Identifying Subsequent Events That Require Disclosure
As you are performing due diligence in your audits, you take subsequent events into account. There are three Type II events that you should investigate to determine whether you need to disclose in the financial statements: the purchase or sale of a business segment, the sale of a large amount of stock or the issuance of bond, and events that create catastrophic losses for your client.
Business segments are components that operate within a company. For example, a ladies shoe manufacturer makes boots, pumps, sandals, and tennis shoes — these are all business segments. Perhaps after the balance sheet date the company decides to close the tennis shoe segment of the business. (Or, on the flip side, the company decides to buy a competing shoe manufacturer.) What action do you need to take? Keep these simple processes in mind:
Look at all documents related to the event, including the sale contract or proof of cash disbursement and/or loan paperwork for the purchase of the segment.
Make any third-party confirmations with the transaction’s other party.
Third-party confirmations are forms sent to outside individuals or companies to verify your client’s financial statement assertions.
If the event is material, you prepare a footnote disclosure to the financial statements. When judging materiality, ask yourself this question: Will including or omitting information about this event likely alter the decision of a reasonable user? (An audit report user may be a potential investor or lender or anyone else who has a financial interest in your client.) You use your professional judgment here, and when in doubt, you ask your audit team leader.
If you determine that the event is significant enough, you must include pro forma financial information in your audit report.
Here’s an example of a disclosure of this nature:
During this period, the Company sold all its interest in Segment A. Total proceeds from the sale were approximately $30 million, and we recognized a pretax gain on this sale of approximately $17 million, which affected the corporate operating segment and was included in other income as net in our consolidated statement of income.
Accounting Glossary
accounting equation
The equation Assets = Liabilities + Equity, which demonstrates the two-sided nature of accounting and is useful for explaining the concept of double-entry accounting (or double-entry bookkeeping).
Accounting Glossary
accounting period
The time period for which financial information is being tracked in a business, such as monthly, quarterly, or annually.
Accounting Glossary
accounts receivable
An account that records the amounts that customers owe to a business.
Accounting Glossary
adjusting entry
A correction made to a bookkeeping account that adjusts for accounting errors or other necessary changes at the end of the accounting period.
Accounting Glossary
cash flows
Used to describe the source or sources of cash or how cash is used.
Accounting Glossary
Chart of Accounts
A list of all the accounts used by a business, including what types of transactions go into each account.
Accounting Glossary
debit
An accounting entry that increases an asset or expense account, and decreases a liability or income account.
Accounting Glossary
dividends
A portion of a company’s profits paid by share of common stock on a quarterly or annual basis.
Accounting Glossary
FASB
Financial Accounting Standards Board. FASB is the highest-ranking authority in the private (non-government) sector of the U.S. for making pronouncements on GAAP and for keeping accounting standards up-to-date.
Accounting Glossary
Federal Unemployment Tax
In the U.S., the fund that used to be known simply as Unemployment. Employers contribute to the fund, and states also collect taxes to fill their unemployment fund reserves. (The acronym FUTA means Federal Unemployment Tax Act.)
Accounting Glossary
fidelity bonds
A type of insurance — typically carried by employers for their employees — that helps guard against theft and reduce the risk of loss.
Accounting Glossary
FIFO
First-in, first-out. A method for costs of goods sold in which a business charges out product costs to cost of goods sold expense in the chronological order in which the goods were acquired.
Accounting Glossary
fungible
Describes a product that is interchangeable and virtually indistinguishable from another product.
Accounting Glossary
General Ledger
A summary of all of a business’s accounts and transactions.
Accounting Glossary
IASB
International Accounting Standards Board. The IASB (based in London) is the main authoritative accounting standards setter outside the U.S.
Accounting Glossary
Journals
The location in which bookkeepers keep records (in chronological order) of daily company transactions.
Accounting Glossary
LIFO
Last-in, first-out. A method for costs of goods sold that selects the last item you purchased first, and then works backward until you have the total cost for the total number of units sold during the period.
Accounting Glossary
LLP
Limited liability partnership. A legal structure that state laws offer to qualified professionals in which all the partners have limited liability.
Accounting Glossary
PC
Professional corporation. A legal structure that state laws offer to qualified professionals who otherwise would have to operate as an unlimited partnership liability.
Accounting Glossary
petty cash
A cash account that businesses keep on hand for unexpected expenses.
Accounting Glossary
revenue
Monies that are collected in the process of selling a company’s goods and services.
Accounting Glossary
salvage value
The amount that an asset is worth after it has been fully depreciated.
Accounting Glossary
statement of cash flows
A financial statement that summarizes a business’s cash inflows and outflows during an accounting period.
Accounting Glossary
transactions
Economic exchanges between a business or other entity and the parties with which the entity interacts and makes deals.
Accounting Glossary
worker’s compensation insurance
A type of insurance carried by employers that covers its employees in case they are injured on the job.
