FASB's New Standard No. 165 Clarifies

Issue of 'Subsequent Events'

The Financial Accounting Standards Board (FASB) has issued a new standard which provides clarity on the issue of “subsequent events” – when a company’s forward-looking statements to investors change due to unforeseen or follow-on events and that require a public disclosure or adjustments in the company’s financial statements.

The Statement of Financial Accounting Standard (SFAS) 165 Subsequent Events (“ASC 855-10” under the new FASB Codification effective July 1, 2009), provides additional guidance on the reporting of subsequent events.  SFAS 165 requires the disclosure of the date through which a company has evaluated these events.  It sets forth definitions for recognizable and non-recognizable events, as well as a definition of the date through which companies are required to evaluate them.  The effective date for SFAS 165 for interim and annual financial periods is June 15, 2009.

Impact on Public Companies - There are two descriptions for the date through which a company has to evaluate subsequent events, for public and non-public companies.  For a public company, the date is defined as the date that the financial statements are issued (with the SEC).  This is further clarified as when the financial statements are widely distributed to shareholders and other financial statement users for general use and reliance in a form and format that complies with generally accepted accounting principles (GAAP). 

Impact on Private Companies - For a non-public company, subsequent events must be evaluated through the date that the financial statements are available to be issued.  This is defined as when the financial statements are in a form and format that complies with GAAP and all necessary approvals for issuance have been obtained.  Proper approvals for issuance would consist of the internal procedures followed by the entity prior to the issuance of the financial statements.  An example would be that the CFO reviews and signs off on the final draft of the financials. 

Scope of the Guidance - The scope is general in nature, applying to all accounting and disclosure of subsequent events not addressed by other applicable GAAP.  The scope limitations in which the previous guidance takes precedence concerns specific instances of recognizable and non-recognizable subsequent events and how they should be reported. 

Generally, recognizable subsequent events are those that provide additional evidence about conditions that existed at the balance sheet date.  These should be reflected as adjustments in the financial statements.  Non-recognizable subsequent events are generally those which provide evidence about conditions that did not exist at the balance sheet date.  Non-recognizable subsequent events are usually disclosed in the notes to the financial statements. 

Some Examples - Some examples of GAAP guidance that apply to specific situations and limit the scope of SFAS 165 are FIN 48, SFAS 128, and SFAS 5.  FIN 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 requires that all recognition, de-recognition, or change in measurement of tax positions taken in a prior annual period be reported as a non-recognizable subsequent event.  These subsequent events would have otherwise been reported as recognizable under SFAS 165.

SFAS 128 Earnings per Share requires stock splits after the balance sheet date to be reported as a recognizable subsequent event, requiring retroactive adjustment of the financial statements.  Under SFAS 165, this would have been a non-recognizable subsequent event that only required disclosure in the notes.  SFAS 5 Accounting for Contingencies requires all gain contingencies to be non-recognizable subsequent events.  The guidance found in SFAS 165 would have caused some gain contingencies to be recognizable.

GAAP and IFRS Convergence - This new pronouncement benefits the convergence of GAAP and International Financial Reporting Standards (IFRS) by requiring the disclosure of the date through which entities evaluate subsequent events.  This disclosure is also required by International Accounting Standard 10 Events after the Balance Sheet Date.  Two significant differences between GAAP and IFRS continue to exist for subsequent event reporting, which are how refinancing of short term obligations and curing breaches in borrowing covenants are treated.

The added value of the new disclosure under SFAS 165 will be felt more for non-public companies, because there is no universal issuance date for financial statements.  It has always been assumed that public companies evaluated the subsequent events through the issuance date since their financial statements are filed with the SEC and provided to the entire general public.  For a private entity, financial statements may be audited and the independent auditor’s report is issued on a certain date, but it may be months before the financial statements are provided to some users. 

An example would be if the independent auditor’s report was issued March 15 and the company applies for a loan on June 30, providing the financial statements to a bank three and a half months after the audit report was issued.  It may not be obvious to the bank that subsequent events were evaluated only through March 15.  Fortunately, this guidance should be easy to implement and add little, if any, cost to the reporting process for both public and non-public entities.