Changes and events
Adjust or Disclose
If the condition existed at year-end, adjust; if it arose afterward, disclose only.
How the exam words it
- -The stem places an event between year-end and issuance ('before the statements are issued') and asks how to treat it.
- -A customer goes bankrupt, a lawsuit settles, a warehouse burns, or a market value drops after year-end.
- -It asks whether the event 'should be recorded as an adjustment' or is 'a Type 2 subsequent event'.
- -It asks what must be disclosed about the evaluation of subsequent events.
The playbook
- 1Fix the window: the balance sheet date to the issuance (or available-to-be-issued) date.
- 2Ask when the underlying condition arose, not when management learned of it or when cash moved.
- 3Condition existed at year-end (Type 1: settlement of existing litigation, a customer already failing) = adjust. Condition arose after (Type 2: casualty, market decline, new financing) = disclose only.
- 4Always disclose the date through which subsequent events were evaluated.
The trap
Adjusting for a Type 2 event. A post-year-end fire or market decline is a new condition, so it is disclosed, never booked into the year-end statements.
How the exam varies it
The same pattern, re-skinned along these axes:
Type 1 versus Type 2Which event: bankruptcy, settlement, casualty, market decline, or financingRecognition treatment versus required disclosure
Drill this pattern
8 questions of Adjust or Disclose from across the AUD topics. Clear it by getting 5 right with a streak of 3.