FAR · Select transactions · 13 practice questions
Recognized vs nonrecognized subsequent events (ASC 855)
Recognize events that provide evidence about conditions that existed at the balance sheet date; disclose but do not adjust for new conditions after year-end. Below: one scenario with four versions, one fact changed each time, plus free practice questions.
Try one first
Hint
For each event, ask whether it provides evidence about conditions that existed at the balance sheet date (adjusting) or whether the causal condition arose after the balance sheet date (nonadjusting, disclose if material).
Answer D. The customer's bankruptcy provides additional evidence about conditions that existed at December 31, Year 1 (an adjusting subsequent event), so Able should recognize the receivable loss in the Year 1 financial statements. The fire resulted from a condition that arose after the balance sheet date (a nonadjusting subsequent event); because the loss is material it should be disclosed in the Year 1 financial statements but not recognized against Year 1 inventory.
Why not A: This is tempting because both events were known before issuance, but recognition depends on whether an event provides evidence of conditions existing at the balance sheet date. The bankruptcy is adjusting and requires recognition; the fire arose from a post‑year‑end condition and, though material, should be disclosed rather than recognized in Year 1.
Why not B: This may tempt candidates who think post‑date events require no reporting, but it is incorrect. While the receivable loss is adjusting and should be recognized, the fire is a material nonadjusting event and should be disclosed in the Year 1 financial statements even though it is not recognized.
Why not C: This overgeneralizes timing. Some events that occur after the balance sheet date provide evidence of conditions that existed at that date and therefore require adjustment. The bankruptcy is such an event and the receivable must be adjusted (recognized), not merely disclosed.
Same scenario, one fact changes
Base case
North Co., a private company, has a December 31, 20X5 year-end. Its 20X5 financial statements will be available to be issued on March 20, 20X6. Before that date: (1) On February 12, 20X6, North settles litigation arising from an employee injury that occurred on October 18, 20X5. At December 31, 20X5, North had accrued $600,000; the settlement is $950,000. (2) On March 1, 20X6, a major customer files for bankruptcy. The related receivable was outstanding at December 31, 20X5, was more than 120 days past due at year-end, and the customer had recurring cash-flow problems throughout Q4 20X5. (3) On March 8, 20X6, a fire destroys North’s warehouse. Assume materiality and ignore insurance.
Answer: Adjust the 20X5 financial statements for the lawsuit (to $950,000) and for the receivable (recognize the credit loss). Disclose the warehouse fire; do not adjust 20X5 amounts for it.
The settlement and the bankruptcy provide additional evidence about conditions that existed at December 31, 20X5, so they are recognized subsequent events (ASC 855). The fire resulted from a post-year-end condition and is nonrecognized; disclose the nature and financial effect if material.
Before you open each one, predict the answer.
Change 1Customer’s financial problems arose only after year-end due to a January 20X6 disaster; the customer was financially sound at 12/31/20X5.
Answer: Adjust the lawsuit accrual to $950,000. Do not adjust the 12/31/20X5 receivable for the bankruptcy; disclose it as a nonrecognized subsequent event. Disclose the fire; do not adjust.
The lawsuit relates to a Year 1 condition and is recognized. The bankruptcy resulted from a new post-year-end condition, so it is nonrecognized (disclosure only if material). The fire also arose after year-end and is disclosed only.
Change 2The injury leading to the lawsuit occurred in January 20X6, not in Year 1; the settlement still occurs on February 12, 20X6.
Answer: Do not adjust 20X5 for the lawsuit; disclose it if material. Adjust the receivable for the bankruptcy (preexisting deterioration at 12/31/20X5). Disclose the fire; do not adjust.
A lawsuit from a post-year-end incident is a new condition and is nonrecognized. The customer’s bankruptcy confirms Year 1 collectibility issues, so it is recognized. The fire is a nonrecognized subsequent event.
Change 3The warehouse destruction occurs on March 28, 20X6 (after the 3/20/20X6 available-to-be-issued date).
Answer: Adjust the lawsuit to $950,000 and recognize the receivable loss. Do not recognize or disclose the March 28 plant destruction in the 20X5 financial statements.
Events after the available-to-be-issued cutoff are outside the evaluation period for a private company. Recognized events still adjust Year 1; the late-March disaster is neither recognized nor disclosed for 20X5.
Key points
- Bankruptcy is recognized only when it confirms preexisting collectibility problems at year-end; if caused by post-year-end events, disclose only.
- A settlement after year-end of a lawsuit from a Year 1 incident updates the Year 1 accrual to the settlement amount.
- Fires, floods, and tornadoes that arise after year-end are nonrecognized; disclose the nature and financial effect, or state that an estimate cannot be made, if material.
- Private companies evaluate subsequent events through the date the financial statements are available to be issued; items after that cutoff are outside the evaluation period.
- Post-year-end market declines in equity prices are nonrecognized subsequent events; disclose if material.
How the exam traps you
- Basing the decision only on whether the event occurred before issuance. Ask whether the event provides evidence about a condition that existed at the balance sheet date.
- Recognizing fire or flood losses in Year 1 simply because they are material. Treat post-year-end disasters as nonrecognized events; disclose if material, do not adjust Year 1 amounts.
- Assuming any bankruptcy filed after year-end is disclosure-only. If the customer’s deterioration existed at year-end, adjust the Year 1 receivable or allowance.
- Ignoring the available-to-be-issued cutoff for private companies. Events after the cutoff are outside the evaluation window and are neither recognized nor disclosed for that period.
Now the same facts as questions
Each question changes one fact from the one before. Watch which change flips the answer.
Question 1
Answer A. Correct. The settlement and bankruptcy evidence Year 1 conditions and are recognized; the fire is a nonrecognized subsequent event and is disclosed if material.
Why not B: Incorrect. The customer bankruptcy confirms Year 1 collectibility problems and should be recognized, not merely disclosed.
Why not C: Incorrect. The fire arose after year-end and should not adjust 20X5 amounts.
Why not D: Incorrect. Events (1) and (2) are recognized because they relate to Year 1 conditions; disclosure alone is insufficient.
Question 2
Answer B. Correct. The lawsuit relates to a Year 1 incident and is recognized; the bankruptcy and fire are nonrecognized and disclosed if material.
Why not A: Incorrect. The bankruptcy stems from a new post-year-end condition and should not adjust Year 1.
Why not C: Incorrect. The lawsuit settlement refines a Year 1 liability and must be recognized.
Why not D: Incorrect. The bankruptcy is nonrecognized here; the lawsuit is the adjusting item.
Question 3
Answer B. Correct. The bankruptcy confirms Year 1 collectibility problems (recognized). The lawsuit and fire are nonrecognized and disclosed if material.
Why not A: Incorrect. The lawsuit arose from a post-year-end incident and is nonrecognized.
Why not C: Incorrect. The bankruptcy requires recognition because it evidences a Year 1 condition.
Why not D: Incorrect. The lawsuit does not relate back to Year 1; it should not be recognized.
Question 4
Answer A. Correct. Events after the available-to-be-issued cutoff are outside the evaluation period; the late-March event is neither recognized nor disclosed for 20X5.
Why not B: Incorrect. The bankruptcy still evidences a Year 1 condition and must be recognized.
Why not C: Incorrect. The lawsuit and bankruptcy require adjustment; the late-March event is outside the window, so disclosure is not required for 20X5.
Why not D: Incorrect. The warehouse loss occurred after the cutoff and should not be recognized in 20X5.
Question 2
Hint
Focus on whether the January event created a new condition or provided more evidence about a condition that already existed at December 31, Year 1.
Answer C. This is a recognized subsequent event because the January bankruptcy provides additional evidence about a condition that existed at the December 31, Year 1 balance sheet date (Customer Z's financial difficulty). Under U.S. GAAP, R Co. should adjust the Year 1 receivable and related bad-debt amount to reflect the decline in collectibility since the later event confirms a preexisting condition.
Why not A: This reflects the incorrect shortcut of treating all post-year-end events as next-period items. The timing of the formal filing does not matter when the event provides evidence of a preexisting condition that affects Year 1 amounts.
Why not B: Tempting because many postperiod events are disclosure-only, but when a later event confirms a condition that existed at the balance sheet date, the financial statements must be adjusted rather than merely disclosed.
Why not D: An invoice-specific default would be strong evidence, but it is not required. Other evidence (such as a subsequent bankruptcy that confirms earlier financial difficulties) can justify a Year 1 adjustment.
Question 3
Hint
Ask whether the later event provides evidence about a condition that already existed at the balance sheet date, or whether it created a new condition after year-end.
Answer A. This is a recognized subsequent event because the bankruptcy provides additional evidence about conditions that existed at the balance sheet date. Because the customer's financial distress and defaults existed before December 31 and the loss is material and estimable, Atlas should adjust Year 1 receivables (write down or increase the allowance) and disclose the nature and effect as appropriate.
Why not B: Tempting because the filing occurred after year-end, but the key is whether the event gives evidence about a condition existing at the balance sheet date. Here, pre-year-end financial trouble indicates the receivable was impaired at December 31, so adjustment (not mere disclosure) is required.
Why not C: This mistakes the timing of the filing for the timing of the loss. Subsequent-event treatment depends on whether the later event confirms an existing condition; because the collectibility problem existed at year-end, the loss belongs in Year 1.
Why not D: This treats the formal filing as the only relevant fact. In reality, the bankruptcy filing is evidence of the customer's prior financial condition; ignoring it would understate Year 1 bad-debt expense or allowance requirements.
Question 4
Hint
Analyze each event separately by asking whether it gives more evidence about a condition that already existed at year-end or instead reflects a new condition arising afterward.
Answer A. The customer's bankruptcy is an adjusting subsequent event because it provides additional evidence about a condition that already existed at December 31, Year 1 (the customer's deteriorating financial condition and collectibility concerns). The flood was a condition that arose after year-end and is a nonadjusting subsequent event; because the loss is material it should be disclosed but not used to adjust Year 1 amounts.
Why not B: Tempting because both events occurred before issuance, but only events that provide evidence about conditions existing at the balance sheet date require adjustment. The flood loss arose from a new condition after year-end and therefore is disclosure-only.
Why not C: This applies an overly broad post-year-end disclosure rule. The customer's bankruptcy supplies additional evidence about a preexisting condition at year-end and therefore requires adjustment of Year 1 amounts.
Why not D: Incorrect cutoff reasoning. Subsequent events are evaluated through the issuance date; the bankruptcy affects recognition and the material flood loss requires disclosure even though it occurred after year-end.
Question 5
Hint
Decide whether the January event gives more evidence about a condition that already existed on December 31, or whether it created a new condition after year-end.
Answer D. This is a recognized subsequent event because the bankruptcy provides evidence about a condition that already existed at the December 31, 20X5 balance-sheet date. Under GAAP, events that confirm conditions existing at the balance-sheet date require adjustment to measurements in the year‑end financial statements, so Morn should adjust the 20X5 receivable to the amount expected to be collected.
Why not A: Incorrect because GAAP requires adjustment when a later event confirms a preexisting condition, not only when the confirming event itself occurred before year‑end. The customer's financial problems existed at December 31 and the later bankruptcy confirms that condition.
Why not B: Tempting because the bankruptcy filing date is after year‑end, but the key is whether the post‑year event confirms a condition that existed at year‑end. Here the customer's financial deterioration existed on December 31, so the event requires adjustment rather than disclosure only.
Why not C: This reflects the common error of treating all post‑year events as Year 2 items. If the subsequent event provides evidence about conditions existing at the balance‑sheet date, the year‑end measurement is adjusted even though the formal filing occurred after year‑end.
Question 6
Hint
Ask whether the February event created a new condition or mainly gave better evidence about a condition that already existed at December 31.
Answer C. Under subsequent-events guidance, events that provide additional evidence about conditions that existed at the balance-sheet date require adjustment to the financial statements. The customer's bankruptcy filing after year-end confirmed that collectibility problems existed at December 31, Year 1, so Marlow should adjust the Year 1 receivable or allowance.
Why not A: This distractor relies on using the event date alone to determine accounting. ASC 855 focuses on whether the event sheds light on conditions at the balance-sheet date; a post-year-end bankruptcy that confirms prior collectibility issues affects Year 1 measurement.
Why not B: This is tempting because the bankruptcy occurred after year-end, but the key question is whether the event provides evidence about conditions existing at the balance-sheet date. Because the customer's distress existed at December 31, the event is confirmatory and requires recognition rather than disclosure-only.
Why not D: The mere existence of the receivable at year-end does not remove it from subsequent-events analysis. Later information can change how an asset should be measured as of the balance-sheet date; here, the bankruptcy is relevant to year-end collectibility.
Question 7
Hint
Ask whether the later event gives new evidence about a condition that already existed at the balance-sheet date.
Answer B. This is a nonrecognized (Type II) subsequent event because the flood resulted from conditions that arose after the balance-sheet date. Under U.S. GAAP, events that arise after the reporting date and do not provide evidence about conditions existing at the balance-sheet date do not require adjustment of reported amounts but should be disclosed if material. The key test is whether the event gives evidence about conditions that existed at December 31; here it does not.
Why not A: Tempting because the settlement occurred after year-end, but the settlement provides additional evidence about a liability that existed at the balance-sheet date (Type I), so Year 1 amounts should generally be adjusted.
Why not C: Although the bankruptcy filing occurred after year-end, it gives evidence about the customer's financial condition at the balance-sheet date and affects collectibility of receivables, which generally requires adjustment of Year 1 amounts.
Why not D: This is a discovery of a preexisting measurement error for Year 1 inventory; such errors affecting the reporting period should be corrected by adjusting the Year 1 amounts rather than only disclosed.
Question 8
Hint
Separate the two events by asking: which one gives more evidence about a condition that already existed at year-end, and through what date does a private company evaluate subsequent events?
Answer C. The March 12 settlement provides additional evidence about a condition that existed at December 31, Year 1, so the Year 1 litigation accrual should be adjusted to the settlement amount. For a private company, ASC 855 requires evaluation of subsequent events only through the date the financial statements are available to be issued, which here is March 15. Because the tornado occurred on March 18, it falls outside that evaluation period and is not reflected in the Year 1 financial statements under ASC 855.
Why not A: This distractor reflects the common mistake of treating all post-year-end events as nonrecognized. The litigation settlement is different because it gives better evidence about a Year 1 condition already existing at the balance sheet date. The tornado treatment is correct here, but failing to adjust the litigation accrual makes the option wrong.
Why not B: This is tempting because candidates often default to the actual issuance date for all entities. Under ASC 855, however, a private company evaluates subsequent events only through the date the statements are available to be issued, not the later physical distribution date. So the litigation adjustment is correct, but the tornado is outside the evaluation period.
Why not D: This choice combines two realistic errors: using the actual issuance date instead of the available-to-be-issued date for a private company, and treating the litigation settlement as merely a nonrecognized post-year-end event. The settlement should adjust the Year 1 accrual, and the tornado is not evaluated under ASC 855 because it occurred after March 15.
Question 9
Hint
Consider each event separately: does it provide evidence about conditions that existed at December 31, Year 1 (adjusting/recognized) or did it arise from new conditions after year-end (nonadjusting/nonrecognized)?
Answer D. Under GAAP, subsequent events that provide additional evidence about conditions existing at the balance-sheet date are recognized (adjusting) and require changes to the financial statements; events that arise from conditions after the balance-sheet date are nonrecognized (nonadjusting) and should be disclosed if material. The Feb 12 settlement confirmed the liability that existed at December 31, Year 1, so Benton should increase the accrual to $900,000. The Feb 25 tornado resulted from conditions after year-end and, being material, should be disclosed but not recorded in Year 1.
Why not A: This choice focuses on the settlement date rather than whether the event evidences a preexisting condition. Because the lawsuit related to a Year 1 injury and the settlement confirms that obligation, the accrual should be increased to the settlement amount.
Why not B: This is tempting because both events occurred before the statements were available to be issued, but it fails to apply the recognized vs nonrecognized rule: only events that provide evidence of conditions existing at the balance-sheet date are recorded. The tornado arose from new conditions after year-end and should be disclosed, not recorded.
Why not C: This reflects the common error of treating all subsequent events as disclosure-only. The Feb 12 settlement provided additional evidence about a liability that existed at year-end, so the accrual must be adjusted to reflect the settlement amount rather than merely disclosed.
Common questions
When is a customer bankruptcy after year-end recognized in Year 1?
When it provides evidence of collectibility problems that existed at the balance sheet date. If the customer’s deterioration arose only after year-end, disclose but do not adjust.
How do I treat a lawsuit settled after year-end that arose from a Year 1 incident?
Adjust the Year 1 financial statements to the settlement amount because the settlement refines a liability that existed at year-end.
What must be disclosed for nonrecognized subsequent events?
Disclose the nature of the event and an estimate of the financial effect, or state that an estimate cannot be made, when the event is material.
Practice FAR like the real exam
The free ChatCPA simulator: real exam layout, timed testlets, starting with a question on this topic. No account needed to start.
Open the free simulator →Questions from the ChatCPA bank of 17,658 CPA exam questions, each with a written reason for every wrong answer. ChatCPA is built by Nicholas Miller, CPA (Oregon #14907). How these pages are made. Spot an error? Tell us.