Definition of Events After Balance Sheet Date
For instance, between a company's balance sheet date of December 31, 2021 and the time that the financial statements are distributed on January 31, 2022, it is possible a significant event occurs or information becomes known that is important to the users of the December 31 financial statements. The following are two types of events/information that require the accountant's consideration:
- There is an event that provides additional information about conditions that existed on December 31
- There is an event that does not change the December 31 amounts, but needs to be disclosed to the users of the December 31 financial statements
The above items are often referred to as subsequent events or post balance sheet events.
Example of Events After Balance Sheet Date
To illustrate the first situation, assume a customer owes a corporation $200,000 on December 31 and the corporation believed that the customer's receivable would be collected in full. (Therefore, the corporation did not have any allowance for doubtful accounts.) On January 28 the corporation learns that the customer filed for bankruptcy and none of the customer's balance of $200,000 will be collected. If the customer's financial condition on December 31 was already in bankruptcy condition, the corporation must adjust its December 31 balance sheet by reducing its net receivables by $200,000 and reporting bad debts expense of $200,000 on its income statement for the year 2021.
An example of the second situation is a loss arising from a catastrophe occurring on January 16, 2022. The amounts reported as of December 31, 2021 will not be adjusted since those amounts were correct as of December 31. However, the readers of the December 31, 2021 financial statements should be informed through a disclosure that a significant loss had occurred to the company's financial position since December 31.