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Because ASC 855 does not provide any bright line tests for determining which subsequent events require disclosure, the decision regarding when to disclose a subsequent event is based on specific facts and circumstances and requires judgment. Generally, there are two criteria that are both required for a subsequent event to need disclosure.
  • The event should have a determinable significant effect on the balance sheet at the time of occurrence or on the future operations of the reporting entity.
  • Without disclosure of it, the financial statements would be misleading.

Consider the following examples:
  • A regular quarterly cash dividend declared after the balance sheet date at the same rate per share as dividends declared during the period being reported on may not be worthy of disclosure. However, if a reporting entity that had paid dividends regularly for several years decided to eliminate cash dividends after the balance sheet date, disclosure may be warranted.
  • Cancellation of a sales contract after the balance sheet date may not need to be disclosed, unless it is reasonably certain that the financial effect will be significant. For example, if the reporting entity reasonably anticipates replacement of the customer or additional sales to present customers, it may not need to disclose the cancellation. However, disclosure may be appropriate if reduced income appeared reasonably certain, a major factory were to be closed, or other significant changes in operations were expected to result.

28.6.1 Disclosure requirements for nonrecognized subsequent events

If a reporting entity determines that disclosure is necessary, ASC 855-10-50-2 indicates that it should include:
  • the nature of the event, and
  • an estimate of the impact on the financial statements or an assertion that an estimate cannot be made.

The guidance within ASC 855 does not require a reporting entity to present all required subsequent events disclosures in one footnote. Rather, management may determine where to include the disclosures within the financial statements.

28.6.2 Pro forma financial data

As discussed in ASC 855-10-50-3, depending on the nature and magnitude of the nonrecognized subsequent event, a reporting entity may include pro forma financial data in the footnotes. Alternatively, in certain more significant situations, the reporting entity may include a pro forma column on the historical balance sheet that reflects the transaction as if it occurred on the balance sheet date. For example, a reporting entity that is undergoing an IPO will often include pro forma financial data on the balance sheet to reflect the conversion of preferred stock to common stock.

28.6.3 Examples of nonrecognized subsequent events

Because nonrecognized subsequent events generally do not relate to conditions existing at the balance sheet date, they are not recognized in the financial statements. However, depending on the nature of the event and whether the financial statements would be misleading without disclosure of it, a reporting entity should consider footnote disclosure. Figure FSP 28-3 includes some examples of nonrecognized subsequent events and indicates where in this guide those examples are discussed.
Figure FSP 28-3
Examples of nonrecognized subsequent events
Description
Reference
Business combinations
Exercise of a call option on debt after the balance sheet date
Debt extinguishments after the balance sheet date
Changes in the classification of long-lived assets
Changes in the conditions of contingently redeemable instruments after the balance sheet date
Acceptance by an employee of special termination benefits
Subsequent events impacting construction-type or production-type revenue contracts
Changes in ownership interest after the balance sheet date
Sales of securities at a loss after the balance sheet date
Liquidation of a reporting entity becomes imminent after the balance sheet date
Bankruptcy filing after the balance sheet date
Litigation settlements resulting in a gain
Changes in segments
Reporting entities should also consider whether there are other subsequent events that warrant disclosure such as:
  • Certain changes in capital structure after the balance sheet date (see FSP 28.5.2 for a discussion of changes in capital structure that are recognized subsequent events)
  • Settlements of litigation related to events giving rise to a claim that took place after the balance sheet date
  • Changes in the fair value of assets or liabilities (financial or nonfinancial) or foreign exchange rates after the balance sheet date
  • Issuance of new notes, bonds, or other indebtedness after the balance sheet date
  • Damage from fire, flood, or other casualty after the balance sheet date
  • Adoption of welfare, pension, compensation, or stock option plans after the balance sheet date

Considerations related to disclosure of the items in Figure 28-3 are further discussed in the following sections.

28.6.3.1 Business combinations

ASC 805, Business Combinations, requires a reporting entity to disclose information that enables financial statement users to evaluate the nature and financial effect of a business combination. The guidance applies to business combinations that occur either in the current reporting period or through the subsequent events measurement period (see FSP 28.3). However, as discussed in ASC 805-10-50-4, disclosure is not required for the specific aspects (e.g., purchase price allocation) of a business combination in which the accounting is incomplete at the time the financial statements are issued or are available to be issued.

ASC 805-10-50-4

If the acquisition date of a business combination is after the reporting date but before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25), the acquirer shall disclose the information required by paragraph 805-10-50-2 unless the initial accounting for the business combination is incomplete at the time the financial statements are issued or are available to be issued. In that situation, the acquirer shall describe which disclosures could not be made and the reason why they could not be made.

See FSP 17.4 for further discussion of disclosures in a business combination.

28.6.3.2 Exercise of a call option on debt after the balance sheet date

The announcement and execution of a call option by the borrower after the balance sheet date, with no violation of covenants at the balance sheet date, does not impact the debt’s classification at the balance sheet date. For further discussion, see FSP 12.3.1. However, the reporting entity may need to disclose the exercise of the call option after the balance sheet date as a nonrecognized subsequent event.

28.6.3.3 Debt extinguishments after the balance sheet date

ASC 470-50-55-9 indicates that announcement of intent to call debt is not recognized as a debt extinguishment. An extinguishment should not be recognized prior to its occurrence. Therefore, a reporting entity should not recognize a debt extinguishment occurring during the subsequent events measurement period (see FSP 28.3). Any gain or loss associated with the debt extinguishment should be recorded in the period when the debt is considered extinguished (see FG 3.7). However, a reporting entity should consider disclosing the likely effect of a planned extinguishment or an extinguishment that occurred during the subsequent events measurement period.

28.6.3.4 Changes in the classification of long-lived assets

ASC 360-10-45-13 does not permit a reporting entity to consider new information resulting from a change in circumstances that occurred after the balance sheet date in evaluating whether long-lived assets held for use should be classified as held for sale at the balance sheet date.
However, if the criteria for classification of the assets as held for sale are met after the balance sheet date during the subsequent events measurement period (see FSP 28.3), ASC 360-10-45-13 indicates that the reporting entity should provide the disclosures in ASC 205-20-50-1(a):
  • a description of the facts and circumstances leading to the expected disposal
  • the expected manner and timing of the disposal

Additionally, the reporting entity should consider disclosing the carrying amount(s) of the major classes of assets and liabilities included as part of a disposal group.

28.6.3.5 Changes related to contingently redeemable instruments

A reporting entity may receive information that a contingently redeemable instrument has become unconditionally redeemable after the balance sheet date, but before the issuance date or the date the financial statements are available for issuance.
We believe this matter should be treated the same as any other subsequent event. If the information received indicates the instrument was unconditionally redeemable on the balance sheet date, the reporting entity should reclassify the instrument as a liability in the financial statements.
However, if the information received indicates that the event that caused the instrument to become unconditionally redeemable occurred after the balance sheet date, the reporting entity should not adjust the financial statements. In this circumstance, the reporting entity should consider appropriate disclosures.

28.6.3.6 Acceptance by an employee of special termination benefits

Special termination benefits arise when the employer offers, for a short period of time, to provide certain additional benefits to employees electing voluntary termination, including early retirement. There may be situations when a special termination benefits offer extends beyond the balance sheet date. Consistent with ASC 712-10-25-1, the termination liability should only include amounts for irrevocable acceptances at the balance sheet date. Reporting entities should consider disclosing the impact of irrevocable acceptances after the balance sheet date.

28.6.3.7 Sub events impacting construction-type revenue contracts

For construction-type or production-type revenue contracts, reporting entities should consider disclosing events occurring after the date of the financial statements that are outside the normal exposure and risk aspects of a contract.

28.6.3.8 Changes in ownership interest after the balance sheet date

As discussed in FSP 10.4, a consolidated reporting entity may report one or more equity method investees or subsidiaries on a lag of up to three months. A question may arise related to the accounting or disclosure of a change of ownership interest in the equity method investee or subsidiary during the lag period. The change of ownership interest may occur as a result of:
  • Transactions in which control is maintained, gained, or lost
  • Transactions involving equity investees, or
  • A complete disposition of all holdings by a parent.

When the reporting period of the subsidiary financial statements precede the reporting period of the parent, generally, the transaction should be recorded in the period of occurrence in the consolidated financial statements, irrespective of any differences between the dates of the financial statements of the equity investee or subsidiary and the consolidated financial statements. See CG 4.5.7 for further discussion.

28.6.3.9 Sales of debt securities at a loss

When a reporting entity sells a debt security at a loss during the subsequent events measurement period (see FSP 28.3), it should assess (1) whether an other-than-temporary impairment may have existed at the balance sheet date and (2) whether its assertions as to whether or not it had the “intent to sell” the security were accurate as of the balance sheet date. Generally, the sale should not be reflected in the value at the balance sheet date; however, a reporting entity should consider disclosing the subsequent sale as a nonrecognized subsequent event.
New guidance
ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, includes a new model for determining whether debt securities are impaired. Financial statement preparers and other users of this publication are encouraged to consider the implications of ASU 2016-13 on accounting for subsequent events.

28.6.3.10 Sales of equity measured at fair value through income

If an equity security measured at fair value with changes in fair value recorded in income is sold at a loss during the subsequent events measurement period (see FSP 28.3), the loss is not a recognized subsequent event.

28.6.3.11 Sales of securities using the measurement alternative

When a reporting entity sells an equity security measured under ASC 321’s measurement alternative (see LI 2.3.2) at a loss during the subsequent events measurement period (see FSP 28.3), it should assess whether an indicator of impairment may have existed at the balance sheet date. Generally, the sale should not be reflected in the value at the balance sheet date; however, a reporting entity should consider disclosing the subsequent sale as a nonrecognized subsequent event.

28.6.3.12 Liquidation becomes imminent

In accordance with ASC 205-30, Presentation of Financial Statements – Liquidation Basis of Accounting, the liquidation basis of accounting should be applied prospectively from the day that liquidation becomes imminent.

ASC 205-30-25-2

Liquidation is imminent when either of the following occurs:

  1. A plan for liquidation has been approved by the person or persons with the authority to make such a plan effective, and the likelihood is remote that any of the following will occur:
    1. Execution of the plan will be blocked by other parties (for example, those with shareholder rights)
    2. The entity will return from liquidation.
  2. A plan for liquidation is imposed by other forces (for example, involuntary bankruptcy), and the likelihood is remote that the entity will return from liquidation.

If this date occurs after the balance sheet date, the reporting entity should continue presenting its financial statements on a going concern basis. However, the reporting entity should consider providing additional disclosures.

28.6.3.13 Bankruptcy filing after the balance sheet date

If a reporting entity files for bankruptcy after the balance sheet date, but prior to the issuance date or the date the financial statements are available for issuance, it should treat the filing as a nonrecognized subsequent event. In that case, the financial statements would not reflect any accounting under ASC 852-10, Reorganizations, nor would they include the debtor-in-possession label (see BLG 3.2). The reporting entity should include appropriate disclosures, including pro forma disclosures, to keep the financial statements from being misleading.
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