A company's balance sheet date is December 31. On February 10, before the financial statements are issued, a major customer that owed a large, already-recorded receivable as of December 31 files for bankruptcy, providing evidence that the receivable's collectibility had already deteriorated by year-end. Under ASC 855 (Subsequent Events), how should this event be treated?
- As a recognized (Type I) subsequent event, requiring an adjustment to the recorded allowance for the receivable in the December 31 financial statements
- As a nonrecognized (Type II) subsequent event, requiring footnote disclosure only, with no adjustment to any recorded amount
- As neither a recognized nor a nonrecognized subsequent event, because the bankruptcy filing occurred after the balance sheet date
- As a prior-period error requiring restatement of an earlier annual report
Why A? And why not the others?
Correct answer: A. As a recognized (Type I) subsequent event, requiring an adjustment to the recorded allowance for the receivable in the December 31 financial statements
ASC 855-10-25-1 defines a recognized (Type I) subsequent event as one that provides additional evidence about conditions that existed at the balance sheet date, and a customer's deteriorating financial condition leading to a February bankruptcy filing is typically evidence that the customer's ability to pay had already weakened by December 31, so the receivable's carrying amount should be adjusted to reflect that condition in the year-end financial statements. The option describing a nonrecognized (Type II) event is wrong because that classification applies to events providing evidence about conditions that arose only after the balance sheet date, which is not the case here since the deterioration was already underway at year-end. The option asserting the event is neither type is wrong because ASC 855's framework classifies every subsequent event as one type or the other based on whether the underlying condition existed at the balance sheet date; a bankruptcy filing shortly after year-end for a receivable already on the books is a textbook recognized event, not something outside the framework. The option describing a prior-period error is wrong because nothing indicates the December 31 receivable balance was mis-stated under previously available information; this is new evidence refining an existing estimate, not a correction of a mistake.
Source: FASB Accounting Standards Codification: ASC 855-10, Subsequent Events