What it means
Accounts carry a year end date, but they take weeks or months to prepare, audit and approve. Anything that happens in that window is a subsequent event, and accounting standards require management to keep looking for them right up to the date the statements are authorised for issue.
The rules are broadly the same under international and US standards, although the labels differ. Events fall into two groups.
Adjusting events provide evidence about a condition that already existed at the year end, so the reported figures must be changed. Non adjusting events relate to conditions that arose only afterwards, so the figures stay as they are and a note is added instead.
A customer entering administration in February over invoices raised the previous November is an adjusting event, because that customer was already in difficulty at the year end. A warehouse fire in February is non adjusting, because the warehouse was standing and intact on 31 December.
The distinction matters commercially because adjusting events move reported profit, and reported profit drives bank covenants, bonus pools and valuations. Auditors probe this area hard, reading board minutes, post year end bank statements and cash received after the date.
Directors who fail to disclose a material non adjusting event risk a modified audit opinion. One special case overrides the split entirely.
If events after the year end show the business can no longer continue trading, the accounts cannot be prepared on a going concern basis at all, even though the evidence arrived after the balance sheet date.
In practice
Real-world examples.
Example
A software company signs a $12,000,000 funding round three weeks after its year end. The amount is not added to the balance sheet, but the directors disclose it in a note because a reader would otherwise misjudge the company's cash position.
Example
A construction firm settles a long running legal dispute in March for $850,000, having carried a $300,000 provision at 31 December. The settlement gives better evidence of an obligation that existed at the year end, so the provision is increased before the accounts are signed.
Example
A retailer's auditor reviews January and February bank statements and finds several December debtors have paid nothing. The finding does not change the debtors ledger by itself, but it prompts a larger bad debt allowance in the year end figures.
Think of it
“Subsequent events are things that happen after year-end-events before statements are issued.
Formula
Calculation
Adjusted figure = Reported figure +/- the effect of adjusting events only, with non adjusting events disclosed in a note rather than booked
Calderwood Instruments closes its year on 31 December with trade receivables of $4,000,000, an allowance for doubtful debts of $150,000 and profit before tax of $2,000,000. On 12 February, before the accounts are authorised on 15 March, a customer owing $600,000 for goods delivered in October enters administration with no prospect of a dividend to creditors.
The insolvency confirms a condition that existed at the year end, so it is an adjusting event. The allowance rises to $150,000 + $600,000 = $750,000, net receivables fall to $4,000,000 - $750,000 = $3,250,000, and profit before tax falls to $2,000,000 - $600,000 = $1,400,000. By contrast, a storm on 20 February that destroyed an uninsured $300,000 machine would be non adjusting, leaving profit at $2,000,000 with the loss described in a note.Case study
Seen in the real world.
This illustrative case describes a fictional company. Ashcombe Foods, an invented ready meals producer, had a strong year to 31 March, reporting profit before tax of $3,100,000 and comfortably clearing a bank covenant that required at least $2,500,000. Its largest customer, a supermarket group, went into administration on 2 June, eleven days before the board planned to approve the accounts.
The finance director argued the collapse was a June event and belonged in a note. The auditor disagreed, pointing to trade press reports and missed payments dating back to February, which showed the customer had already been in trouble at the year end. The $700,000 owed at 31 March was written off, taking profit to $2,400,000.
That put Ashcombe below its covenant, and its fictional management team had to approach the bank for a waiver before the accounts could be signed on a going concern basis. The bank granted it, but repriced the facility, and the episode became the reason Ashcombe introduced monthly credit reviews of its largest customers.
Watch out
Common mistakes.
- Treating the year end date as a hard cut off and ignoring information that arrives afterwards about conditions that already existed.
- Assuming a dramatic event automatically changes the numbers, when a fire, an acquisition or a share issue after the year end is usually disclosed rather than booked.
- Stopping the search for subsequent events when the audit fieldwork ends, rather than continuing to the date the accounts are authorised for issue.
Questions
People also ask.
What is the exact cut off date for subsequent events?
The date the financial statements are authorised for issue, which is normally the date the board formally approves them.
Are dividends declared after the year end shown as a liability?
No, a dividend declared after the balance sheet date is disclosed in a note and recognised in the following period.
Who is responsible for identifying subsequent events?
Management holds the responsibility, and the auditor performs procedures to test whether management has identified them properly.
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