Question

Financial Statement Disclosure:

International Clothiers Ltd. has offices in Canada, Bermuda, Europe and the United States. Each of the following events have occurred after the company’s 31 December 2017 year-end, but before their financial statements had been finalized:

a. On 27 January, International Clothiers Ltd entered into a long-term lease for a private airplane for the company president and CEO. The lease requires payments of US$75,000 per month for 60 months.

b. The board of directors met on 15 February 2018 and decided to discontinue its shoe division due to continuing losses and a change in business strategy.

c. One of the company’s major retail customers declared bankruptcy on 22 March. The retail customer accounted for 20% of International Clothier’s year-end receivables and 35% of International Clothier’s revenue in 20x7.

Answer 1

These events are called subsequent events in accounting parlance and are those events that occur after reporting period but before the financial statements for that period have been issued or are available to be issued.

(a): As per GAAP the event of entering into a long-term lease for a private airplane for the company president and CEO will be regarded as a new event or non-adjusting event as the condition for leasing did not exist as of the balance sheet date. As such this event will not require disclosure on the financial statements.

(b): As per GAAP the event of discontinuing the shoe division will be regarded as an event that provides additional information and hence will be regarded as an adjusting event. This is because the condition of the shoe division making continuing losses existed on the balance sheet date. As such this event will have to be disclosed on the company’s financial statements.

(c ): This event will also be regarded as an adjusting event and hence will have to be disclosed in the financial statements. This is because the invoice must have been issued before the balance sheet date and the customer went bankrupt on 22^nd March which is a subsequent date. As such the impact of this event will have to be considered and the allowance for doubtful accounts may need adjustments to match the amount of receivables that will likely be collected.