Subsequent Events—Reexamination of Statement 56

Research Description: The objectives of this pre-agenda research are (1) to evaluate the effectiveness of the existing guidance for subsequent events and (2) to consider the need for revisions to those standards. If additional guidance is determined to be needed, another objective is to consider the development of revised accounting and financial reporting for subsequent events.

Status: Added to Research Agenda: December 2021

Subsequent Events—Project Plan

Background: The GASB routinely reviews its existing standards to ensure that they remain effective. Those reviews typically take place after a pronouncement has been in effect long enough to be fully evaluated (in general, at least five years). Statement 56 was effective upon its issuance in March 2009, but the subsequent events guidance dates to AICPA audit literature from 1972 and Interpretation 6 began to be effective in 1983. Moreover, the Board incorporated the guidance from the AICPA literature into Statement 56 essentially as is. Therefore, those standards 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.

This pre-agenda research activity on subsequent events builds on prior pre-agenda research conducted by the GASB and a study by external researchers. The content of disclosures of subsequent events was included within the scope of the pre-agenda research reexamining note disclosures. The final memorandum from that research summarized the overall findings related to subsequent events notes (and contingent liabilities notes; the two topics generally were examined in tandem) as follows:
  • Overall, user participants consider significant contingent liabilities and significant subsequent events disclosures valuable, and preparer and auditor participants do not believe those disclosures are difficult to prepare or audit.
  • Preparer and auditor participants believe the contingent liabilities disclosures are more difficult to prepare and audit than the subsequent events disclosures because of the difficulty of gathering the information and testing the completeness of that information.
  • Some participants believe that it should be highlighted that the contingent liabilities and subsequent events disclosures should include only those items that are significant.
  • Disclosures related to contingent liabilities were not prevalent in the notes of governments in the archival sample. However, disclosures related to subsequent events were prevalent.
The archival analysis found the prevalence of subsequent events disclosures varied among types of governments: 88 percent of states presented a subsequent events note, as did nearly half of the local governments in the random sample of reports examined. On the other hand, 37 percent of counties, 27 percent of school districts, 26 percent of taxing districts, and 25 percent of business-types activities disclosed information about subsequent events. Those results are consistent with the preliminary findings of a study funded by a GASB Crain Grant, which found states were four times more likely to disclose a subsequent event than cities and counties in their sample. Those subsequent events were related to municipal bonds more than twice as often as all other subsequent events combined.

Respondents to a GASB survey of users rated the usefulness of subsequent event disclosures relatively high—an average of 4.04 on a scale of 1 (not valuable at all) to 5 (very valuable). Overall, two-thirds of respondents rated the disclosure valuable or very valuable. Preparer and auditor participants in the research generally did not consider subsequent events disclosures difficult to prepare or audit.

Perhaps for that reason, subsequent events are not a common topic for technical inquiries—about 3 per year since 2017. Preliminary results of Crain Grant study by external researchers indicated, however, that governments may be having more difficulty with the standards than they realize. For example, 10 percent of their government-year observations of disclosed subsequent events were described as occurring before or as of fiscal year-end, even though the subsequent event period does not begin until after fiscal year-end. The study found that 29 percent of states disclosed a subsequent event in error at least once, compared with 9 percent of counties and 6 percent of cities.

To examine instances of governments not disclosing subsequent events that meet the definition in the standards, the study compared government’s disclosures with (1) their continuing disclosures to Electronic Municipal Market Access (EMMA®) of material bond-related events and (2) instances of bond rating changes, both between their fiscal year-end and financial statement issuance date. In more than a quarter of the observations in the study, a government made more bond-related continuing disclosures to EMMA than bond-related subsequent event disclosures in their notes to financial statements. In 42 percent of the instances of rating changes, the government did not disclose a rating change-related subsequent event in their notes to financial statements. Although those preliminary findings should be considered with some caveats, they are notable evidence that governments and their auditors may, in fact, be having difficulty applying the subsequent event standards, at least with respect to bond-related events, which are the most common type of subsequent event disclosed.

Major Research Issues: The following issues will be considered:

  1. How prevalent are recognized and nonrecognized subsequent events among state and local governments?
  2. How prevalent are subsequent event disclosures? What types of subsequent events do governments disclose in practice?
  3. What difficulties do governments have, if any, distinguishing between subsequent events that require adjustments to the financial statements and those that are limited to disclosure?
  4. What difficulties do governments have, if any, determining whether information that became available prior to the issuance of the financial statements reflects conditions that existed as of the date of the financial statements?
  5. What other issues do governments and auditors have, if any, in applying the standards?
  6. How are the standards applied to events occurring after the issuance of the financial statement when a government reissues the financial statements?
  7. How do the nature and timing of subsequent events relate to those of the events being addressed by the Risks and Uncertainties Disclosures project?
  8. What impact might the proposed changes to MD&A in the Financial Reporting Model project have on subsequent events reporting?
  9. What information are governments disclosing about subsequent events? Is that information essential to users for making decisions and assessing government accountability?
  10. What disclosures do users need, if any, about subsequent events that they are not currently receiving? How would they use that information?
  11. What essential information, if any, do users need regarding recognized subsequent events?
  • Pre-agenda research approved: December 2021
Current Developments: The staff began its review of subsequent events literature, including review of the Crain Grant research previously conducted.

Research Work Plan: The plan for the pre-agenda research includes the following activities:
Discuss research memorandum with the Board.
Board Meetings Research Activities
July–August 2022 Literature review.
September–November 2022 Develop and administer preparer and auditor surveys.
October–December 2022 Develop and administer user surveys.
January–February 2023 Develop interviews protocols and advance material, as necessary.
March–April 2023 Conduct interviews, as necessary.
May–June 2023 Analyze research results and draft research memorandum.
July 17, 2023 Discuss research memorandum with the Board.
August 2023 Discuss research results with GASAC.