The AcSB recently issued a re-exposure draft onÂ proposed changes to Handbook Section 3820.
IN March 2004, the Accounting Standards Board (AcSB) issued an exposure draft of proposed amendments to Handbook Section 3820, Subsequent Events. The key change was to define the subsequent event period as from the date of the balance sheet to the date the financial statements are authorized for issue. This change was intended to extend the subsequent period from the current date of completion.
Another change was to define the date of authorization of issue and to require that this date â€” and who authorized the statements for issue â€” be disclosed in the notes to the financial statements. The revised Section 3820 was to apply to all entities: there were to be no exceptions for not-for-profits, or exclusions under differential reporting.
Based on the responses it received to the exposure draft, the AcSB concluded that changes were needed to the proposals â€” changes significant enough to warrant re-exposure. Issued in March 2005, the re-exposure draft retained the MarchÂ 2004 amendments that would extend the subsequent period as well as the requirements related to authorization to issue.
New was a decision to distinguish between publicly and non-publicly accountable enterprises. According to the re-exposure draft, publicly accountable enterprises are “public enterprises, co-operative business enterprises, regulated financial institutions and regulated financial institution holding companies, enterprises subject to rate regulation, government business enterprises, and government business-type organizations.” Non-publicly accountable enterprises include small and/or private enterprises, not-for-profit organizations, and pension plans.
This distinction is critical. The re-exposure draft requires that a publicly accountable enterprise search for, identify, and report subsequent events that occur between the balance sheet date and a date no earlier than the date of authorization for issue. On the other hand, an entity other than a publicly accountable enterprise must search for, identify, and report subsequent events that occur between the balance sheet date and a date no earlier than the date of completion.
The date of authorization for issue is the date at which those charged with governance, such as the Board of Directors, approve the financial statements for issue, including the related notes. This is a date later than the date of completion, which is generally the date by which management has completed the process of gathering information and preparing the financial statements, and determines that the financial statements, including the related notes, result in a fair presentation in accordance with generally accepted accounting principles (GAAP).
Furthermore, entities will have to disclose their subsequent event date. The subsequent event date is the date to which an entity searches for, and identifies, subsequent events. The subsequent event date is no earlier than the date of authorization for issue (for publicly accountable enterprises) or completion (for all other entities).
Adjusting and Non-adjusting Events
The re-exposure draft also distinguishes between adjusting and non-adjusting subsequent events:
- adjusting subsequent events are those that provide evidence of conditions that existed at the balance sheet date; and
- non-adjusting subsequent events are those that are indicative of conditions that arose after the balance sheet date.
Therefore, an entity will be required to adjust amounts recognized in its financial statements for subsequent events that:
- occur between the balance sheet date and the date of authorization for issue of the financial statements, but relate to conditions that existed at the balance sheet date; and
- are material.
Furthermore, an entity will be required to disclose the effects on its financial statements of subsequent events that occur between the balance sheet date and the date of authorization for issue of the financial statements, but relate to conditions that existed at the balance sheet date. Disclosures will also be necessary for subsequent events that:
- relate to conditions that arose after the balance sheet date; and
- would influence the economic decisions of users made on the basis of the financial statements taken as a whole.
The subsequent events review includes consideration of whether the entity is, or will remain, a going concern.
The following timelines, taken from the re-exposure draft, succinctly demonstrate the different requirements for publicly and non-publicly accountable enterprises. Note the different key date: for publicly accountable enterprises, the subsequent event date is the date of issue; for non-publicly accountable enterprises, it is the date of completion.
Unlike the original exposure draft, the re-exposure draft’s amendments to Section 3820 will not result in convergence with IAS 10, Events After the Balance Sheet Date. Only publicly accountable enterprises will be required to disclose the date of authorization for issue of the financial statements and who gave that authorization. The AcSB also chose to exclude a requirement in IAS 10 to disclose, when such is the case, the fact that owners or others have the power to amend financial statements after issue. Why? This is not common practice in Canada and it was felt that there was little merit in specifying a disclosure that would likely not be required.
Furthermore, non-publicly accountable enterprises only report subsequent events that management becomes aware of during the period between the subsequent event date and the date of issue. During this period, a non-publicly accountable enterprise would have a passive responsibility to identify subsequent events, as compared to the active responsibility to search for and identify subsequent events between the balance sheet date and the date of completion.
On the other hand, Section 3820 will not, for publicly accountable enterprises, create a Canada/U.S. GAAP difference. The wording of the re-exposure draft does not preclude an enterprise from reporting subsequent events to a later date. For example, a publicly accountable enterprise could follow U.S. practice or securities regulations for reporting subsequent events and still comply with the proposed Canadian standard by extending the subsequent event period from the date of authorization for issue to the date of issue of the financial statements.
A final standard is expected to be issued in the fourth quarter of 2005. Assuming the revisions proposed are approved, the “new” SectionÂ 3820 would apply to financial statements covering interim and annual periods ending on or after JuneÂ 30, 2006, with earlier adoption encouraged.