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Impacts for ASC 855- Subsequent Events

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As per ASC (accounting standards codification) 855, subsequent events, entities need to consider the subsequent events or transactions to the balance sheet date to determine whether disclosures or adjustments of these transactions or events are required for the financial statements of the company.

There are two types of subsequent events:

Additional information
An event provides additional information about existing conditions as of the balance sheet date, including the estimation used to construct the financial statements for that period.

New events
An event issues new information about conditions that did not exist on the balance sheet date. 

If there are successive events that provide new information about circumstances that did not exist as of the balance sheet date and for which the information emerged before the financial statements were accessible to be issued, these events should not be recognized in the financial statements

ASC 855 deals with the recognized and non-recognized of subsequent events or transactions
Recognized subsequent events
It includes those events or transactions that provide additional evidence regarding conditions subsided at the balance sheet date, including the evaluates innate in preparing the entity financial statements. Management should use all the information related to the transactions or event that becomes available before the availability or issuance for issuance of the financial statements should be used by management to assess the conditions on which the estimates were based. The company’s financial statements should adjust the event or transaction in the financial statement for any changes in estimates based on the use of such evidence.

Non-recognized subsequent events
It includes those transactions or events that provide evidence concerning conditions that didn’t exist at the balance sheet date but arose after the date. These transactions or events should not result in an adjustment of the financial statements of the entities. However, some of these transactions or events may be of such a nature that disclosure of the same is required to keep the financial statements from being misleading.

In their 2019 year-end filings, some financial institutions disclosed the pandemic disease as a non-recognized subsequent event. However, many U.S. companies do not choose to disclose this transaction or event at all as the pandemic situation had not yet significantly impacted the U.S. As time passes, it becomes a difficult task of the company to conclude at each reporting period whether the pandemic situation is a recognized vis-à-vis non-recognized subsequent event or transaction, as well as the resulting potential financial statement impact.

Financial institutions should seriously assess their significant accounting estimates, especially those perceptive to uncertainty, and regulate whether a conceded subsequent event has occurred and what, if any, adjustments are considered mandatory to various accounts. For financial institutions, we should expect, at a minimum, those accounts to include the following:

  1. Allowance for loan and lease losses (ALLL)
    What impact would defects, charge-offs, and potential impairments have on the allowance calculation for loan and lease losses?
  1. Goodwill
    Has a triggering event led management to assume an interim goodwill impairment analysis is compulsory?
  1. Deferred taxes
    Has the assessment of the reliability of DTA (deferred tax assets) changed (i.e., is there a need for a valuation granting) given future income forecasting?

Management of the company should consider all transactions or events that occur after the balance sheet date and before the reporting date when concluding if there is sufficient evidence that the pandemic situation is a recognized subsequent event, and adjustments to financial statements are necessary.

The recognition of the subsequent events in financial statements can be quite subjective. However, given the amount of time required to revise financial statements at the last minute, it is valuable to strongly consider whether the circumstances of a subsequent event can be constructed as not requiring the revision of financial statements.

At AJSH, we assist our clients in bookkeeping, payroll, auditing, taxation, secretarial compliances and preparation of financial statements ensuring compliances with applicable accounting standards. If you have any questions or wish to know more about ASC 855, kindly contact us.


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