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Subsequent Events

Subsequent Events Definition

The definition of a subsequent events are generally defined as events that occurs after the year end period but before the financial statements have been issued. A subsequent event falls underneath the disclosure principle and can be confusing to many accountants that encounter them. However, the codification provides guidance under ASC 855 subsequent events. This allows accountants to distinguish separate events and how to write subsequent events disclosure.

Subsequent Events Meaning

The problem arises for companies because subsequent event accounting could dramatically alter an investor’s opinion. It might be misleading to issue the statements as they are at period end. There are generally two types of subsequent events.

1)The first is a recognized event whereas the second is a non-recognized event. Recognized or type 1 subsequent events are typically events that occurred at the financial statement date. But that may have concluded after the year end. The financial statements must then be altered to include this event because it would be misleading not to list the event.

2) Type 2 or non-recognized events are then events that were not ongoing and occurred after the year end. These accounting subsequent events should not be disclosed within the current financials, but a subsequent event footnote disclosure should be made in the financials so that investors know that the event did occur.

Subsequent Events Examples

Type 1 event (recognized)

Honyota Inc., a car manufacturer, has had some ongoing litigation proceedings concerning the safety of its cars in the United States. Year end occurred a month ago but the financials have not been issued at this date, the litigations proceedings have finally concluded after months and Honyota will be required to pay $50 million in damages to various customers around the U.S. Honyota has accrued for this event since the litigation proceedings began and has gone ahead and paid the amount needed. Then recognize the event as a type 1 event because this has been ongoing for months. In addition, conclude the final amount paid.

Type 2 event (non-recognized)

After year end, Welder supply has lost one of its customers due to bankruptcy. Welder Supply has not issued it statements yet. Owen, an accountant, is trying to determine if he should recognize this event in the year end financials issued within a few days. Owen determines that the company does not need to recognize the change in accounts receivable because Welder Supply had no indication that its customer was in financial distress. Therefore, Owen should not recognize the event in the year end financials. Owen should however make a subsequent event note disclosure within them stating the event that did occur to prevent litigation from presenting misleading statements.

Note: An event of this type would include a small customer that suddenly declared bankruptcy. And the company had no idea before the year end date. This would cause the accounts receivable to change as the company expects not to collect.

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subsequent events

See Also:
Accounting Principles
Probable Losses
Contingent Liability
Accounting Changes

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Probable Losses

See Also:
Accounting Principles
Subsequent Events
Business Segments
Accounting Changes

Probable Losses Definition

Probable losses disclosure or the disclosure of loss contingencies is usually a concern for ongoing litigation proceedings or perhaps the discontinuance of an operation that will likely see a loss when it is sold. This form of probable accounting falls under the disclosure principle which states that a company must report a probable loss before it occurs if the amount can be readily estimated and it is likely the event will happen.

Probable Losses Example

Case Entertainment Co. has a business line that makes VHS systems. However, technology has reached a point where VHS systems have become obsolete to the new DVD disc players which is another line which Casa Entertainment owns. Looking to future Casa has decided that it would like to discontinue the VHS operations which have begun to show losses and expand the profitable DVD operations. Casa has had the plant and its operation equipment appraised as it gets ready to dispose of the line. After appraisal the company has shown that it will see a loss on the disposal of the assets of $125 million. The discontinuance of the operations net of taxes has shown that the company will post a further loss of $5 million. The income from continuing operations will be $400 million. Therefore the Casa should show the following on the bottom of it’s income statement.

Income from continuing operations……………………………$400 million
Discontinued Operations:
Loss from operation…………………………………………………… $(5 million)
Loss on Disposal………………………………………………………… $(125 million)
Net Income ………………………………………………………………….$270 million

Note: The following was most likely accrued for over the year or since the decision was made to discontinue the operation.

Probable Losses

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Full Disclosure Principle

See also:
Accounting Principles 5, 6, and 7
Accrual Based Accounting GAAP Rules
Generally Accepted Accounting Principles (GAAP)
What is GAAP?

Full Disclosure Principle Definition

As one of the principles in Generally Accepted Accounting Principles (GAAP), the Full Disclosure Principle definition requires that all situations, circumstances, and events that are relevant to financial statement users have to be disclosed. In other words, all of a company’s financial records and transactions have to be available for viewing.

Full Disclosure Principle Example

The Full Disclosure Principle in financial reporting exists so that individuals, from potential investors to executives, can be made aware of the financial situation in which a company exists. Without the Full Disclosure Principle of GAAP, it is likely that companies and organizations would withhold information that could possibly shed negative light on their financial standing. A prime full disclosure principle example of this occurred during the Enron scandal. In this case, particular individuals and investors argued that this principle was violated. It was also argued that Enron withheld and fabricated crucial information to investors that would have made a difference in how these individuals invested in the company.

Full Disclosure Principle Consequences

GAAP designed this principle to protect the safety businessmen and investors. As a result, there are consequences when companies fail to adhere to this rule. In addition to the consequence that investors can be mislead into making unintelligent decisions as a result of withholding financial information, the Securities and Exchange Commission (SEC) also maintains the right to penalize any misbehavior. A company can be fined millions of dollars for any discrepancies or misconduct involved with their financial statements or accounting information.

In one example of this, Worldcom was fined 750 million dollars for reporting inflated income to investors. However, Worldcom was responsible for over 2 billion dollars in financial damages. Therefore, while the financial penalty to Worldcom was substantial, the consequence to the investor was far greater. The penalty for Woldcom was 75 times greater than any previous penalty. Thus, the Worldcom example is showing that the full disclosure principle is intact to prevent nasty consequences from occurring to both companies and the individual investor.

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Full Disclosure, Full Disclosure Principle, Full Disclosure Principle Definition, Full Disclosure Principle Example

Full Disclosure, Full Disclosure Principle, Full Disclosure Principle Definition, Full Disclosure Principle Example

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Business Segment Reporting

See Also:
Accounting Principles 1, 2, & 3
Accounting Principles 5, 6, & 7
Probable Losses
Subsequent Events
Accounting Changes

Business Segment Definition

Define a business segment as an area of operation in which a company has an established separate product line or industry in which the company operates. For example, General Electric operates in several different industries and must disclose each one of its business segments. Companies often do this to diversify themselves away from the up and downs of certain industries. They will also do this to grow new product lines as their older ones become obsolete. For example, Microsoft replaced the Xbox 360 with the original Xbox as it became obsolete to newer gaming systems.

Business Segment Disclosure

Disclosure of business segments or areas of operation must be separate. It must also provide specific information to the public with regard to the Income Statement as well as the Balance Sheet. Specifically, the public is concerned with the information regarding the income and assets upon the balance sheet. This way potential investors (and management) can break down the amount of assets that are used in each business line or segment. Then they can determine which are most profitable. Get rid of outdated or unprofitable lines and dispose of them while growing segments which show potential.

Business Segment Reporting Example

For example, Leslie is the CFO for Casa Entertainment Co.. It’s a firm which specializes in home entertainment which has several segments. It has a television production plant as well as produces Video Home System (VHS), Digital Video Disc (DVD) products, and home speaker systems. Leslie is writing the financial statements. Per the disclosure principle for segment disclosure, she is required to separate all four of these divisions in regards to its separate income items as well as the assets listed on the balance sheet. She would then total all of the divisions into a large income statement and balance sheet. As a result, this provides a consolidated form which is easier to read. However, if an investor desired to read deeper into the numbers provided, then they would see which divisions/segments were most successful.

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business segment reporting

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Disclosure of Accounting Changes

See Also:
Accounting Principles
Probable Losses
Subsequent Events
Business Segments
How to Make Dramatic Changes in Business
Planning Your Exit Strategy
Percentage Completion Method
What Your Banker Wants You To Know

Accounting Changes

Accounting changes and error corrections are the switch from one principle of accounting to another – like with inventory and recognition of revenue. Error corrections come from an accounting change in estimates, such as accounting changes in depreciation method for assets or how it might record the company uncollectible accounts. For example, a company might decide that it needs to switch to straight line depreciation from an accelerated method. This makes it easier and in line for tax purposes. Companies might also decide that a better way of accounting for its inventory is to adopt the Last in First out (LIFO) method; instead of a First in First out (FIFO) method.

Disclosure of Accounting Changes

Regardless of the accounting change, when a company adopts a new method of accounting, GAAP requires companies to disclose these changes in the financial statements. Whenever the company is writing its notes to inform the (potential) investor, it must announce the specific change first. Then it is required to announce the impact that this change will have upon the company’s income and the balance sheet.

Accounting Changes Example

Jimbo Slice works for a toy manufacturer by the name of Awesome Toy Co. The economy has recently gone through a downturn and the company expects that it will not receive a larger amount of its accounts receivable because many of its customers are on the verge of declaring bankruptcy. Jimbo has decided that a change in accounting estimate is needed in regards to the estimation of bad debt expense. At the year end, Jimbo must list this change in estimate on the financial statement and its effect on income which is most likely a reduction.

Accounting changes can either be an obstacle or an advantage for your company. Download your free External Analysis whitepaper that guides you through overcoming obstacles and preparing how your company is going to react to external factors.

accounting changes, Disclosure of Accounting Changes

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