Disclosing subsequent events in annual financial statements
At this time, everyone is in a constant state of uncertainty – and governmental entities are not immune to this. In addition to the uncertainty of everyday life, governments are unable to predict the impact of COVID-19 on revenue streams or on changes to employee needs. We are all waiting to see what the new normal will truly be.
When preparing annual financial statements, a governmental entity needs to perform an analysis of any potential subsequent events related to COVID-19. At this point in time, very few entities would have information to report a recognized event in their financial statements that would lead to adjusting financial numbers. An example of this would be having definitive evidence that an estimate in place at year-end is based now on incorrect data, such as a major customer going bankrupt. The more common scenario that governments will see is the potential for a disclosure in the footnotes of the financial statements. This would be required for items that did not exist at year-end, but certain known facts would be essential to help the users understand the financial statements.
One of the key items to consider when performing this analysis on subsequent events is whether the impact or transaction is known versus anticipated. If there are known impacts, such as declines in investment values, declines in significant revenues (such as federal or state aid or certain taxes collected), change in demand or discontinuation of certain services, increased costs related to employee benefits or labor or any other major change from the previous expectation, a subsequent event should be disclosed. If these impacts are anticipated, based on the current environment, but not known, this is more appropriately an item to mention in the Management’s Discussion and Analysis. As is the case with all Governmental Accounting Standards Board (GASB) requirements, the material nature of the subsequent event should be taken into consideration and, if needed, discussed with your auditors.
For additional guidance on subsequent event disclosures, please see the GASB Codification section 2250, paragraphs .109-.116.
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