Post-Balance-Sheet Event

A post-balance-sheet event is a significant event or transaction that takes place after the balance sheet date but before the financial statements are issued or available to be issued. US GAAP calls these subsequent events and covers them in ASC 855; IFRS calls them events after the reporting period and covers them in IAS 10. Because annual statements are usually finalized weeks or months after the year end, accountants must decide whether information that comes to light in that gap changes the figures or simply needs to be explained. In US reporting and audit practice, each one is known as a subsequent event.

There are two types. Events that provide more evidence about conditions that already existed at the balance sheet date require the amounts in the statements to be adjusted. Events that reflect conditions arising after that date do not change the amounts but, if material, must be disclosed in the notes.

Under US GAAP these are called recognized (Type I) and nonrecognized (Type II) subsequent events; under IFRS they are adjusting and non-adjusting events.

• Adjusting examples: a customer that owed money at year end goes bankrupt shortly afterwards, showing that its receivable was already impaired; a lawsuit is settled for an amount different from the provision recorded; inventory is sold below cost after year end, indicating its net realizable value at the reporting date; or fraud or errors are discovered that show the statements were wrong.
• Non-adjusting examples: a fire or flood destroys a factory after year end; the company makes a major acquisition, issues shares or takes on large new debt; exchange rates or market prices change sharply; or the company announces a restructuring.

Dividends declared after the reporting date are non-adjusting under IAS 10, because no obligation existed at year end. If events after the reporting date show that the company is no longer a going concern, IAS 10 and ASC 205-40 require the statements to be prepared on that basis, or substantial doubt to be disclosed, even though the cause arose later, as discussed in the entry on the going concern assumption.

A distributor's year ends on 31 December, and its statements are issued on 10 March. At year end it has an allowance for doubtful accounts covering 2 percent of a $500,000 receivable from a major customer. On 20 January the customer files for bankruptcy, and the administrators say unsecured creditors are likely to recover 30 cents on the dollar. Because the customer's financial problems existed at year end, this is an adjusting event. The distributor increases its allowance on this account from $10,000 to $350,000, recording an extra $340,000 of bad debt expense in the year just ended.

On 15 February, a storm destroys one of its warehouses, with uninsured losses of about $1,200,000. The warehouse was undamaged at year end, so this is a non-adjusting event. The distributor does not change its year-end figures but discloses the nature of the event and an estimate of its financial effect in the notes.

Under US GAAP, companies that file with the Securities and Exchange Commission (SEC) evaluate subsequent events through the date the statements are issued and do not disclose that date; other entities evaluate through the date the statements are available to be issued and must disclose it. Under IFRS, the company must disclose the date its statements were authorized for issue and who authorized them. Auditors perform specific procedures, such as reading later board minutes, reviewing interim figures and asking lawyers about litigation, to identify subsequent events up to the date of the auditor's report. Disclosures of non-adjusting events must describe the event and estimate its financial effect, or state that an estimate cannot be made, as required by the general approach to contingent losses and the full disclosure principle.

Errors include adjusting for events that arose after year end, such as a post-year-end market crash, or failing to adjust for evidence about year-end conditions, such as a settlement confirming a contingent liability. Companies also sometimes overlook events in the period after the auditor's report but before issue, which can require the statements to be revised.