I would like to record about the key points of the US CPA exam content.
<Create and note the points based on mainly Becker’s workbook>
Filer or non-Filer
<End Date of Subsequent Event Evaluation Period>
- Filer: the subsequent event evaluation period ends on the date its financial statements are issued. In this case, the financial statements were widely distributed to financial statement users in a format compliant with GAAP. The entities that file financial statements with the SEC are not required to disclose the date through which subsequent events have been evaluated.
- Non-Filer: the subsequent event evaluation period ends on the date the financial statements are available to be issued. This date is when the financial statements are completed in a GAAP-compliant format and all approvals for issuance have been obtained. Entities that do not file their financial statements with the SEC are required to disclose the date through which subsequent events have been evaluated and whether that date is the date the financial statements were issued or the date the financial statements were available to be issued.
Non-adjusting Subsequent Event
- Only footnote disclosure is required for a ‘reasonably possible’ loss. The nature of the contingency should be disclosed as well as the nature of the possible loss or range of loss. For example, in that case when the insurance appears to be available for the entire loss except the deductible portion, only the possible loss of the deductible portion needs to be included in the footnote.
Adjusting Subsequent Events
- If new information is obtained after the balance sheet date about unresolved events that significantly impact the company, such as litigation costs becoming finalized, this information is treated as an adjusting subsequent event. If there is a difference between the estimated costs recorded at the balance sheet date and the actual finalized amount, this difference must be adjusted and reflected in the financial statements.
Appropriate accounting steps for dealing with the total loss of a building due to a fire and the estimation of reconstruction costs.
- Asset Impairment Processing: If a building is completely destroyed, its book value should be recorded as an impairment loss and removed from the balance sheet.
- Recognition of Expected Insurance Proceeds: If insured, the amount expected to be received from insurance, when its receipt is considered highly probable, should be recognized as an ‘Other Receivable’ on the asset side. The estimate of the insurance proceeds should ideally be based on formal confirmation from the insurance company. However, it can be recognized based on reasonable estimates even if it is not finalized at the end of the period.
- Accounting for Reconstruction Costs: If there is an estimate for reconstruction costs, these are costs to be incurred in future periods and are typically treated as capital expenditures. Thus, they do not directly affect the end-of-period financial statements. Expenses related to reconstruction may either be capitalized as a building or expensed as repair costs, depending on the nature and scale of the reconstruction.
- Disclosure Requirements: Such significant events must be detailed in the notes to the financial statements. These notes should include a description of the event, details of the impacted asset, the amount of impairment, estimates and actual amounts of insurance proceeds received, and the financial impact of the reconstruction plans.
