Events after the Balance Sheet Date. SFAS 165 - Coursework Example

?SFAS 165 – Events after Balance Sheet Introduction The biggest dilemma that public entities generally face while reporting the financial ment is that whether the subsequent event (events after balance sheet date) should be recognized and disclosed in the financial statements or not (Deloitte, 2012). SFAS 165, “Subsequent Events” have eased out this problem of the company to a greater extent as it provides a detailed and comprehensive framework for the objective, scope, recognition and disclosure of the subsequent events (Financial Accounting Standard Board, 2009). This standard has also provided some examples of such events which should be or should not be recognized and reported in the financial statements. This article examines objective of SFAS 165 in a detailed manner such that the important paragraphs of the Statement are directly reproduced from the Statement so that actual wordings of the Statements regarding the important points of the Statement can be presented in their intended meaning. This article is structured in such a manner that the first section highlights the overview of this Statement followed by the section which focuses upon the objectives of this Statement. Next section emphasizes the recognition criteria of this statement along with some of the examples taken directly from the Statement which highlight both types of events, the one which should be recognized as well as the other ones which should not be. The subsequent section outlines the comparison of SFAS 165 of GAAP with IAS 10 of IFRS. After that an example from Thomson One Banker database is reported in this article followed by discussion on that example. Conclusion is the last part of this article which leads to the end of this article. Overview of SFAS 165 Statement of Financial Accounting Standards 165 (SFAS 165) discusses the events after the balance sheet date. Those events are also referred to as subsequent events. Generally, those events that arises “after the balance sheet date but before the date of financial statements are issued or available to be issued”, requires significant consideration of the management of the reporting entity regarding the applicable accounting treatment of those events (Financial Accounting Standard Board, 2009). This SFAS was issued in May, 2009 but became effective on June 15, 2009for the reporting entities. Objective of SFAS The objective of SFAS is to determine and set the principles and guidelines for the events “after balance sheet but before the date of financial statements, are issued or available to be issued”. Those principles highlight three important areas which include the period which relates to the events after balance sheet date, the circumstance that leads to the recognition of those events in the financial statements and lastly, the disclosures that need to be made in respect of the events after balance sheet date (Financial Accounting Standard Board, 2009). Scope of SFAS 165 The scope of SFAS 165 is applicable on all the events after balance sheet excluding those events that are applicable elsewhere in the generally accepted accounting principles (GAAP) (Financial Accounting Standard Board, 2009). Some of those statements of GAAP are indicated below which does not come under the scope of SFAS 165. It is also explicitly mentioned in SFAS 165 that the following list of GAAP standards is not exhaustive by any means. FASB Interpretation No. 48 - Accounting for Uncertainty in Income Taxes SFAS 128 - Earnings per Share SFAS 5 - Accounting for Contingencies Recognition Criteria The recognition criteria for the events after the balance sheet requires that the event in consideration must have some evidences which ensure that event existed at or before the balance sheet date. In SFAS 165, the word “existed at the balance sheet” is of prime importance because actually it is the cut off point which decides whether an event that occurred “after the balance sheet date but before the date of financial statements are issued or available to be issued”, should be recognized or not in the financial statements (Financial Accounting Standard Board, 2009). Examples of Recognized Events The following is the example of those events that should be recognized in the financial statements by the reporting entity (Financial Accounting Standard Board, 2009). If an event of litigation took place before the balance sheet and the reporting entity also provided some reliable estimates of the settlement and booked those amounts in the financial statements, but “after the balance sheet date but before the date of financial statements are issued or available to be issued”, the litigation settled with an amount different from the previous estimate of the reporting entity, in this case, the reporting entity is required to recognize the actual amount of settlement in the financial statements. Non-Recognition Criteria Similarly SFAS 165 also provides guidance for those events that do not qualify for their recognition but looks similar to those events that need to be recognized. The criteria for non-recognition is derived from the recognition criteria such that those events that “did not exist at the balance sheet date”, but occurred “after the balance sheet date but before the date of financial statements are issued or available to be issued”, then those events are not subject to any recognition in the financial statements (Deloitte 2012). The actual guideline of SFAS 165 in respect of non-recognition of those events is reproduced as under (SFAS 165): Examples of Recognized Events The following are some of the examples of those events that do not qualify for their recognition in the financial statements and also have been highlighted in SFAS 165 (Financial Accounting Standard Board, 2009): Disposal of a bond or issuance of shares “after the balance sheet date but before the date of financial statements are issued or available to be issued” Losses incurred in respect of trade receivables due to bankruptcy of the debtors which occurred “after the balance sheet date but before the date of financial statements are issued or available to be issued” Loss incurred in respect of merchandise or property, plant and equipment due to any natural disaster, or malfunction which occurred “after the balance sheet date but before the date of financial statements are issued or available to be issued” Deviations in the foreign exchange rates which can change the fair value of assets and liabilities of the reporting entity and occurred “after the balance sheet date but before the date of financial statements are issued or available to be issued” A business combination that occurred as a result of merger or acquisition “after the balance sheet date but before the date of financial statements are issued or available to be issued” Disclosure Requirements The major emphasis of SFAS 165 for the disclosure of the events after the balance sheet is placed on the “date through which the events after the balance sheet date have been evaluated” (Financial Accounting Standard Board, 2009). As per SFAS 165, that date needs to be disclosed in the financial statement through which the events after balance sheet date have been evaluated (Deloitte, 20012). SFAS 165 also provides the guidelines in respect of non-recognized event such that if those events are not disclosed in the financial statements, then the financial statements might become misleading, therefore, those events should be disclosed (Financial Accounting Standard Board, 2009). Comparison SFAS 165 (GAAP) with IAS 10 (IFRS) Subsequent events or events after balance sheet date or events after reporting period have mostly the similar accounting treatment in both US GAAP and IFRS such that both of these standards are constantly making efforts towards their convergence (Earnst & Young, 2010). This is the reason why only at few occasions, there are some discrepancies under SFAS 165 and IAS 10. The following table highlights the major similarities and the differences between the two standards in respect of events after balance sheet under the guidance provided by Deloitte (2008). Items GAAP IFRS Recognition Criteria “Events existed at the balance sheet date” Same as GAAP Non-recognition Criteria “Events did not existed at the balance sheet date” Same as GAAP Date through which subsequent events are to be considered Events occurring “after the balance sheet date but before the date of financial statements are issued or available to be issued” (SFAS 165) “Events occurring after the balance sheet date but before the date of financial statements are authorized to be issued.” (IAS 10) Stock Dividends Financial Statements need to be adjusted for the effect of stock dividend Financial Statements need not be adjusted for the effect of stock dividend Reclassification of Short term loans Financial Statements need to be adjusted for the effect of reclassification. Financial Statements need not be adjusted for the effect of reclassification. An example of Subsequent Event from an annual report This example is taken from the financial statements of Heartland International Healthcare Centre in which an existing debt is reclassified into another debt which is recognized as subsequent event according to SFAS 165 (Heartland International Health Centre Financial Statements, 2009). The excerpts from the financial statements are reproduced as under: NOTE 7 – NOTES PAYABLE Notes payable consisted of: 2009 Note payable to Illnois Facilities Fund with a maturity date of February 2024. The note bears an interest rate of 6%, subject to adjustment at the five-year and 1 O-year anniversary dates. Initial monthly principal and interest payments are ?2,954. ?346,372 Note payable to bank with a maturity date of November 6, 2009. Interest is payable monthly at a variable rate subject to a minimum rate that was 6% as of June 30, 2009. The Health Center has entered into an agreement to refinance this debt into a long-term note subsequent to year-end. ?688,000 Total ?1,034,372 Future principal payments required under the above obligations are as follows at June 30, 2009and reflect the subsequent refinancing arrangement noted above. 2010 2011 2012 2013 2014 Thereafter 9,560 46,438 49,263 52,258 55,437 801,416 Total 1,034,372 Total interest expense incurred on the related debt was ?42,446 for the year ended June 30, 2009. There was no interest expense for the year ended June 30, 2008. NOTE 11 - SUBSEQUENT EVENTS Management evaluated subsequent events through December 23, 2009, the date the financial statements were available to be issued. Events or transactions occurring after June 30, 2009 but prior to December 23, 2009 that provided additional evidence about conditions that existed at June 30, 2009 have been recognized in the financial statements for the year ended June 30, 2009. Events or transactions that provided evidence about conditions that did not exist at June 30, 2009 but arose before the financial statements were available to be issued have not been recognized in the financial statements for the year ended June 30, 2009. On November 12, 2009, the Health Center refinanced its note payable to bank (see Note 7) into a long-term promissory note that matures on December 1, 2024, with the Ilinois Facilities Fund. This promissory note bears interest at a rate of 5.875% until December 1, 2014. At December 1, 2014 and through November, 30, 2019, the promissory note bears interest at a rate based on the yield of United States Treasury obligations. At December 1, 2019, the rate readjusts. The Health Center is required to make monthly payments of principal and interest of ?5,759. The promissory note is secured by the property that was initially purchased. Conclusion This article mainly discussed the overview, recognition criteria, disclosure requirements, comparison of subsequent events under GAAP (SFAS 165) with that of IFRS (IAS 10) followed by an example of subsequent event disclosure from the financial statements of the Heartland International Health Center. Overall, there is not too much difference in the accounting treatment of subsequent events under both GAAP and IFRS mainly terminologies are different in both the standards. References Deloitte, 2008, IFRSs and US GAAP A pocket comparison, [Online], Available at: , [Accessed on 5th April 2012]. Deloitte, 2012, Summaries of International Financial Reporting Standards, IAS10 Events after the Reporting Period, [Online] Available at : [Accessed on 5th April 2012]. Ernst & Young, 2010, US GAAP vs. IFRS: the basics, Subsequent events, [Online] Available at: [Accessed on 5th April 2012]. Financial Accounting Standards Board, 2009, Financial Accounting Series, “Statement of Financial Accounting Standards No. 165 Subsequent Events” Norwalk, CT: Financial Accounting Standards Board. Heartland International Health Centre Financial Statements, 2009, [Online] Available at: [Accessed on 5th April 2012]. International Accounting Standards Board, 2008, International Financial Reporting Standards (IFRSs®) 2008: Including International Accounting Standards (IASs®) and Interpretations as approved at 1 January 2008, “The consolidated text of International Financial Reporting Standards as approved on 1 January 2008”. London, International Accounting Standards Board. Thomson One Banker database, 2012, [Online] Available from:[Accessed on 5th April 2012]. Read More