Subsequent events

Typical coverage of US GAAP Subsequent events period Type I subsequent events (events that arise prior to the balance sheet date) Type II subsequent events (events that arise after the balance sheet date)

Executive summary The accounting for subsequent events under IFRS and US GAAP is largely similar. Under IFRS, the subsequent event period runs through the authorization date of the financial statements. Under US GAAP, the subsequent event period for SEC filers runs through the date that the financial statements are issued, and for non-SEC filers, it runs through the date the financial statements are available to be issued.

Primary pronouncements US GAAP ASC 855, Subsequent Events (as amended by ASU No. 2010-09, Subsequent Events) IFRS IAS 10, Events After the Reporting Period

Progress on convergence No further convergence is planned at this time.

Subsequent events period US GAAP IFRS The subsequent events period begins immediately following the balance sheet date. Similar

Subsequent events period Date through which subsequent events are evaluated US GAAP Subsequent events are evaluated through the date that the financial statements are issued (for SEC filers) or are available to be issued (in the case of non-SEC filers). For SEC filers, the issuance date is also the date that the financial statements are filed with the SEC. SEC filers are not required to disclose the date the financial statements were issued, however, such disclosure is required for a non-public company. IFRS Subsequent events are evaluated through the date that the financial statements are “authorized for issue.” The authorization date is prior to the filing date. Depending on an entity’s corporate governance structure and statutory requirements, authorization may come from management or a board of directors. Requires disclosure of the date the financial statements were authorized for issuance.

Date through which subsequent events are evaluated example The Hilo Company (Hilo), a public company in the United States, is considering adopting IFRS in 2010 or 2011. The Board met on February 20, 2010, and voted to accept the final financial statements and authorized management to file the financial statements with the SEC on February 28, 2010. On February 23, 2010, a decision was reached in a lengthy lawsuit against Hilo, whereby the amount of the judgment against Hilo exceeded the recorded accrued liability by $5.0 million. Because the conditions on which the judgment was rendered existed at December 31, 2009, Hilo decided that this was a Type I subsequent event and recorded an additional expense and accrual as of December 31, 2009, to reflect the judgment. Thus, the financial statements in the annual report to shareholders, as filed with the SEC, reflected this subsequent event. Under IFRS, would Hilo record the subsequent event described above similarly to US GAAP?

Date through which subsequent events are evaluated example Example 1 solution: No. Subsequent events under US GAAP are evaluated through the date that the financial statements are issued (filed for SEC purposes) or are available to be issued, which in this example is February 28, 2010. Under IFRS, subsequent events are only evaluated through the date of authorization of the financial statements, which in this example is February 20, 2010. In that regard, since there might not have been a review of the subsequent events after February 20, 2010, the additional expense accrual may not have been recorded under IFRS. Thus, there could have been a difference of $5.0 million (pretax) in income due to the difference between US GAAP and IFRS.

Disclosure of date to which subsequent events are evaluated example Assume the same facts as in example 1 above. Hilo is drafting its subsequent events footnote. Through which date should it disclose that subsequent events procedures have been performed under US GAAP and IFRS? a. The date the Board voted to accept the financial statements and authorized management to file (February 20, 2010). b. The date of the decision on the lawsuit (February 23, 2010). c. The date that Hilo’s management filed the financial statements with the SEC (February 28, 2010). d. None of the above.  

Disclosure of date to which subsequent events are evaluated example Example 2 solution: US GAAP: d. Public companies (those filing with the SEC) are not required to disclose the date through which subsequent events have been performed. IFRS: a. IFRS requires disclosure of the date that the financial statements were authorized for issuance.

Type I subsequent events Events that arise prior to the balance sheet date US GAAP IFRS An event that occurs during the subsequent events period that provides additional evidence about conditions existing at the balance sheet date usually results in an adjustment to the financial statements. Similar

Type I subsequent events Events that arise prior to the balance sheet date US GAAP A change in judgment regarding tax uncertainties is recorded in the period the change in judgment occurs. IFRS If a change in judgment regarding tax uncertainties occurs during the subsequent events period, year-end balances are adjusted.

Type I subsequent events Changes in judgment for uncertain tax positions Example 3 XYZ Company has evaluated a tax position as of February 28, 2010, the company’s reporting date. Management has concluded that under both US GAAP and IFRS, the position should not result in the recognition of a liability. In early March (before the authorization or issuance of the financial statements), the taxing authority prevailed in a highly similar court case. Thus, it is highly likely that the company will not sustain its tax position. XYZ Company now believes, based upon this new fact, that it will ultimately need to remit taxes of $100,000 to the taxing authority. How should this subsequent event be reflected in the February 28, 2010, financial statements under both US GAAP and IFRS?

Type I subsequent events example Change in judgments for uncertain tax positions Example 3 solution: US GAAP: ASC 855-10-15-3 through 5 scopes out other authoritative literature that contains specific guidance on recognition, measurement and disclosure of subsequent events and, thus, the tax uncertainties are not adjusted. Consequently, no adjustment will be made to the financial statements. If the amount is material, disclosure may be required. IFRS: Tax uncertainties are not treated any differently than other contingencies in this regard. Thus, XYZ Company will record an additional tax expense and tax liability of $100,000 in the 2010 financial statements.

Type II subsequent events Events that arise after the balance sheet date US GAAP IFRS An event that occurs during the subsequent period that relates to conditions that arose subsequent to the balance sheet date, usually does not give rise to an adjustment to the financial statements but disclosure may be necessary to keep the financial statements from being misleading. Similar

Type II subsequent events Events that arise after the balance sheet date US GAAP An auditor must evaluate if there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period, not to exceed one year from the date of the financial statements. If substantial doubt exists, disclosure is required. Short-term loans are classified as long term if the entity intends to refinance the loan on a long-term basis and prior to issuing the financial statements the entity can demonstrate an ability to refinance the loan. IFRS Management must assess its ability to operate as a going concern and the evaluation period is not limited to one year from the date of the financial statements. If the entity cannot continue to operate as a going concern, the financial statements must be adjusted accordingly. Short-term loans refinanced after the balance sheet date may not be reclassified to long-term liabilities.

Type II subsequent events Events that arise after the balance sheet date US GAAP If a debt covenant violation on long-term debt is cured before the financial statements are issued, the debt can maintain its long- term classification at the balance sheet date. Events that occur between the original issue date of the financial statements and the reissue date may require disclosure to prevent the statements from being misleading. Financial statements are adjusted for stock dividends and stock splits declared after the balance sheet date. IFRS A debt covenant violation on long-term debt must be cured prior to year-end for the debt to maintain its long-term classification at the balance sheet date. IFRS does not specifically address reissuance of financial statements. Financial statements are not adjusted for stock dividends and stock splits declared after the balance sheet date.

Type II subsequent events example Stock dividends after the balance sheet date On January 15, 2010, the Kona Company’s (Kona) Board of Directors declared a 10% stock dividend to all shareholders of record on January 31, 2010. The fair value of the stock as of January 15, 2010, was $40 per share. As of January 31, 2010, Kona had not finalized the completion of the 2009 financial statements and as of December 31, 2009, shareholders’ equity was as follows: Common sock, 1,000,000 shares, par value $10 per share $ 10,000,000 Additional paid-in capital 20,000,000 Retained earnings 50,000,000 $80,000,000 What is the effect of the stock dividend on Kona’s 2009 financial statements under US GAAP and IFRS?

Type II subsequent events example Example 4 solution: US GAAP: The 10% stock dividend would be reflected as of December 31, 2009, and capital stock would have been increased by $1,000,000. (10% x 1,000,000 shares = 100,000 shares x $40 fair value = $4,000,000) The journal entry to record the stock dividend as of December 31, 2009, would be as follows: Retained earnings $4,000,000 Paid-in capital $1,000,000 Additional paid-in capital 3,000,000 IFRS: There would be no adjustment to the December 31, 2009, financial statements because this would be recognized as a 2010 event.

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