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Subsequent events: To recognize or not to recognize? · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought Leadership from PWC.
• 0:06
  SPEAKER_03: Welcome to PWC's Accounting Podcast.
• 0:09
  SPEAKER_03: I'm Heather Horn.
• 0:11
  SPEAKER_03: And thanks for joining me again today as we continue our Tuesday series in which one of our all-star podcast guests takes over the podcast, picking the topics for the month and joining me on all the episodes.
• 0:25
  SPEAKER_03: For the month of April, our takeover guest is Pat Gerbin, a deputy chief accountant in PwC's national office.
• 0:33
  SPEAKER_03: This month, Pat's sharing his insights and going back to the basics on some critical accounting areas, including contingent liabilities, subsequent events, and inventory.
• 0:44
  SPEAKER_02: I think that is one of the key elements is to make sure you're capturing information across the organization and that you are really, really thoughtful about the wide net that you cast in capturing all of that.
• 0:57
  SPEAKER_01: Yeah, I mean I probably just doubled down on this notion of really making sure you have the um communication protocols inside the organization.
• 1:06
  SPEAKER_03: That was Pat and Latina Fauquinier, another partner in PWC's national office.
• 1:12
  SPEAKER_03: Together, they walk us through an accounting topic that every company in every industry needs to understand.
• 1:19
  SPEAKER_03: What is that?
• 1:20
  SPEAKER_03: Of course, subsequent events.
• 1:23
  SPEAKER_03: With so much going on in the world, how much of what happens between the period end and the issuance of the financial statements needs to be accounted for andor disclose?
• 1:32
  SPEAKER_03: So many questions, but luckily Pat and Latina have so many answers.
• 1:37
  SPEAKER_03: So with that, stay tuned to hear our conversation.
• 1:42
  SPEAKER_03: So, Pat, Latina, welcome.
• 1:44
  SPEAKER_03: So nice to have you back on the podcast.
• 1:46
  SPEAKER_03: Pat and Latina, welcome to your first time.
• 1:49
  SPEAKER_03: Um, and definitely an important topic today, I think, given all the volatility we've seen, and I just feel like in the past few years, we've continued to deal with a lot of issues that have a lot of subsequent events implications, that this would be a great time to revisit some of the subsequent event guidance.
• 2:06
  SPEAKER_03: Uh, but Pat, as always, as you know, it's always nice to start with an overview of what the guidance is.
• 2:11
  SPEAKER_03: So can you do that for us first?
• 2:14
  SPEAKER_01: Sure.
• 2:15
  SPEAKER_01: So um subsequent events, by definition, something that happens after the balance sheet date, but before the financial statements are issued, sort of in the subsequent period.
• 2:25
  SPEAKER_01: Um the guidance we have for it is in um ASC 855, specifically dealing with subsequent events.
• 2:33
  SPEAKER_01: Um and it requires companies to evaluate transactions or events that occur subsequent to the balance sheet date.
• 2:42
  SPEAKER_01: Um the other important part of that window is when the financial statements are issued.
• 2:47
  SPEAKER_01: So if you're a public company, that would be when they're filed with the SEC or when they're available to be issued.
• 2:53
  SPEAKER_01: So if you're a non-public company and don't have that statutory filing deadline when the financial statements are available to be issued.
• 2:59
  SPEAKER_01: So that sort of defines your subsequent events window.
• 3:04
  SPEAKER_01: We have two types of subsequent events.
• 3:07
  SPEAKER_01: Um officially in the guidance, they're referred to as recognized subsequent events or non-recognized subsequent events.
• 3:14
  SPEAKER_01: Once upon a time, there was um auditing literature that referred to them as type one or type two, so you might still hear that uh nomenclature.
• 3:22
  SPEAKER_01: So type one would be recognized, type two would be non-recognized.
• 3:27
  SPEAKER_01: Um as you sort of would guess from the name, if they're recognized, then those are things that are actually going to affect the financial statements that are not yet issued, even though the event or the information came to light after the balance sheet date.
• 3:42
  SPEAKER_01: It is indicative of conditions that existed at the balance sheet date and therefore should be reflected in the financial statements.
• 3:50
  SPEAKER_01: The non-recognized type, by definition, means the information or the event that came to light relates to new information or new circumstances that arose after the balance sheet date.
• 4:02
  SPEAKER_01: They did not exist at the balance sheet date.
• 4:05
  SPEAKER_03: So, Pat, as you mentioned, they used to be called type one and type two.
• 4:09
  SPEAKER_03: And you mentioned in an earlier podcast that you and I are on the older end of accounting.
• 4:14
  SPEAKER_03: I think you may have answered this indirectly, but do you know when they they kind of brought this from the AI CPA guidance into the um FASBI guidance why they made the change?
• 4:25
  SPEAKER_03: Was it just because calling something type one and type two was not very descriptive?
• 4:29
  SPEAKER_01: Or yeah, I mean I think it was basically that.
• 4:32
  SPEAKER_01: I mean, you you know, you have to define what a type one or a type two is if you're gonna say that.
• 4:36
  SPEAKER_01: And the the plain meaning of the words is probably more helpful ultimately, even though a lot of us that are of our generation probably know them as type one and type two.
• 4:45
  SPEAKER_03: All right.
• 4:45
  SPEAKER_03: So, Pat, I think that's good level setting.
• 4:47
  SPEAKER_03: But Latina, let me turn to you and bring you into the conversation.
• 4:50
  SPEAKER_03: So one of the things I think that comes up is a question if someone's evaluating a subsequent event, is the types of things that they should be thinking about and some of the complexities that they should be considering when they're evaluating whether or not it falls in that type one, type two, or recognized, non-recognized category.
• 5:08
  SPEAKER_02: Yes, Heather.
• 5:09
  SPEAKER_02: And so as companies are thinking about whether they have a type one or a type two subsequent event, it's really important to focus on what are the conditions that existed as of the balance sheet date.
• 5:20
  SPEAKER_02: So there may be new transactions that happen that are clearly outside the balance sheet date, do not impact the financial statements to be issued, but there may be events that transact over an extended period of time that it takes a while to really understand if that condition is in existence at the balance sheet date.
• 5:39
  SPEAKER_02: And that's where the judgment comes involved.
• 5:41
  SPEAKER_02: And because there's a vast amount of information that companies have to go through, lots of uh transactions and events that can transpire after the balance sheet date, all of that needs to be captured and considered.
• 5:54
  SPEAKER_02: So if we were to sort of take two ends of the spectrum, right?
• 5:57
  SPEAKER_02: You might have an event that's a single isolated event that happens after the balance sheet date.
• 6:04
  SPEAKER_02: For example, a company acquires a business, that transaction doesn't close until after the balance sheet date.
• 6:10
  SPEAKER_02: Well, it's pretty clear in most circumstances that that condition did not exist as of the balance sheet date.
• 6:15
  SPEAKER_02: So that would be a non-recognized event.
• 6:18
  SPEAKER_02: Whereas you might have transactions that continue to evolve, circumstances that continue to evolve, and it's not until after the balance sheet date that you know what happened, but the condition existed as of the balance sheet date.
• 6:30
  SPEAKER_02: So take, for example, a customer, a major customer, files bankruptcy shortly after balance sheet date, but before the financial statements were issued.
• 6:39
  SPEAKER_02: Well, that might look like an isolated event, but in reality, that customer was likely experiencing a deteriorating financial situation leading up to the balance sheet date.
• 6:50
  SPEAKER_02: So that condition in and of itself existed as of the balance sheet date.
• 6:54
  SPEAKER_02: And adjustment to the financial information, such as recognized receivables, might require an additional evaluation of collectability, taking into consideration that bankruptcy event.
• 7:07
  SPEAKER_03: Well, and on that particular point, if someone is particularly interested, Pat and I did a podcast, I think, in 2019 probably, um, dealing specifically with that set of um events so that we can include that in our show notes.
• 7:23
  SPEAKER_02: Fantastic.
• 7:24
  SPEAKER_02: But, you know, along that those lines, you know, there's also been some recent turmoil with some banks that we've been hearing about here in the first quarter of 2023.
• 7:33
  SPEAKER_02: And so those are the types of things that companies may also have to evaluate to determine whether or not there's something that they do need to then reflect either in their financial statements or in their disclosures.
• 7:45
  SPEAKER_02: Um there's often a very short window of time that companies have to capture this information and think about the very challenging assessment that they might have given all of the different types of arrangements, the nature of the relationship that they have with those banks, and how that might impact their current financial conditions.
• 8:04
  SPEAKER_02: And so they can't ignore those types of transactions as well.
• 8:08
  SPEAKER_01: And maybe just one point on that like I absolutely agree, you need to be focused on those developments.
• 8:14
  SPEAKER_01: It's a little bit of a tangent from the pure kind of subsequent event context, but some of the other forward-looking evaluations that you need to make, particularly around going concern, are the types of things that could be influenced by some of those events.
• 8:28
  SPEAKER_01: So in some cases, we have like another gap framework that sort of interacts with things that happen in the post-balance sheet period.
• 8:35
  SPEAKER_01: So we need to be thinking about not just the events and the subsequent events guidance, but what is that underlying gap framework that we need to think about too?
• 8:43
  SPEAKER_03: So let me ask a question though, because we mentioned the banks and you know, we're recording at the end of March, but I um our listeners will be listening to this in April.
• 8:53
  SPEAKER_03: And so, you know, you're moving from something that we've seen events in March.
• 8:58
  SPEAKER_03: What types of things are we potentially thinking could happen in April that companies should be thinking about?
• 9:04
  SPEAKER_03: Or I it's just trying to kind of tie those two things together.
• 9:09
  SPEAKER_02: Yeah.
• 9:09
  SPEAKER_02: So, you know, there could be impacts on, you know, depending on the nature of the relationship that they have, they could have impacts on their investments, they have might have impacts on um deposits that they have.
• 9:21
  SPEAKER_02: You know, in this case, the the government has come forward and said all of those will be insured, um, even those deposits above the recognized limit.
• 9:32
  SPEAKER_02: But those types of things, you know, if with that information hadn't come to light, they would have to consider whether or not there's an impact there.
• 9:38
  SPEAKER_02: So it is really important that companies think very carefully about the nature of the relationships that they have, all of their um you know, contracts and arrangements as they may need to be considered in their financial statements.
• 9:52
  SPEAKER_01: And one of the things that maybe is obvious, but you know, we talked about recognized versus non-recognized subsequent events, that relates to the um financial statements that haven't yet been issued.
• 10:01
  SPEAKER_01: Like we're talking about a window now.
• 10:03
  SPEAKER_01: So something that was a subsequent event, say for the year-end financial statements that arose in March, that might have been a non-recognized event.
• 10:10
  SPEAKER_01: Well, if we get to the end of March and we're now into April doing reporting for March, well, now we're just dealing with that event in the normal course, right?
• 10:18
  SPEAKER_01: Yeah.
• 10:18
  SPEAKER_03: And I guess I also asked that question through at like a calendar year bias, which I try not to have, but clearly there are companies that have, like, for example, February 28 year ends that could be dealing with some of this as a subsequent event, or more things could happen.
• 10:32
  SPEAKER_03: So I think maybe the point you're making here is that you really do have to pay attention to what's going on.
• 10:40
  SPEAKER_03: And, you know, we've had sort of a theme recently of not having financial statements that are like set it and forget it, don't just roll things forward, don't just presume things are the same.
• 10:50
  SPEAKER_03: And I think to that, um, Latina, I literally wrote down while you were talking controls.
• 10:55
  SPEAKER_03: And so, what have you seen from like a best practice in terms of monitoring?
• 11:00
  SPEAKER_03: Because I think that's the other risk care.
• 11:02
  SPEAKER_02: Yeah, that is the other side of it, right?
• 11:04
  SPEAKER_02: Is that companies need to have processes and policies in place so that they are prepared to monitor and identify these issues and to continue all the way through issuance of the financial statements.
• 11:15
  SPEAKER_02: So thinking about transactions that might be pending as of the balance sheet date, right?
• 11:21
  SPEAKER_02: If you have regulatory approval that's on the line, you're waiting to hear back whether approval comes through or it's not approved, for example, like a drug for the pharmaceutical industry, that might be something that they need to evaluate for changes in evolving facts and circumstances related to pre-existing events or transactions, um, changes in the business capital structure, if there's stock splits or dividends, might need to be pushed back into the current financial statements to be issued.
• 11:53
  SPEAKER_02: Other changes in current economic environment might need to be reflected.
• 11:59
  SPEAKER_02: So it's a wide net that companies need to be prepared to cast while evaluating subsequent events.
• 12:05
  SPEAKER_03: All right.
• 12:05
  SPEAKER_03: And I think, I mean, Pat, the first thing that comes to mind for me is actually harkens back to last week's episode that we did with Tom, where we talked about contingencies.
• 12:14
  SPEAKER_03: And so I know that's that's one example.
• 12:17
  SPEAKER_03: So anything on that or any other examples that you'd want to give us?
• 12:21
  SPEAKER_01: I mean, that is probably your classic example of where you see a lot of recognized subsequent events arise.
• 12:28
  SPEAKER_01: So lost contingencies, uh, think of some dispute that's in play.
• 12:34
  SPEAKER_01: Um, those tend to take a very long time to um sort of germinate, uh, sort of come to fruition.
• 12:41
  SPEAKER_01: Most cases then they will be subject to a subsequent events evaluation if those conditions existed prior to the balance sheet date.
• 12:49
  SPEAKER_01: Anything then that happens relative to that uncertainty or contingency in the subsequent events window is likely going to influence the measurement of the contingency or the expectation of the probability of the contingency at the balance sheet date.
• 13:05
  SPEAKER_01: Lost contingencies in particular are of that ilk because the model is probable and reasonably estimable.
• 13:13
  SPEAKER_01: So as long as the underlying claim or uncertainty existed at the balance sheet date, anything that comes to light, whether it's new information, it's settlement negotiations, it's the adjudication of the matter in a court, those are all going to affect the measurement of the liability.
• 13:30
  SPEAKER_01: That's different than gain contingencies.
• 13:33
  SPEAKER_01: And that's not necessarily because we think differently in terms of subsequent events, but that gets back to this point about the interaction of the underlying gap framework.
• 13:42
  SPEAKER_01: Because gain contingencies have a different recognition threshold.
• 13:46
  SPEAKER_01: We only recognize gain contingencies when they are realized or realizable.
• 13:52
  SPEAKER_01: That tends to be a much higher threshold than simply the probable threshold for a loss, right?
• 13:59
  SPEAKER_01: So we're not going to recognize those until we meet that threshold, which if we hadn't met it at the balance sheet date, even if it becomes realized or realizable in that subsequent events period, that would be a non-recognized event.
• 14:13
  SPEAKER_01: We'd disclose it, but we wouldn't recognize it.
• 14:16
  SPEAKER_03: All right.
• 14:16
  SPEAKER_03: And then Pat, I know interrelated with that are insurance recovery is something you and Tom and I spoke about a bit last week, but how do you think then about insurance and the timing of when you're going to record that?
• 14:30
  SPEAKER_01: So insurance tends to obviously show up a lot in the loss contingency context, right?
• 14:36
  SPEAKER_01: Because you have an uh you buy insurance to protect against losses.
• 14:40
  SPEAKER_01: Again, the underlying accounting framework for insurance is I can generally recognize insurance recoveries up to the amount of any loss that I've recognized.
• 14:50
  SPEAKER_01: So if I'm applying the contingency framework and I've accrued a loss because it's probable and estimable, but I have insurance coverage for that, I can go ahead and accrue those probable insurance recoveries, assuming the insurance policy is not in dispute and it's a covered loss.
• 15:06
  SPEAKER_01: To the extent that there might be insurance recoveries available to me in excess of that recognized loss, that kicks you into this gain contingency model, in which case I wouldn't recognize those until I had achieved the recognition threshold, which is that realized or realizable, usually going to be pretty close to when I actually get the cash.
• 15:29
  SPEAKER_03: So, Pat, let me ask you a follow-up question.
• 15:32
  SPEAKER_03: And I I think your answer is going to be it depends, but I will ask anyway.
• 15:36
  SPEAKER_03: So if you had a loss that happened, let's say at your calendar year end, you had a loss in November.
• 15:42
  SPEAKER_03: Now you're preparing your year-end financial statements and you're waiting to hear from your insurance company.
• 15:48
  SPEAKER_03: And then like in February, the insurance company says, yes, we will honor your claim and we'll pay you.
• 15:57
  SPEAKER_03: Because the insurance side is a gain, does that mean you would recognize the loss in the period when it occurred and then this insurance recovery in the following period?
• 16:06
  SPEAKER_03: Or again, it it really depends if you've been communicating with the insurance company all along and some of those types of factors.
• 16:13
  SPEAKER_01: Yeah, so there's a couple of things in play there.
• 16:16
  SPEAKER_01: So anytime I have a loss, I obviously have to account for that loss pursuant to the ASC 450 guidance on contingencies, regardless of whether I have insurance or not.
• 16:25
  SPEAKER_01: That's step one.
• 16:27
  SPEAKER_01: At that same point in time, though, I do need to evaluate do I have insurance?
• 16:31
  SPEAKER_01: Does it cover this type of loss?
• 16:33
  SPEAKER_01: And do I have a reasonable expectation, is it probable that the insurer will pay?
• 16:38
  SPEAKER_01: I might be able to reach that judgment that it's probable of recovery without any interaction with the insurer.
• 16:44
  SPEAKER_01: Um, I might not, right?
• 16:46
  SPEAKER_01: So I that's sort of an evaluation I need to think through.
• 16:50
  SPEAKER_01: And if for whatever reason I did, so I've I've already dealt with the loss piece of it, but if I needed additional confirmation from the insurer in order to be confident that I was going to be probable of recovery, I wouldn't recognize that insurance recovery until the point at which it became probable.
• 17:08
  SPEAKER_01: But interestingly, because we're talking still about the insurance recovery is only up to the amount of the recognized loss, I'm sort of in this probable model rather than a gain contingency model.
• 17:19
  SPEAKER_01: Right.
• 17:19
  SPEAKER_01: So that's the distinction.
• 17:21
  SPEAKER_01: And that that's sort of a related point in terms of whether you're adjusting a loss contingency up or down is different than if you're recognizing a gain contingency.
• 17:33
  SPEAKER_03: All right.
• 17:33
  SPEAKER_03: So just to restate, because I I think I asked the question in a way wrong, what you're saying is for that in my particular fact pattern, the insurance recovery would be up to the amount of loss would be based on probable.
• 17:47
  SPEAKER_03: Again, I may not need confirmation.
• 17:50
  SPEAKER_03: I may, but I may not, depending if it's very clear in my policy.
• 17:53
  SPEAKER_03: And then it would only be an incremental amount.
• 17:55
  SPEAKER_03: So let's say that they were paying, you know, I don't know, rebuilding costs versus what the cost I have in my books or something like that, that I would need to consider under the gain contingency guidance.
• 18:06
  SPEAKER_03: Correct.
• 18:06
  SPEAKER_03: All right.
• 18:07
  SPEAKER_03: It's a little add-on to our podcast from last week as well, but very helpful.
• 18:11
  SPEAKER_03: So Latina, then going back to you, if I look, you know, we've been talking about sort of what's been going on from a current macroeconomic environment point of view.
• 18:19
  SPEAKER_03: Any particular fact patterns you've seen that you'd highlight for our listeners?
• 18:24
  SPEAKER_02: One of the areas that uh we're seeing companies continue to evaluate is exit and disposal activity.
• 18:30
  SPEAKER_02: And so, as you can imagine, those plans often take a period of time to come together.
• 18:36
  SPEAKER_02: And that particular guidance, AC420, provides very specific uh criteria that has to be met in order for an accrual to be recognized.
• 18:46
  SPEAKER_02: And so, similar to what Pat was saying, you have to think about the interaction with the subsequent events guidance as well as other gaps.
• 18:53
  SPEAKER_02: So companies need to think about the event or the transaction that they're trying to account for and determine whether or not specific gap does apply and then follow that relevant guidance to determine initial recognition, initial measurement, and subsequent recognition and measurement criteria.
• 19:11
  SPEAKER_02: Keeping in mind the subsequent events guidance does require you to continue to evaluate events and transactions all the way up to the issuance date.
• 19:19
  SPEAKER_02: So as we're seeing companies think about specific transactions such as a disposal or exit activity, they might not complete that plan until after the balance sheet date.
• 19:31
  SPEAKER_02: But they have to think about other costs that they may be occurring that may be adjacent to the exit or disposal activity.
• 19:40
  SPEAKER_02: And that gap may require them to recognize a liability or an accrual as of the balance sheet date.
• 19:47
  SPEAKER_02: So, for example, if you're you know terminating employees as part of uh the exit or disposal activity, you might not reach the one-time recognition for termination, but there might be ongoing termination costs that you expect to accrue that you may reach the probable threshold of recognizing as of the balance sheet date.
• 20:08
  SPEAKER_02: And it's not until after the balance sheet date that you actually determine the number of employees that are impacted and come up with the final number.
• 20:15
  SPEAKER_02: So you may have to true up essentially that accrual as of the balance sheet date based on the completed um disposal activity.
• 20:23
  SPEAKER_02: There may be other things that you have to think about as well, like lease termination or other um impairments or retirements of long-lived assets, just to name a few that while are not directly part of the 420 transaction, they are need to be considered and estimated for based on all of the most current information that you have up to the date of issuance.
• 20:48
  SPEAKER_03: So I think key point here being then that you have to look at the subsequent events guidance, but you can't ignore the underlying guidance for the particular transaction because it may have some specific factors you can you should consider, or it may actually specify how you should be treating information, whether it occurs before or after the balance sheet date.
• 21:09
  SPEAKER_02: Is that that's right.
• 21:10
  SPEAKER_02: Yeah.
• 21:10
  SPEAKER_02: So thinking about all of the costs that you might incur associated with the transaction, evaluating the appropriate gap that reflects the timing that you need to make uh recognize uh an activity, but then contemplating that subsequent events guidance would tell you you need to continue to think about that as additional information arises to inform management, especially of those underlying assumptions and judgments in determining what that accrual or that estimate would be.
• 21:40
  SPEAKER_03: All right.
• 21:40
  SPEAKER_03: So then I have like a question I really want to ask about disclosures, but I do have want to ask Pat one question first, and I'll come back to you, Latina.
• 21:47
  SPEAKER_01: And maybe before you do that, Heather, just one point, because this is an area that's like kind of a hornet's nest, that whole exit disposal cost to begin with, and especially when we're talking about it in the context of subsequent events, a lot of times.
• 22:00
  SPEAKER_01: Things that happen after the balance sheet date are explicitly precluded from being pushed back to the balance sheet date under the exit disposal cost activity.
• 22:08
  SPEAKER_01: So that's I think a really critical point to just make sure absolutely some of the things that happen are going to inform estimates of accruals that should be recognized at the balance sheet date.
• 22:18
  SPEAKER_01: But there are other things that happen after the balance sheet date.
• 22:21
  SPEAKER_01: But again, because of the underlying gap framework, you're pre precluded from reflecting in the balance sheet.
• 22:27
  SPEAKER_03: So I think then, Pat, that goes back to make sure you really know which guidance you should be following and then look at the sort of totality of subsequent events and that guidance and recognize that if the individual guidance has um specifics that you should be following, that would I would almost say like supersede or trump.
• 22:46
  SPEAKER_03: Yeah.
• 22:46
  SPEAKER_03: Okay.
• 22:47
  SPEAKER_03: That's very helpful.
• 22:48
  SPEAKER_03: Thank you.
• 22:48
  SPEAKER_03: So then, pal, let me ask you one other question just on sort of types of events, because the ones we've talked about here, I'm going to say are more like one-off types or ones that hopefully companies are not seeing on a recurring basis.
• 23:01
  SPEAKER_03: But I think sort of the bread and butter subsequent events questions that you know we typically continue to see involve, I'll call it more routine things.
• 23:11
  SPEAKER_03: So what are some of the recurring types of transactions that you see questions about?
• 23:16
  SPEAKER_01: Yeah, so the two that you would think of are sort of ordinary course of business, day-to-day activities.
• 23:21
  SPEAKER_01: Um, one would be inventory.
• 23:24
  SPEAKER_01: Um the inventory model contemplates this notion of estimated selling prices in the ordinary course of business when you're thinking about inventory valuation.
• 23:34
  SPEAKER_01: So it it almost by definition says you need to look at what's happening in the post-balance sheet period to inform those estimates of the estimated selling price in the ordinary course of business.
• 23:45
  SPEAKER_01: And that can work both ways.
• 23:47
  SPEAKER_01: You might have estimated selling prices that are um higher than what you were experiencing when you thought you needed a uh net realizable value provision, or you could have post-balance sheet sales of inventory at amounts lower than that.
• 24:03
  SPEAKER_01: That would suggest maybe you do need a net realizable value provision for your inventory.
• 24:08
  SPEAKER_01: And I would just stress again, that's very different from some other asset impairment frameworks where we take a much more strict view of the conditions specifically at the balance sheet date relative to the market, right?
• 24:22
  SPEAKER_01: This is a concept where we're looking at estimated selling prices in the ordinary course of business, forward looking as opposed to know what was the value on the balance sheet date.
• 24:31
  SPEAKER_01: So that's that's one that sort of any company that has inventory is going to be be dealing with routinely.
• 24:37
  SPEAKER_01: Um, the other one is if you have revenue contracts where you have some um impact from future events.
• 24:46
  SPEAKER_01: So the two classic cases would be some sort of arrangement that includes a variable consideration that depends on future activities, future either purchasing behavior, think of like volume type uh rebates or discounts, or any kind of a revenue contract where you're recognizing revenue over time and you're estimating your progress on that contract, uh, particularly if you think about estimating progress in relation to total cost or total anticipated cost versus actual costs.
• 25:20
  SPEAKER_01: Those are estimates that are going to be informed by information that comes to light or need to be informed by information that comes to light after the balance sheet date.
• 25:29
  SPEAKER_01: Um, to the extent that the costs that you expect to incur are increasing, that means your progress is less than you thought it was.
• 25:37
  SPEAKER_01: Um, or if you've seen purchasing behavior by your customer that's going to kick you into a different um tier of the pricing, you know, those are things that need to be factored into the revenue that was recognized at the balance sheet date.
• 25:51
  SPEAKER_03: So, Pat, you made a point for inventory that anyone who's holding inventory should be thinking about this each period.
• 25:59
  SPEAKER_03: For revenue, you also made a point that this would be revenue contracts where control is transferred over time.
• 26:05
  SPEAKER_03: Are there some specific examples where you're more apt to see these types of issues that you should be considering?
• 26:12
  SPEAKER_01: So, particularly in the uh revenue space, I would say any company that's involved in what I'll call long-term construction projects need to be um, it kind of comes back to this point of like all the information you have to um try to keep track of and capture, making sure you have the processes to get the information flowing through the organization.
• 26:31
  SPEAKER_01: But certainly because those are by definition sort of happening over a long period of time, you're going to likely have information that becomes available in that subsequent events window that could tell you my estimate of what it's going to take to complete this contract is going to be better or worse than I thought it was.
• 26:51
  SPEAKER_01: And in that context, there's some specific gap, again, sort of this interaction between subsequent events and the underlying gap framework, which tells you that if you end up concluding that you might have a loss on the performance of that contract, you would also need to accrue that loss as of the balance sheet date.
• 27:09
  SPEAKER_01: And again, you could sort of interpret it by saying, well, the contract was in place.
• 27:12
  SPEAKER_01: I committed to perform.
• 27:14
  SPEAKER_01: I now realize in that subsequent events window that it's going to result in me incurring a loss.
• 27:19
  SPEAKER_01: Those were conditions that existed at the balance sheet date.
• 27:22
  SPEAKER_01: I should push that back.
• 27:24
  SPEAKER_03: So, Pat, I think the point you're making, and it was kind of a thread that's been running through here, but it's probably worth emphasizing, is that sometimes there's information that you maybe should have known at the balance sheet date.
• 27:37
  SPEAKER_03: And when I say maybe should have, it's like someone in the company may have information, but the accounting department doesn't.
• 27:43
  SPEAKER_03: And Latina made a really good point earlier about controls, and I think that's the interplay.
• 27:48
  SPEAKER_03: So, for example, in your construction contracts, you want to make sure you're talking to people who are managing them.
• 27:53
  SPEAKER_03: But there's lots of examples where you want to make sure you have the best information so you don't find out something later that does impact those financial statements.
• 28:02
  SPEAKER_01: Yeah, it's a great point.
• 28:03
  SPEAKER_01: And I would think if you want to put it in the COSO context, it's information and communication, right?
• 28:07
  SPEAKER_01: It's sort of like you need to have the the um the processes and the protocols in place inside the organization to make sure you're capturing the information from all the different parts of the organization and getting it funneled up to the people who are responsible for the financial reporting, sort of the not knowing or somebody didn't tell me unfortunately doesn't uh work well.
• 28:32
  SPEAKER_03: So then Latina, I said I was gonna come back to you because I do think the logical next question is disclosure, particularly if you have a case where maybe something isn't being recognized.
• 28:43
  SPEAKER_03: But even in the case of something being recognized, I think disclosure is critical in this area.
• 28:47
  SPEAKER_03: So what are some of the reminders you would give there?
• 28:50
  SPEAKER_02: Yes.
• 28:50
  SPEAKER_02: So whether it's recognized or not recognized, the ultimate consideration is what do users and readers of the financial statements need in order to have a complete picture of the financial statements as of the date of issuance.
• 29:04
  SPEAKER_02: So when you're thinking about specific disclosure requirements, there's no bright line in terms of like whether you disclose something or not.
• 29:13
  SPEAKER_02: The general framework is that if it's going to be something that's going to have a significant determinable effect on the financial statements, it should be disclosed, as well as if omission of that information would cause the financial statements to be misleading.
• 29:28
  SPEAKER_02: And I think that last piece is really the lens that management needs to think about is does this information skew or potentially mislead the financial statements if it's not in there, if we don't disclose it?
• 29:40
  SPEAKER_03: Latina, let me ask you a question.
• 29:42
  SPEAKER_03: Because you said use the word significant.
• 29:44
  SPEAKER_03: Is that deliberate instead of material?
• 29:46
  SPEAKER_03: Or are we by significant, do we mean material impact on the financial statements?
• 29:51
  SPEAKER_02: No, I think it is deliberate instead of material, right?
• 29:54
  SPEAKER_02: Um, it's really through a different lens.
• 29:56
  SPEAKER_02: It's what would the users need that information, that critical information for investors or others to understand the financial statements, whether it's material or not.
• 30:09
  SPEAKER_02: The lens is really what is gonna be the impact.
• 30:12
  SPEAKER_02: So thinking about it from the impact perspective versus, you know, a quantifiable number.
• 30:17
  SPEAKER_02: This is hitting a materiality threshold.
• 30:20
  SPEAKER_02: It's really, is this gonna have a significant impact on the financial statements?
• 30:24
  SPEAKER_03: So maybe focus on qualitative factors.
• 30:26
  SPEAKER_03: Yes.
• 30:27
  SPEAKER_03: Yeah.
• 30:27
  SPEAKER_02: Okay, that's helpful.
• 30:29
  SPEAKER_02: Yeah.
• 30:30
  SPEAKER_02: If um, you do have to disclose some of the things that they should be thinking about, what's the nature of the event or transaction?
• 30:37
  SPEAKER_02: And you also would need to then disclose the impact uh on the financial statements.
• 30:42
  SPEAKER_02: If you can't uh estimate, you have to include something to that effect as to why an estimate can't be made.
• 30:49
  SPEAKER_03: Let me ask another question here.
• 30:51
  SPEAKER_03: And uh, Pat, for our listeners of our uh contingencies, because we made a point there that if there is a contingency to say you can't estimate it often, if it's probable that it's difficult to make that argument that you can't estimate, do we use a similar threshold here, or given, I mean, in some cases you may really the event could have just happened a few days before you're issuing, like maybe you really can't estimate.
• 31:18
  SPEAKER_01: Yeah, I would say this is definitely one of my favorite, you know, facts and circumstances, situations.
• 31:23
  SPEAKER_03: I should have previewed that that's what I expected you to answer.
• 31:26
  SPEAKER_01: I mean that in the context of the contingencies that we were talking about, that's a little bit of a look, if it's probable and that there's been a loss, it's pretty difficult to assert that you can't make an estimate.
• 31:38
  SPEAKER_01: In the context of subsequent events, you know, given timing, given the array of things we might be thinking about, there's likely you know more of an opportunity to to make that assertion, particularly if it's something that we're only going to disclose anyway.
• 31:53
  SPEAKER_03: Yeah.
• 31:54
  SPEAKER_03: But I guess your point is it's truly facts and circumstances.
• 31:57
  SPEAKER_03: So maybe that's, you know, it you could get to that answer, but you should be doing your full analysis uh first.
• 32:04
  SPEAKER_03: So Latina, anything else from a disclosure perspective we should be considering?
• 32:09
  SPEAKER_02: Yeah, certainly.
• 32:10
  SPEAKER_02: I mean, I think when companies are thinking about uh, you know, other instances where disclosure may be necessary, um, you may decide that you need to disclose on a pro forma basis in the financial statements or other gap may indicate in certain situations that it's necessary to include uh pro forma.
• 32:31
  SPEAKER_02: So um a business combination, for example, you may have a pro forma column in your historical balance sheet, um, other instances where it just provides more clear information.
• 32:43
  SPEAKER_02: Uh, companies may need to think about whether or not uh additional pro forma disclosure would be helpful.
• 32:50
  SPEAKER_03: So then, question I always like to ask at the end of the podcast, as as Pat knows and Latina, hopefully you're anticipating.
• 32:58
  SPEAKER_03: Um, I think we are in a unique position where you have an opportunity to deal with lots of these issues.
• 33:04
  SPEAKER_03: And for many of our listeners, you know, this is maybe more of a one-off type of thing.
• 33:08
  SPEAKER_03: And so I'll ask both of you the same question.
• 33:10
  SPEAKER_03: It's just from your experience, what are some of the best practices for people in either identifying or evaluating subsequent events?
• 33:18
  SPEAKER_03: And Latina, I'll go to you first.
• 33:20
  SPEAKER_03: Certainly.
• 33:21
  SPEAKER_02: So we talked about processes and having policies in place.
• 33:25
  SPEAKER_02: And I think that is one of the key elements is to make sure you're capturing information across the organization and that you are really, really thoughtful about the wide net that you cast in capturing all of that.
• 33:38
  SPEAKER_02: And so, you know, I think it's important for companies to understand that it is management's responsibility to ensure that the financial statements present fairly based on all the current information that they have up to the date of issuance and that it is facts and circumstances.
• 33:53
  SPEAKER_02: So careful evaluation of those events and transactions may be necessary to ensure that they're getting that sort of complete picture reflected in those financial statements.
• 34:03
  SPEAKER_03: So this is almost that you have an opportunity, even before you get to this point, to make sure you're gonna capture everything by a really well-designed control.
• 34:12
  SPEAKER_03: I mean, in a way that there's a benefit to that that it's not in sort of the final scramble for the financial statements that you have to figure out what to do, but design the control wall ahead of time and then the information should just come to you.
• 34:23
  SPEAKER_03: Just wait for it, right?
• 34:24
  SPEAKER_03: Yes, just wait for it to come.
• 34:26
  SPEAKER_03: Yeah.
• 34:26
  SPEAKER_03: Okay, that's really helpful and I think great advice.
• 34:29
  SPEAKER_03: And then Pat, how about from your perspective?
• 34:31
  SPEAKER_01: Yeah, I mean, I probably just double down on this notion of really making sure you have the um communication protocols inside the organization.
• 34:39
  SPEAKER_01: Your point about making sure you don't do that at the last minute is important because if you do have something that arises that you really have to evaluate, you need the time to do the evaluation, not to figure out how to get the information.
• 34:53
  SPEAKER_01: Um, particularly like when we're thinking about the interaction with some of the other assessments you need to make.
• 34:59
  SPEAKER_01: Like we talked earlier about some of the banking challenges that we've experienced here in in March.
• 35:04
  SPEAKER_01: If those arise late in the financial reporting cycle, still in the subsequent events window, you've got real work to do.
• 35:10
  SPEAKER_01: So you need to make sure you have the um information flowing to have as much time as you can to make those evaluations.
• 35:19
  SPEAKER_01: Um that's really the the the critical um ingredient, I think.
• 35:24
  SPEAKER_01: And and maybe just one finite point we we touched on it earlier, but this idea that um you know not being able to make an estimate is not the same thing as like it's hard or the information wasn't readily available.
• 35:39
  SPEAKER_01: Like you have an obligation to sort of accumulate as much information as exists to inform that estimate, even if it's for disclosure purposes.
• 35:47
  SPEAKER_01: So really making sure you're thinking holistically about the information you really can get access to as opposed to just that, which is sort of obvious.
• 35:58
  SPEAKER_03: I think those are all great points.
• 36:00
  SPEAKER_03: And I guess, Pat, if I reflect on what we've been talking about here, it also seems like in to some extent, in addition to your sort of well-designed um control, you can probably also anticipate in some ways some subsequent events you should consider.
• 36:16
  SPEAKER_03: So, for example, if you have those those long-term construction contracts, or if you are dealing with inventory, or if you just did a big transaction, you have big contingencies, like it's not to say you would capture everything, but almost having that, okay, I know I'm going to look at these items, and then I'm gonna look for anything else also feels like it can make things a little easier when you're trying to issue the financial statements.
• 36:40
  SPEAKER_01: Yeah, definitely your disclosure committee should have a subsequent events kind of watch list every period.
• 36:47
  SPEAKER_03: All right, well, definitely a difficult topic.
• 36:50
  SPEAKER_03: I think you guys made it seem relatively straightforward, but I know when it comes down to it, lots of judgment and definitely not always easy to operate these controls.
• 36:58
  SPEAKER_03: So uh appreciate you guys joining me today, and thank you for all the insight.
• 37:02
  SPEAKER_01: Thanks, Heather.
• 37:03
  SPEAKER_01: Thanks, Heather.
• 37:05
  SPEAKER_03: That's our show for today.
• 37:07
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• 37:10
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• 37:27
  SPEAKER_03: From Thought Leadership at PWC, I'm Heather Horn.
• 37:31
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