Nothing has gripped us quite like the Coronavirus (COVID-19). It has begun to affect all facets of life, from travel bans, school closures, meetings, and even financial reporting. Generally Accepted Accounting Principles (GAAP) has an Accounting Standard Codification (ASC) that addresses unforeseen circumstances occurring after the balance sheet date but before the audit is issued. This is Topic 855.
For the private middle market industry, consideration should be given to ASC 855 Subsequent Events for financial reporting disclosures until the date the financial statements are available to be issued.
What is ASC 855?
ASC 855 is GAAP guidance on subsequent events. There are two types of subsequent events, recognized and nonrecognized subsequent events.
A recognized subsequent event occurs when additional evidence of a condition that existed before the balance sheet date occurs after the balance sheet date but before the date the financial statements are available to be issued.
Example: If litigation occurred before the balance sheet date, the Company should consider the result of judgment or settlement that occurred subsequent to the balance sheet date, but before the date the financial statements were available to be issued. This could create an adjusting accrual journal entry at the balance sheet date.
A nonrecognized subsequent event occurs when evidence about conditions that did not exist at the date of the balance sheet but occurred after the balance sheet date but before the date the financial statements are available to be issued.
Example: Let’s take the example from the recognized subsequent event and change the litigation to occurring after the balance sheet date. The Company would not have to consider adjusting the accrual at the balance sheet date. However, the Company should consider whether a subsequent event footnote disclosure should be included.
Should Coronavirus be included as a footnote in financial reporting?
The unprecedented nature of COVID-19 and its swiftness will, or has, affected many companies. The timing of the pandemic occurred for most companies after the calendar year, and for most, before the date the financial statements are available to be issued. Therefore, companies that are performing audits or reviews with calendar year ends, shouldn’t make adjusting journal entries for the event at the calendar year end. However, companies should consider the COVID-19’s effect, and when it’s considered a material impact, include as a subsequent event footnote.
Due to the uncertainty and reach of COVID-19, a Company may have difficulty determining its total impact to their business and the necessary financial reporting. At KROST, we translate the complex and simplify it for your business solutions. Have questions about financial reporting? We’re here to help. Contact us today.
About the Author
Keith Hamasaki, CPA, Principal
Assurance & Advisory, Manufacturing & Distribution, Not-for-Profit
With nearly two decades of consulting experience, Keith specializes in Audit and Business Advisory services to emerging and middle market companies in areas such as process improvement, internal controls, technical GAAP accounting implementation, and procedural review assessments. As someone who has consistently overcome challenges, Keith has developed an expertise in a variety of industries including Real Estate and construction, Financial Services, Technology, digital media, Restaurants, Hospitality, Not-for-Profit organizations, and employee benefit plans. » Full Bio