Subsequent events
Every subsequent events CPA exam FAR item is settled by one question, and it is not when did it happen. It is did the condition exist at the balance sheet date. If it did, the event gives you better evidence about something already on the balance sheet and the statements are adjusted. If it did not, the event is new and the statements are disclosed against, never adjusted. A fire after year end and a customer bankruptcy after year end fall on opposite sides of that line.
| Blueprint group | FAR-III-G |
| Area weight | 25–35% |
| Approx. share of the exam | 4.3% |
What the Blueprint asks for here
At this group the Blueprint expects a candidate to identify events occurring after the balance sheet date but before the financial statements are issued or available to be issued, to determine whether each requires adjustment of the statements or disclosure only, and to calculate the resulting adjustment.
This is our paraphrase, not the Blueprint’s wording. verbatim quote pending The authoritative representative-task text is in the AICPA Blueprints, which are published free — download them and read the group directly. We will not print a quotation we have not taken from the source document.
Subsequent events CPA exam FAR items: one question decides each one
Why this group is worth its weight
Subsequent events is a small group with an unusually clean decision rule, which makes it one of the few places in FAR where a candidate can go from nothing to reliable in under an hour. It also appears inside items that are nominally about other groups — receivables, contingencies, inventory — because a fact dated after year end is a cheap way to add a second decision to any fact pattern.
The two categories
A recognised subsequent event provides additional evidence about conditions that existed at the balance sheet date. The financial statements are adjusted for it, because the condition was already there and the new information only improves the estimate: litigation arising from a pre-year-end incident settled after year end, or the bankruptcy of a customer whose financial position was already deteriorating. A nonrecognised subsequent event arises from conditions that did not exist at the balance sheet date. The statements are not adjusted, and the event is disclosed if the statements would otherwise be misleading: a fire, a business combination, an issuance of stock after year end.
Adjusting means adjusting to the settled amount
The second half of a recognised event is arithmetic, and it is where the items are actually lost. If a liability was already accrued, the adjustment is the difference between the settled amount and the amount accrued, not the whole settlement. If a receivable was carried without an allowance against it, the adjustment is the full amount now known to be uncollectible. Reading which of those two situations you are in takes one sentence of the fact pattern and decides the whole answer.
The window, and who has to say where it ends
The evaluation period runs from the balance sheet date to the date the financial statements are issued for an entity that files with a regulator, and to the date they are available to be issued otherwise. An entity that is not a filer discloses the date through which subsequent events were evaluated and whether that is the issuance date or the available-to-be-issued date. The exam gives you both dates when the distinction matters and one date when it does not.
The standard this group is examined on is published by the standard setter: FASB Accounting Standards Codification. The Blueprint coordinates and weight ranges above come from the AICPA Blueprints. What is ours, and labelled as ours, is the reading, the practice item and the misconception tags.
A practice item
our own practice item Written by us against the public Blueprint. It is not an AICPA question and it is not taken from any review course.
A company’s fiscal year ended 31 December Year 1 and its financial statements were issued on 1 March Year 2. Three things happened in between:
• On 5 February a customer owing $90,000 at 31 December declared bankruptcy. The customer’s financial condition had been deteriorating throughout Year 1, and no allowance had been recorded against this account.
• On 20 February a fire destroyed an uninsured warehouse with a carrying amount of $400,000.
• On 20 January litigation arising from an accident that occurred in November Year 1 was settled for $150,000. The company had accrued $100,000 for it at 31 December.
By what amount should pretax income for Year 1 be reduced?
| A | $140,000 | correct |
| B | $540,000 | |
| C | $90,000 | |
| D | $240,000 |
The rule
A subsequent event that provides additional evidence about conditions existing at the balance sheet date is recognised: the financial statements are adjusted to reflect it. A subsequent event arising from conditions that did not exist at the balance sheet date is not recognised; it is disclosed if the statements would otherwise be misleading. Where an amount was already accrued, the adjustment is the difference between the settled amount and the amount accrued.
The arithmetic
The bankruptcy is recognised, because the customer’s condition was deteriorating during Year 1, and with no allowance against the account the adjustment is the full $90,000. The litigation is recognised, because the accident occurred in November Year 1, but $100,000 was already accrued so only the $50,000 increment is recorded. The fire is nonrecognised — the warehouse existed on 31 December — and is disclosed rather than adjusted. $90,000 + $50,000 = $140,000.
What we would ask you first
This is the part of the product that is hard to show without an account, so here it is directly: for each wrong option above, the opening question our tutor asks — before any explanation — targeting the specific mistake that option represents. Choosing B ($540,000) and choosing D ($240,000) are different errors and deserve different first questions.
If you chose B — fire_treated_as_recognised
“You adjusted for all three events. One of them arose from a condition that did not exist on 31 December — the warehouse was standing that day. What does that event require instead of adjustment?”
If you chose C — settlement_increment_missed
“You picked up the receivable and stopped. The litigation arose from an accident in November Year 1, which is before the balance sheet date. Does the January settlement tell you something about a condition that already existed?”
If you chose D — full_settlement_adjusted
“Both of your events are the right ones. But $100,000 of the settlement was already sitting in the Year 1 statements. What is left to record?”
To be precise about what happens next: the exchange is a rate limit, not a gate. Answering well gets you to the full worked explanation in three or four exchanges; answering badly still gets you there. And if you would rather skip it, asking three times gets you the walkthrough.
Common questions
What is the difference between a recognised and a nonrecognised subsequent event?
A recognised subsequent event provides additional evidence about conditions that existed at the balance sheet date, and the financial statements are adjusted for it. A nonrecognised subsequent event arises from conditions that did not exist at that date; the statements are not adjusted and the event is disclosed if omitting it would make them misleading.
How far after year end do you evaluate subsequent events?
To the date the financial statements are issued, for an entity that files with a securities regulator, and to the date they are available to be issued otherwise. An entity that is not a filer discloses the date through which it evaluated subsequent events and which of the two bases that date represents.
Misconception tags in this group
These are the labels our diagnosis attaches when a wrong answer matches a known pattern. They are worth reading even if you never use the product — naming your own error is most of the work.
fire_treated_as_recognised— Adjusting for an event that arose from conditions not existing at the balance sheet date.settlement_increment_missed— Failing to recognise an event whose underlying condition existed before year end.full_settlement_adjusted— Recording the whole settlement rather than the increment over the amount already accrued.evaluation_window_misread— Evaluating to the wrong end date — issued against available to be issued.