Subsequent Event: a Worked Example

A mid-market company with a June year-end may not sign its accounts until September or later. Over those months the business keeps trading, customers pay or do not, and lenders make decisions. The accounting standards draw a window from balance date to the date the accounts are authorised for issue, and what happens inside it can change them. The relevant rules are IAS 10 (issued in Australia as AASB 110 and in New Zealand as NZ IAS 10) for IFRS reporters and Section 32 of FRS 102, which most UK mid-market groups use.

The auditor looks too. Under ISA (NZ) 560, for example, an auditor performs procedures covering the period up to the date of the audit report, which include asking management and reading the minutes. A bank often knows something here that nobody else outside the business does, because a declined facility or a tightened limit is the bank's own decision.

The standards give examples on each side. A customer's bankruptcy after year end usually confirms that a debt was already impaired at balance date, so the receivable is written down. A court case settled after year end over something that happened before it is adjusting too. A fall in the market value of investments after year end is not, and neither are a large acquisition, a disposal or a restructuring announced after the date, though each may need a note. The word usually matters in the bankruptcy example: if a customer fails because of something that happened after balance date, such as a fire, the debt was sound on the day and the event is non-adjusting.

Going concern is the exception that overrides the sorting. Both IAS 10 and FRS 102 say accounts must not be prepared on a going-concern basis if, after balance date, management decides to liquidate or stop trading, or has no realistic alternative. Short of that, a material uncertainty about going concern has to be disclosed.

A maker of retail display cabinets, constructed for this page like every figure in it, has a 30 June balance date and plans to sign on 28 September. Net debt is US$12.0m. Draft EBITDA is US$5.0m and profit before tax US$3.1m. Its facility tests net leverage at 30 June, on the audited accounts, at 3.25 times. That level belongs to the example and is not offered as a market norm. Three things happen before signing.

The first event changes the numbers, and the bad debt lands inside EBITDA, taking the covenant with it. The test falls on 30 June, so the breach dates from balance date even though nobody could know of it until August. That has a further consequence for the classification of the debt, because a waiver obtained now is too late to keep the loan out of current liabilities.

The second event changes nothing in the June figures, but if it is material the directors describe it and estimate its effect, and a lender reading the forecast will want it. The third does not touch a single line of the balance sheet, and it is the most serious of the three. Without the US$6.0m line the directors must show how the business will fund itself for the coming year. If they cannot, the accounts carry a material uncertainty, or worse.

A subsequent event is a fact that has happened. A forecast risk has not happened, and belongs in the going-concern assessment rather than in this note. A covenant breach that occurs after balance date is itself a non-adjusting event, so the loan keeps its classification and the breach is disclosed if material. A contingent liability is a possible obligation at balance date, and events in the window can settle whether it has become a real one.

DEFINED IN ONE PARAGRAPH → · GOING CONCERN AND BANK SUPPORT → · THE BANK IN YOUR AUDIT FILE →

The desk sets the note against what it already knows. If the bank told the borrower in August that a limit would be cut, and the accounts signed in September say nothing, the omission is a question about the directors and about what the auditor was told. It need not mean bad faith, but it leads straight to a harder conversation about what else was left out. Many facility agreements also oblige a borrower to tell the lender promptly about material events, so silence in the accounts may sit beside a breach of that undertaking.

The note also dates the lender's picture. Accounts signed in late September are a June photograph with a September caption, and a lender reading them in October still needs management accounts since balance date. An event that lands after signing appears nowhere in those accounts, which is why a lender reads recent trading and the subsequent-events note together rather than treating either as complete.

ONE-MINUTE FILE: A DECLINED LINE → · THE MONTHLY PACK →