Form 10-K on February 15, 20X2.
Should FSP Corp record the liability to pay severance benefits in its 20X1 financial statements?
Analysis
No. The facts indicate that the payment of severance benefits was not probable at the balance sheet date (December 31, 20X1). Accordingly, the appropriate period in which to record the liability is the first quarter of 20X2. If the amount of severance benefits (and the impact of the earthquake damage) is material, FSP Corp should disclose the matter in the 20X1 financial statements.
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