Question

Presented below are three independent situations.

Situation 2: Subsequent to the date of a set of financial statements but prior to the issuance of the financial statements, a company enters into a contract that will probably result in a significant loss to the company. The amount of the loss can be reasonably estimated.

Instructions

Discuss the accrual or type of disclosure necessary (if any) and the reason(s) why such disclosure is appropriate for each of the three independent sets of facts above.

Short answer

The material loss has been incurred subsequent to the date of the financial statements but prior to their issuance should be disclosed by means of a note in the financial statements.

Step-by-step solution

Meaning of Subsequent events

The term "subsequent events" refers to occurrences that occur after a company's fiscal year ends but before its financial results are revealed. To put it another way, the following occurrences occur after the cut-off date but before the corporation submits its financial statements.

Discussing the appropriate disclosure that should be disclosed

Notwithstanding the fact that

1. There is a potential loss on the contract,
2. The amount of the loss can be reasonably estimated, and
3. The potential for loss was discovered prior to the issue of the financial statements, the fact remains that the remainder that the contract was made after the financial statements were issued prevents the accumulation of the loss contingency in the financial statements for the period prior to the loss.

However, the fact that a significant loss occurred after the financial statements were prepared but before their issuance should be stated in the financial statements by way of a note. An estimate of the nature of the contingency and the amount of the anticipated loss, or a range within which the loss is most likely, must be included in the disclosure.