Making sure that material subsequent events are disclosed in financial statements has long been an audit requirement . The introduction of FASB’s SFAS No. 165 ” Subsequent Events ” shifts that responsibility to the internal preparers of financial statements and explicitly makes it the nonprofits not the auditors responsibility to have correctly treated subsequent events .
Subsequent events are events or transactions that occur after the Balance Sheet date but before the financial statements are issued . There are two types of subsequent events :
The first type consists of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet , including estimates inherent in the process of preparing financial statements . These types of subsequent events would be recorded in the financial statements . The classic examples are litigation or a claim that is settled after the balance sheet date but before the financial statements are issued or subsequent evidence about an accounts receivable or payable before the statements are issued . For example if an accounts receivable is on the books at the 12/31 balance sheet date for $50,000 and we become aware that the Company that owes us the money declared bankruptcy 60 days after year end which is before we have issued our statements that fact must be considered in determining what we would show as a receivable ( if anything ) on the 12/31 statements .
A Type 2 subsequent event would consist of events that did not exist at the date of the financial statements but arose after that date . For example we are issuing July 31 financial statements for our nonprofit in New Orleans and on August 29th we are hit by Hurricane Katrina . The financial loss from this event would not be recognized in the 7/31 financial statements but if material would need to be disclosed in the footnotes to our statement . In certain cases the effect of the Type 2 subsequent event could be so pervasive as to necessitate some proforma disclosures of the effect of the event in the footnotes to the statement .
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