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CPA/FAR/Notes, Subsequent Events & Going Concern

Notes, Subsequent Events & Going Concern

Recognized vs non-recognized subsequent events and management's going-concern evaluation.

Medium 45 minArea I: Financial Reporting

Subsequent events: two types

TypeDefinitionTreatment
Recognized (Type I)Condition existed at the balance sheet dateAdjust the financial statements
Non-recognized (Type II)Condition arose after the balance sheet dateDisclose only, no adjustment

EXAMPLE: A lawsuit filed before year-end that settles after year-end for a determinable amount is a Type I event — adjust the financials. A factory that burns down after year-end is a Type II event — disclose, don't adjust, since the condition (the fire) didn't exist at year-end.

Evaluation period

Management evaluates subsequent events through the date the financial statements are issued (public companies) or available to be issued (many private companies) — not just through the audit report date.

Going concern

Management must evaluate, for each annual and interim period, whether there is substantial doubt about the entity's ability to continue as a going concern for one year from the financial statement issuance date. If substantial doubt exists and isn't alleviated by management's plans, that must be disclosed; if doubt remains after considering plans, the disclosure must say so explicitly.

EXAM TIP: Going-concern doubt does not, by itself, change the basis of accounting (financials stay at historical cost, not liquidation basis) unless liquidation is actually imminent.