Before starting with the answer, I would like to first give a brief of what subsequent events are and how they are accounted :
First of all subsequent events are events which occur after the balance sheet date but before the date financial statements are issued by the management.
There are 2 types of subsequent events :
1. Adjusting events : These are the events occurring after the balance sheet date for which conditions were pre-existing as on the balance sheet date.
2. Non-Adjusting events : These are events occurring after the balance sheet date for which no conditions were existing as on the balance sheet date.
Accounting for Subsequent events : If the subsequent event is an adjusting event, then adjustments are required to be made in the financial statements along with an explanatory note. If it is a non-adjusting event, no adjustment is required in the financial statements, however disclosure should be made if such event occurs before the date on which financial statements are issued and is also material.
Now that we have understood the concept, we have answered the question below :
S. No. | Answer | Remarks |
Case 1 | (b) : a disclosure note only should be provided | This is
a non-adjusting event as the alleged damage has been caused by the
company after the balance sheet date, i.e., no conditions were
pre-existing on the balance sheet and hence no adjustment is
required in the financial statements. However this is a significant event which has occured before the financial statements are issued and the ultimate settlement has also been concluded before issuance of financial statements and hence a discloure note is required to be given in the financial statements |
Case 2 | (b) : a disclosure note only should be provided | Even though it is an adjusting event, only investigation by EPA has begun till the date financial statements are issued and hence even though it is probable that the damage assessment will ensue, the outcome of the case and the amount of liability cannot be accurately determined and hence it should be disclosed as contingent liabilty in the financial statements. |
Case 3 | (a) : a loss should be accrued in the financial statements with an explanatory note | Loss
should be accrued because : 1. It is an adjusting event since the conditions were pre-existing on the balance sheet date. 2. Ultimate settlement has been done before issuance of financial statements. |
Case 4 | (c) : no disclosure is necessary | Since the investigation has begun only after the issuance of financial statements, no disclosure is necessary. |
Note : There can also be a different opinion with regards to the
fact that (B) event ("investigation by EPA has begun") should have
happened before the balance sheet date for the event to be an
adjusting event. However, in my opinion if the alleged damage was
caused by the company before the balance sheet date, that means the
conditions were pre-existing on balance sheet date and the question
has been answered accordingly. It is really a subjective matter and also depends on the auditor's opinion and hence the question could have been answered while taking that assumption. |
Lincoln Chemicals became involved in investigations by the U.S. Environmental Protection Agency in regard to damages...
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Eastern Manufacturing is involved with several situations that possibly involve contingencies. Each is described below. Eastern’s fiscal year ends December 31, and the 2018 financial statements are issued on March 15, 2019. Eastern is involved in a lawsuit resulting from a dispute with a supplier. On February 3, 2019, judgment was rendered against Eastern in the amount of $110 million plus interest, a total of $125 million. Eastern plans to appeal the judgment and is unable to predict its outcome...
Eastern Manufacturing is involved with several situations that possibly involve contingencies. Each is described below. Eastern's fiscal year ends December 31, and the 2021 financial statements are issued on March 15, 2022. a. Eastern is involved in a lawsuit resulting from a dispute with a supplier. On February 3, 2022, judgment was rendered against Eastern in the amount of $111 million plus interest, a total of $126 million. Eastern plans to appeal the judgment and is unable to predict its...
Eastern Manufacturing is involved with several situations that possibly involve contingencies. Each is described below. Eastern's fiscal year ends December 31, and the 2021 financial statements are issued on March 15, 2022. a. Eastern is involved in a lawsuit resulting from a dispute with a supplier. On February 3, 2022, judgment was rendered against Eastern in the amount of $112 million plus interest, a total of $127 million. Eastern plans to appeal the judgment and is unable to predict its...
5 Eastern Manufacturing is involved with several situations that possibly involve contingencies. Each is described below. Eastern's fiscal year ends December 31, and the 2018 financial statements are issued on March 15, 2019. a. Eastern is involved in a lawsuit resulting from a dispute with a supplier. On February 3, 2019, judgment was rendered against Eastern in the amount of $117 million plus interest, a total of $132 million. Eastern plans to appeal the judgment and is unable to predict...
Eastern Manufacturing is involved with several situations that possibly involve contingencies. Each is described below. Eastern's fiscal year ends December 31, and the 2021 financial statements are issued on March 15, 2022 a. Eastern is involved in a lawsuit resulting from a dispute with a supplier. On February 3, 2022, judgment was rendered against Eastern in the amount of $117 million plus interest, a total of $132 million Eastern plans to appeal the judgment and is unable to predict its...