COVID-19 Impacts for ASC Topic 855, Subsequent Events

COVID-19 was declared a pandemic by the World Health Organization (WHO) on March 11, 2020. A few weeks later, the first quarter of 2020 closed, and financial institutions should consider the impact COVID-19 will have on their financial reporting framework now, specifically relating to subsequent events. Accounting Standards Codification (ASC) Topic 855, Subsequent Events, states that entities need to consider events or transactions subsequent to the balance sheet date to determine whether adjustments or disclosures are needed in the financial statements.

Financial institutions should determine if the COVID-19 event is a recognized or non-recognized subsequent event; if it is determined that the pandemic is in fact a recognized subsequent event, what effects on the financial statements should be considered?

ASC 855 defines recognized and non-recognized subsequent events as the following:

Recognized subsequent events consist of those events or transactions that provide additional evidence with respect to conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. All information that becomes available prior to the issuance or availability for issuance of the financial statements should be used by management in its evaluation of the conditions on which the estimates were based. The financial statements should be adjusted for any changes in estimates resulting from the use of such evidence1.”

Non-recognized subsequent events consist of those events that provide evidence with respect to conditions that did not exist at the date of the balance sheet but arose subsequent to that date. These events should not result in adjustment of the financial statements. Some of these events, however, may be of such a nature that disclosure of them is required to keep the financial statements from being misleading1.”

As of Dec. 31, 2019, financial statements and U.S. Securities and Exchange Commission (SEC) filings were being completed. The U.S. began to hear discussion of the virus, at which point the impact of COVID-19 was relatively unknown. In their 2019 year-end filings, some financial institutions included a disclosure noting the pandemic as a non-recognized subsequent event. However, many chose not to disclose this event at all as the pandemic had not yet significantly impacted the U.S.

Now that COVID-19 is present in the U.S., millions are filing for unemployment, supply chains are being disrupted and the general fear of the unknown is growing considerably across industries and markets. As time passes, it becomes a difficult task to conclude at each reporting period whether the pandemic is a recognized versus a non-recognized subsequent event, as well as the resulting potential financial statement impact.

Financial institutions should critically assess their significant accounting estimates, especially those that are susceptible to uncertainty, and determine whether a recognized subsequent event has occurred and what, if any, adjustments are considered necessary to various accounts. For financial institutions, we would expect at a minimum those accounts to include:

  • Allowance for loan and lease losses (ALLL): What impact would delinquencies, charge-offs and potential impairments have on the ALLL calculation?
  • Goodwill: Has there been a triggering event that would lead management to believe an interim goodwill impairment analysis is necessary?
  • Deferred taxes: Has the assessment of realizability of deferred tax assets changed (i.e., is there a need for a valuation allowance) given future income predictions?
  • Investment and other securities (including cost or equity method investments): Has there been a significant unrecoverable decline in the value of securities?

Management should consider all events that occur between the balance sheet and the reporting date when concluding if there is enough evidence that the pandemic is in fact a recognized subsequent event and adjustments to financial statements are necessary. Due to the effects of the COVID-19 pandemic, we are currently in a state of change and evolution. Therefore, financial institutions should document the impact consideration that the pandemic situation is having on its financial statements and communicate frequently with key stakeholders.

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  1. ARM, ASC Topic 855, Subsequent Events, 10 Overall, U.S.: Scope


Steven Khoury
Manager, DHG Financial Services

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