Subsequent events: two types
| Type | Definition | Treatment |
|---|---|---|
| Recognized (Type I) | Condition existed at the balance sheet date | Adjust the financial statements |
| Non-recognized (Type II) | Condition arose after the balance sheet date | Disclose only, no adjustment |
EXAMPLE: A lawsuit filed before year-end that settles after year-end for a determinable amount is a Type I event — adjust the financials. A factory that burns down after year-end is a Type II event — disclose, don't adjust, since the condition (the fire) didn't exist at year-end.
Evaluation period
Management evaluates subsequent events through the date the financial statements are issued (public companies) or available to be issued (many private companies) — not just through the audit report date.
Going concern
Management must evaluate, for each annual and interim period, whether there is substantial doubt about the entity's ability to continue as a going concern for one year from the financial statement issuance date. If substantial doubt exists and isn't alleviated by management's plans, that must be disclosed; if doubt remains after considering plans, the disclosure must say so explicitly.
EXAM TIP: Going-concern doubt does not, by itself, change the basis of accounting (financials stay at historical cost, not liquidation basis) unless liquidation is actually imminent.