Subsequent events What are the two types of subsequent events identified in the accounting literature and what is required when each occurs? Provide an example of each type of subsequent event

Answer 1

The two types of subsequent events are Type I and Type II events. Type I subsequent events provide evidence about conditions that existed at the balance sheet date. The financial statements should be adjusted to reflect this type of subsequent event. Type II subsequent event indicates conditions that did not exist at the balance sheet date. The financial statements should not be adjusted for these events, but they should be considered for disclosure.
An example of a Type I subsequent event is a lawsuit that occurred before the balance sheet date that the client had accrued a loss for as of year-end, but which was settled in early January for a much larger sum of money. The client would have to accrue as of year-end the additional loss from the settlement of the lawsuit.
An example of a Type II subsequent event is where a natural disaster occurs after year-end in early January and destroys a major warehouse or significant asset of the client. If the loss is material enough then the client will need to disclose it in the notes to the financial statements but would not have to accrue it since the event does not reflect conditions existing as of year-end.