Financial Planning

subsequent-events-financial-reporting

Subsequent Events and Financial Reporting
Subsequent Events and Financial Reporting 1600 941 smolinlupinco

In financial reporting, “subsequent events” are major events or transactions that occur after the reporting period ends but before financial statements are finalized. These events may include cyberattacks, natural disasters, regulatory changes, and the loss of a large business contract.

Whether or not you should report these subsequent events is something of a gray area, but the following guidance from the AICPA can help you make your decision.

Recognized and unrecognized subsequent events

Financial statements are a reflection of a company’s financial position at a specific date, as well as the operating results and cash flows for the period ending on that date. 

Since completing financial statements takes time, there’s often a gap between the financial statement date and the date when financial statements are ready to be issued. In some cases, unforeseeable events may occur during this time frame.

The AICPA classifies subsequent events into two groups in chapter 27 of their Financial Reporting Framework for Small- and Medium-Sized Entities:

1. Recognized subsequent events

These subsequent events offer further evidence of conditions that already existed on the financial statement date. For example, a major customer may declare bankruptcy due to the risk associated with its accounts receivable. In this case, there are often indicators of financial distress—such as rising staff turnover or late payments—for some time before the customer finally files for bankruptcy.

2. Nonrecognized subsequent events

Nonrecognized subsequent events are due to conditions that arose after the financial statement date. For example, if a business is severely damaged by an earthquake or a major storm, they’ll usually have no way of forseeing this disaster before it occurs.

Generally speaking, recognized subsequent events must be recorded in your company’s financial statements. Nonrecognized subsequent events don’t need to be recorded, but you may need to disclose the details of the event in the footnotes.

Understanding disclosure requirements

As a general rule, you should disclose nonrecognized subsequent events in the footnotes if omitting information about them might mislead investors, lenders, or other stakeholders. At a minimum, your disclosures should describe the event and provide an estimate of its financial impact, if possible.

In certain extreme cases, a subsequent event may have an effect pervasive enough that it puts your company’s viability in question. If so, your CPA may choose to re-evaluate the going concern assumption underlying your financial statements.

We can help you make disclosure decisions

If you’re unsure whether you need to report or disclose a subsequent event, contact us. We can offer you guidance and help you eliminate the guesswork.

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audits-related-party-transactions

Audits and Related-Party Transactions
Audits and Related-Party Transactions 1600 941 smolinlupinco

Business transactions involving related parties—including parent companies, subsidiaries, affiliated entities, relatives, and friends—sometimes occur at above- or below-market rates. This can cause your company’s financial statements to become misleading to the people who rely on them, since undisclosed related-party transactions can skew their understanding of the company’s true financial results.

Auditors and related parties

Because there’s a strong possibility of double-dealing with related parties, auditors place significant focus on hunting for undisclosed related-party transactions.

To uncover these transactions, auditors may use all of the following documents and data sources:

  • Lists of a company’s current related parties and associated transactions
  • Disclosures from board members and senior executives regarding their previous employment history, ownership of other entities, or participation on additional boards
  • Press releases announcing significant business transactions with related parties
  • Minutes from board of directors’ meetings, especially any discussion of significant business transactions
  • Bank statements, particularly for transactions that involve intercompany wires, check payments, and automated clearing house (ACH) transfers

In assessing these documents, auditors will pay particular attention to contracts for goods or services that are priced at higher (or lower) rates than goods and services purchased or sold in similar transactions between unrelated third parties.

For example, in order to reduce its taxable income in the United States, a manufacturer might buy goods from its subsidiary at artificially high prices in a low-tax country. Similarly, an auto dealership might pay the child of the owner an above-market salary with benefits that aren’t available to unrelated employees. Or a spinoff business might lease office space at below-market rates from its parent company. 

Targeting related-party transactions

Auditors use all of the following procedures to target undisclosed related-party transactions:

  • Interviewing the accounting personnel who report related-party transactions in the company’s financial statements
  • Looking at the company’s enterprise resource planning (ERP) system and testing how related-party transactions are identified and coded
  • Analyzing how related-party transactions are presented in the company’s financial statements

Robust internal controls are needed to ensure accurate, complete reporting of these transactions. Your company’s vendor approval process should include clear guidelines to help accounting personnel identify related parties and mark them in the ERP system accordingly. Companies that don’t have these measures in place may inadvertently fail to disclose related-party transactions.

Communicating with auditors

Communication is key when it comes to related-party transactions. You should always tell your auditors if you have any known related-party transactions—and don’t be afraid to ask for assistance disclosing and reporting these transactions in accordance with U.S. Generally Accepted Accounting Principles.

Beneficiary Designations and Joint Titles: Careful Planning Avoid Overriding Will

Beneficiary Designations and Joint Titles: Careful Planning Is Needed to Avoid Overriding Your Will
Beneficiary Designations and Joint Titles: Careful Planning Is Needed to Avoid Overriding Your Will 850 500 smolinlupinco

A careless approach to beneficiary designations and jointly titled assets can easily undermine your estate plan. 

For example, you may specify in your will that all of your property should be divided equally among your children. But say that your IRA accounts for half of your estate and names your oldest child as the beneficiary. In this case, your oldest child will inherit half of your estate in addition to a third of the remaining assets. It’s hardly an equal division of your assets, and probably far from what you intended.

Jointly owned property requires similarly careful treatment. Regardless of the terms of your will, the surviving owner takes title to the property after your death. What many people fail to realize is that their wills exert no control over disposition of nonprobate assets. 

Understanding nonprobate assets

Nonprobate assets include life insurance policies, IRAs and retirement plans, joint bank or brokerage accounts, and even savings bonds. When you pass away, nonprobate assets are generally transferred automatically according to a beneficiary designation or contract. Because of this, they override your will. 

To ensure your estate plan remains in line with your wishes, it’s important to regularly review beneficiary designations and property titles, especially after significant life events such as a marriage or divorce, the death of a loved one, or the birth of a child. 

Planning to use POD and TOD designations

Payable-on-death (POD) and transfer-on-death (TOD) designations allow you to transfer assets outside of probate in a simple and cost-effective way. While POD designations are used for bank accounts and certificates of deposit, TOD designations can be used to transfer stocks, bonds, or brokerage accounts. In many states, you may even be able to use TOD designations to transfer real estate.

All you need to do to set up these designations is provide a signed POD or TOD beneficiary designation form. To claim the money or securities after you pass away, your beneficiaries will simply need to present their identification to the bank or brokerage, along with a certified copy of the death certificate.

Although they are useful and convenient, POD and TOD designations must be carefully coordinated with the rest of your estate plan. Without careful planning, your POD or TOD may conflict with your will, trusts, or other estate planning documents.

You should also take care not to use POD and TOD designations for too high a proportion of your assets. If you use these designations for the majority of your assets, there may not be sufficient assets left in your estate to settle your debts, taxes, or other expenses. In this case, your executor will need to initiate a proceeding to bring assets back into the estate.

If you hold joint accounts, use POD or TOD designations, or have large retirement accounts or life insurance policies, proper planning is essential to avoid overriding your will. We can help you identify potential conflicts in your estate plan.

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