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Add It to the Agenda: Subsequent Events

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Brooke Stout
June 22, 2023

Per the Environmental Protection Agency, fire-related threats are increasing. As the uptick in natural disasters, such as fires, continues, subsequent events will become increasingly prevalent in financial reporting. On the Governmental Accounting Standards Board’s (GASB) Pre-Agenda Research docket is a reexamination of Statement 56 – Subsequent Events. This is often an area that falls to the wayside, or the subsequent side, of financial reporting. According to GASB’s project plan, Statement 56 and all prior iterations, which stem directly from the AICPA literature, have never been “evaluated for their appropriateness to state and local governments, effectiveness, consistency with the conceptual framework or the usefulness of the information that results from their application.” State and local governments often require an adapted version of the AICPA’s guidance due to the difference in purpose from for-profit entities and the usefulness of information for their stakeholders. 

A survey conducted by GASB found that respondents rated the usefulness of subsequent event disclosure a 4.04 out of 5. An analysis by GASB found that 88 percent of states presented a subsequent event note while only approximately 50 percent of the local governments in the sample presented a subsequent event and even fewer, only 37 percent, of counties disclosed information about subsequent events. An additional study funded by GASB found that “states were four times more likely to disclose a subsequent event than cities and counties.” For those who have either worked for or audited a city or county, these are likely not surprising findings. Despite these disclosures not being difficult to audit or to prepare, they are often overlooked in the push to publish the Annual Comprehensive Financial Report (ACFR). The issue for stakeholders becomes apparent when differences in application of statements across organizations becomes prevalent, such as appears to be the case with subsequent event disclosure based on GASB’s findings.

One of the “Major Research Issues” GASB has identified is “How prevalent are recognized and non-recognized subsequent events among state and local governments?” Jeremy Michels, in his article “Disclosure Versus Recognition: Inferences from Subsequent Events,” explains there is a long history of investors finding recognized values more pertinent than disclosed values (2017, p. 4). While state and local governments do not have “investors” in the traditional sense, they do have stakeholders such as taxpayers, lenders or bondholders, that rely on the accuracy of the ACFR. One issue that rises to the top of this concern is how a stakeholder may interpret disclosure versus recognition of an event. As an extreme example, under the current standard a fire occurring during the fiscal year could demolish an entire building and have a material impact on the financial statements, but this same event occurring just one day after fiscal year end would only require disclosure—disclosure that could be overlooked by stakeholders. Consideration should also be given to how stakeholders react to a recognized event versus a disclosed event.

Stakeholder needs and reactions are another focus area of GASB in their “Major Research Issues.” GASB poses the question “What essential information, if any, do users need regarding recognized subsequent events?” Keith Czerney, Jaime Schmidt, Anne Thompson and Wei Zhu explore reactions to subsequent events in their 2020 article “Do Type II Subsequent Events Impair Financial Reporting Quality?” They found material events occurring subsequent to the fiscal year but prior to financial statements being issued (i.e., Type II) are associated with lower financial reporting quality. This is likely due to the decreased reaction time available to prepare for disclosure. Although this study was performed around corporate events, the assumption can be made that findings would transfer, particularly in the case of resource constrained local governments. By posing the research question about essential information, it would appear GASB is hoping to make subsequent event reporting as clear and concise as possible, which may be of significant benefit to resource constrained local governments, particularly when dealing with these Type II subsequent events.

One area of particular focus for GASB is the disclosure of bond-related events. As part of the above-mentioned study, GASB found governments included in the study made more bond-related continuing disclosures to Electronic Municipal Market Access (EMMA) than bond-related subsequent event disclosures in their ACFR. This seems to point to difficulty in applying the subsequent events standards. Much of this difficulty could stem from the lack of adaptation that has occurred to these standards to make them easier to apply for state and local governments and speaks to the necessary research and review of Statement 56. GASB is currently analyzing research results and drafting the research memorandum, with a goal to discuss the research memorandum with the Board at the July 17th, 2023, meeting. If state and local governments do not want to get burned, they should maintain awareness of the potential deficiencies in subsequent event reporting and watch for updates from GASB as they move forward with their research on Statement 56.

Author: Brooke Stout is a Certified Public Accountant, Certified Internal Auditor, experienced governmental auditor, and Assistant Professor of Accounting at Eastern Oregon University. Email: [email protected]

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