When should a subsequent event be disclosed?

When to Report Subsequent Events

Financial statements present a company’s financial position as of a specific date, typically the end of the year or quarter. But sometimes events happen shortly after the end of the period that have financial implications for the prior period or for the future. Here’s a look at what’s reportable and what’s not.

Classifying Subsequent Events

So-called “subsequent events” happen between the date of the financial statements and the date the financial statements are available to be issued. This lag usually lasts two or three months, because it takes time to record end-of-period journal entries, make estimates, draft footnotes and, if applicable, complete external compilation, review or audit procedures. The two types of subsequent events include:

Recognized   These events provide further evidence of conditions that existed on the financial statement date. For example, a major customer might file for bankruptcy. There was probably evidence of the customer’s financial distress in the prior period, such as a decrease in revenue or a buildup of receivables. The customer’s bankruptcy filing may trigger a write-off for bad debts to be recorded on the balance sheet in the prior period.

Nonrecognized   These subsequent events reflect unforeseeable conditions that didn’t exist at the end of the accounting period. Examples might include a change in foreign exchange rates, a fire or an unexpected natural disaster that severely damages the business.

Generally, the former must be recorded in the financial statements. The latter type of subsequent event isn’t required to be recorded but may have to be disclosed in the footnotes.

Disclosing Subsequent Events

Nonrecognized subsequent events must be disclosed in the footnotes only if failure to disclose the details would cause the financial statements to be misleading to investors and lenders. Subsequent event disclosures should include 1) a description of the nature of the event, and 2) an estimate of the financial effect (or, if not practical, a statement that an estimate can’t be made).

In some extreme cases, the effect of a subsequent event may be so pervasive that a company’s viability is questionable. This may cause the CPA to re-evaluate the going concern assumption that underlies its financial statements.

Footnotes Add Value

Subsequent events may not be reflected on a company’s balance sheet or income statement. But, when in doubt, companies typically disclose subsequent events to promote transparency in financial reporting. Contact us for more information about reporting and disclosing subsequent events.

© 2019

Key statements of financial position sheet items and related disclosures that have been impacted by COVID-19 were as follows:

Trading assets, trading liabilities and financial investments
Given recent market volatility, the Consolidated Entity reviewed the appropriateness of the inputs to its valuations, which included the use of correlations, price volatilities, funding costs and bid offer, counterparty and own credit spreads. The impact of changes in valuation inputs has also been considered in terms of the classification of exposures in the fair value hierarchy, transfers within the fair value hierarchy and the Level 3 sensitivity analysis. The Consolidated Entity’s financial investments include a portfolio of unlisted equity investments which, in accordance with the Consolidated Entity’s accounting policies, are measured at FVTPL. The determination of the investments’ carrying value included a consideration
of the impact of COVID-19.

Derivative assets and liabilities
Given recent market volatility, the Consolidated Entity reviewed the appropriateness of the inputs to its valuations. These included valuation adjustments (XVA) and notably the credit valuation adjustment (CVA), debit valuation adjustment (DVA) and funding valuation adjustment (FVA). The impact of changes of inputs to the valuations has also been considered in terms of the classification of exposures in the fair value hierarchy and transfers within the fair value hierarchy.

Held for sale assets and liabilities
Held for sale assets and liabilities includes certain disposal groups and investments in associates and joint ventures for which the conditions precedent relating to the disposal were met subsequent to 31 March 2020. For these and other items that are classified as held for sale, the appropriateness of the held for sale classification at the reporting date was reassessed and affirmed. Further, the impact of COVID-19 on the carrying value of the assets and liabilities that were classified as held for sale was assessed. Refer to Note 102 and Note 21.2

Loan assets, due from subsidiaries and other assets
In response to COVID-19 the Consolidated Entity and the Company undertook a review of wholesale and retail credit portfolios, loans to its subsidiaries and other financial asset exposures, as applicable, and the ECL for each. The review considered the macroeconomic outlook, customer credit quality, the type of collateral held, exposure at default, and the effect of payment deferral options as at the reporting date. The ECL methodology, SICR thresholds, and definition of default remained consistent with prior periods. The model inputs, including forward-looking information, scenarios and associated weightings, together with the determination of the staging of exposures were however revised. The impact of COVID-19 on the credit risk management disclosures, notably in relation to credit quality and collateral and other credit enhancements was also considered. Refer to Note 122 and Note 34.2

Property, plant and equipment and right-of-use assets
Included in the group’s property, plant and equipment and right-of-use assets at 31 March 2020 is a portfolio of rotorcraft assets. Given the impact of COVID-19, the portfolio was subject to impairment testing which concluded that no material impairment was required. Refer to Note 13.2

Interest in associates and joint ventures, investments in subsidiaries and interests in unconsolidated structured entities
The Consolidated Entity’s investments in associates and joint ventures is diversified, has been acquired over time and covers various sectors (including infrastructure and green energy) and geographic locations. When it has been assessed that there is an indicator of impairment the Consolidated Entity tests the carrying amount of each of its investments for impairment, by comparing the investment’s recoverable amount with its carrying value. Disclosures with respect to the Consolidated Entity’s equity accounted interests in Macquarie AirFinance Limited, East Anglia ONE Limited and Macquarie Infrastructure Corporation (MIC) have been provided. In addition to the Company assessing its investments in subsidiaries for impairment, the Company and Consolidated Entity re-affirmed that there were no circumstances as a result of COVID-19 that would affect the existing control conclusion for its subsidiaries, including structured entities, nor did it highlight instances in which the Company or Consolidated Entity now had control of such entities. Refer to Note 14 and Note 16 (Not reproduced).

Intangible assets
Consistent with the Consolidated Entity’s accounting policies, the Consolidated Entity has tested goodwill and indefinite life intangible assets for impairment and has reviewed the carrying value of its finite life intangible assets at the reporting date for indicators of impairment and, where applicable, reviewed the measurement of the carrying value of such intangible assets. Such assessment incorporated a consideration of COVID-19. Refer to Note 15.3.

Debt issued and loan capital
Debt-related covenants were assessed to determine whether there were any breaches for which disclosure is required. The Consolidated Entity identified no such breaches at 31 March 2020 nor at the time at which these financial statements were authorised for issue. Refer to Note 223 and Note 24.3.

Hedge accounting
An assessment was conducted as to the impact of COVID-19 with respect to whether the hedged forecasted cash flows in cash flow hedge relationships remain highly probable at the balance date. Based on available facts as at 31 March 2020, including announcements from governments and regulators, as well as discussions with our clients, the modelling of the hedged future cash flows were determined to remain highly probable and hence hedge accounting has continued to be applied.

Risk management
The Consolidated Entity’s robust risk management framework continues to be applied across the Operating and Central service groups and RMG continues to monitor the impact of COVID-19 on the Consolidated Entity’s risk profile. Non-financial risks emerging from global movement restrictions, and remote working by our staff, counterparties, clients and suppliers, are being identified, assessed, managed and governed through timely application of the Consolidated Entity’s risk management framework.

When should subsequent events be recognized?

What subsequent events are and why they must be reported?

What is an example of a subsequent event that might be disclosed?

Which subsequent event would generally require disclosure in the financial statements?