Under ASC 855, Subsequent Events, there are two types of subsequent events:

Events or transactions related to the estimate for credit losses that occur after the balance sheet date but before the financial statements are issued (or available to be issued) can be either recognized or nonrecognized subsequent events. This depends on the nature of the information received after the balance sheet date. While certain amendments were made to ASC 855 as a result of the CECL standard, credit losses were not scoped out of the subsequent events guidance. We believe that the amendments to the subsequent events guidance introduced by ASU 2016-13 were made to reflect that the accounting for credit losses has changed from an incurred loss model to an expected loss model, which requires forecasting future events.

The subsequent occurrence or non-occurrence of a forecasted event may not require a change in estimated credit losses at the balance sheet date when the possibility was already properly considered in the balance sheet estimate. As with any forecast, the estimate for expected credit losses will include imprecision and will not be 100% accurate.

During the 2018 AICPA Conference on Current SEC and PCAOB Developments, the SEC staff discussed a consultation relating to the application of the subsequent events guidance in the context of the CECL guidance. The consultation included three examples of information received after the balance sheet date but before the financial statements are issued (or available to be issued). In each case, the information received was significantly different than management’s expectations.

In the first fact pattern, the registrant received a servicer report after the balance sheet date that showed delinquencies and prepayments that occurred before the balance sheet date. In the second fact pattern, the registrant received an appraisal report estimating the fair value of loan collateral as of the balance sheet date. In both cases, the SEC staff concluded the registrant must consider the information in its estimate of expected credit losses. The SEC staff noted an important consideration in their conclusion was that it was loan-specific information and related to facts that existed at the balance sheet date.

The third fact pattern related to the US government’s announcement of estimated unemployment rates for a period including the balance sheet date. The SEC staff stated that it would not object to the registrant either considering or not considering such rates in its estimate of expected credit losses.

The SEC staff shared their view that in connection with the forward-looking estimate of expected credit losses, there can be recognized and nonrecognized subsequent events. They also articulated some principles on how information received after the balance sheet date but before the financial statements are issued (or are available to be issued) could be evaluated.

In applying the subsequent events guidance, the SEC staff noted that an entity should first consider if the information received indicates a weakness or deficiency in the credit losses estimation process. If so, the information received subsequent to the balance sheet date but before the financial statements are issued (or available to be issued) should be considered in the credit losses estimate.

Finally, the SEC staff reminded entities that nonrecognized subsequent events are required to be disclosed.

We believe an entity should develop an accounting policy with respect to the treatment of subsequent events when information is received relating to forecasting assumptions and it has not completed its estimation process, and consistently apply this accounting policy. In addition, when the information identifies a weakness or deficiency in the entity’s estimation process, the entity should make the appropriate enhancements to its process and internal controls.

It depends. Often, the default of a borrower subsequent to the balance sheet date is a culmination of conditions that built up over a period of time, which may include the period before the balance sheet date. An entity would need to consider whether the borrower’s default provides additional evidence about conditions that existed and were “known or knowable” at the balance sheet date.

The estimate for expected credit losses may already have included consideration that this event was likely to occur. For example, an entity may have assigned a high probability of default when determining the estimate of expected credit losses on a loan that is individually assessed. In this case, the actual default serves to confirm an event that was already considered in the forward-looking estimate based on information available at the balance sheet date. If the loan was collectively assessed in a pool with other similar loans, the estimation of credit losses may have contemplated some portion of the loans in the pool defaulting, so the subsequent default may be an event that provides specific identification of which of the loans in the pool defaulted. If the entity’s estimation process included forecasts of defaults in its forecasted credit losses, it may not be necessary to revisit the balance sheet estimated credit losses.

No. If the default of the borrower is clearly and directly attributable to an event that occurred subsequent to the balance sheet date (e.g., the plant burning down), this would be considered a nonrecognized subsequent event as it does not provide additional evidence about conditions that existed at the balance sheet date. An entity should not adjust its year-end credit losses estimate, but should assess the disclosures required for nonrecognized subsequent events.