Video instructions and help with filling out and completing Which Form 5495 Subsequent

Instructions and Help about Which Form 5495 Subsequent

I else here and today we'll be talking about subsequent events what is a subsequent event it's an event that occurs between a business's year-end date and the date that the financial statements are approved for issue what does that mean let's look at a timeline to see a fiscal year has a start date and a year end date the fiscal year lasts either one year or an operating cycle whichever is longer I made this fiscal year one year ending December 31st note that two-thirds of all companies have a year end date that's December 31st or close to it so it makes sense that you frequently see this date as a year end date for companies in textbooks between the start and end dates of the fiscal year is the reporting period all transactions that take place during this period must be reported in the financial statements that's the basis of accrual accounting which is required under IFRS and Aspie the year-end date is the cutoff point for recognizing transactions in that fiscal period the cutoff date is the point when one reporting period ends and the next one starts however after the year-end several weeks or months may pass before the Board of Directors approves the financial statements for issue during that time the business will do things like count and price inventory prepare adjusting entries ensure the accounting records are complete and have the financial statements audited this period between the cutoff date and the date when the financial statements are approved is called the subsequent events period during this period events that impact the company's business in a significant way may occur if material should these events be reflected in the financial statements even though they happened after the cutoff date the simple answer is yes if the events are material the stakeholders would need this information to help them predict the future and make decisions without this information the financial statements may be misleading however the answer is far more complicated than that it actually depends on what the event is and when it happened subsequent events are divided into two types adjusting events and non adjusting events let's cover each individually events in the subsequent event period our adjusting events if the actual condition existed before the cutoff date but in the subsequent period additional evidence comes to light that allows the company to improve the measurement of a previous estimate this includes information that would have been recorded in the accounts if it had been known at the cutoff date this means that with regards to measurement the preparer should use the best information available including information available during the subsequent events period as long as the condition existed during the reporting period that's critical let's clarify this concept with a few examples using the timeline assume there is a major technological change and you find out about it during the subsequent event period say February 12th this change will make your inventory worth far less because few customers will want to buy it anymore you found out about that change in the subsequent events period but what if the technological change actually occurred on November 21st note that the condition the technological change existed before the cutoff date even though the evidence of the change was found during the subsequent events period the measurement of inventory owned at year-end must be adjusted written down to the lower of cost or net realizable value this meets the requirements of an adjusting event which means that the adjusting entry must be recorded in the accounting system and the updated value of inventory must be reported on the financial statements even though the evidence was discovered during the subsequent events period let's do another example say that a customer declares bankruptcy on March 12th before the financial statements are approved for issue would this fact be reflected in the year-end financial statements by adjusting the accounts the answer is yes the financial statements would be adjusted for estimates such as the allowance for doubtful accounts information during the subsequent events period is used to determine the allowance including actual collections and defaults why because it's likely the customer was already in financial difficulty before the cutoff date we can adjust the measurement of a FDA this is also true for accounts such as sales returns and allowances which are often estimated at period end let's do one more example say that a lawsuit was settled during the subsequent events period on January 31st with your company on the hook for two million dollars of damages if the event that caused the lawsuit happened within the reporting period say in June of the reporting period then the settlement of the lawsuit must be reported in the year-end financial statements by recording a loss on the income statement and a liability on the balance sheet this is again because the condition existed before the year-end date the evidence in the form of the settlement was available in the subsequent events period and that affects the way you would measure the impact of the lawsuit on the company let's now turn our attention to non adjusting events these are events where the condition did not exist before the cutoff date an example would be an accident that destroys a factory on January 28th although the factory definitely existed before the cutoff date the destruction did not happen before the cutoff date the evidence is again available in the subsequent events period but this new evidence would never affect the amounts on the financial statements there would be no adjustment to the account balances why not let's look at an example using the timeline to see why there are no adjustments necessary say that on February 9th there is a severe decline in financial markets and suddenly the investment your company made in the shares of Apple Inc take a dive your investment a long-term asset