Introduction

The auditor’s work does not end with an examination of the completed (audited) accounting period. It is also necessary to be consistent with events that occur in the future (in the next accounting period), especially because these events may affect the financial statements for the accounting period, for which they are prepared. The purpose of this article is to describe in more detail the issues and significance of events that occurred after the balance sheet date and the moments related to them.

Post-balance-sheet events

These are events that occurred between the balance sheet date and the date the financial statements were compiled, approved and signed by the statutory body and subsequently published. All entities are required to compile financial statements as of the date of closing the accounting books using all information known at that time. This day is called the balance sheet day, which for most companies in the Czech Republic falls on the last day of the calendar year (i.e. 31 December). However, because a significant period of time may elapse between the balance sheet date and the date the financial statements are compiled, approved and published, it is possible that certain events may occur, which may or may not materially affect the financial statements. The entity is obliged to take subsequent events into account. Incorrect assessment of these events may cause the financial statements to be misstated and they may not present a true and fair view of the subject matter and financial position of the accounting entity.

The impact of subsequent events on an entity’s financial statements depends on their type. We distinguish between two types of events:

• Events after the balance sheet date that do not require adjustment are those that describe a situation that arises in a subsequent period and is therefore unrelated to the previous accounting period (for which the financial statements are compiled).
• Events after the balance sheet date that require adjustment, on the contrary, are those that relate to a previous accounting period and provide only additional (more recent) evidence of a situation that already existed as of the balance sheet date.

Non-adjusting events

Non-adjusting events are events that clearly occurred in a subsequent accounting period and are not related to the previous accounting period. Although these events do not modify the values in the financial statements as such, if material, they must be disclosed in the notes to the financial statements and in the annual report, if the entity compiles one. Examples of events that do not require adjustments of the financial reports (financial statements) include natural disasters that affect the company, the commencement of significant litigation, or the sale of subsidiaries or other significant assets of the accounting entity in a subsequent period.

Adjusting events

Events that require adjustment of the financial reports are those that relate to events that existed as of the date of the financial statements (balance sheet date) of the give accounting period, but the accounting entity was not informed about them until after the balance sheet date. In order to maintain a true and fair view of the subject matter of the accounts, it is necessary to also reflect these changes in the financial statements for the given year. The most common example of this is a change in the expected outcome of litigation – for example, a new decision is issued or, conversely, the litigation is concluded and the final impact on the accounting entity is known, both on the asset side and on the liability side (position) of the accounting entity. Reserves are made for passive litigation (the entity is a defendant) in the current accounting period based on the entity’s best estimate and expectations (supporting evidence) at that time. Therefore, if a change is subsequently recorded, an adjustment to the financial statements is necessary. Another example of adjustments reflected in the financial statements could be an impairment of assets – e.g. the need to create (update) an allowance for inventories due to the sale of inventories “below the cost”, the bankruptcy of a customer and therefore the related creation (update) of an allowance for receivables, etc.

Definition of post-balance sheet date moments

One of the key events in the financial statements is the balance sheet date. Another important moment is the date of compilation and approval of the financial statements – this is the moment when the documents for the financial statements (state reports, notes to the financial statements, report on relations, etc.) were compiled and submitted for approval by the statutory body by attaching a signature record. Accounting entities that are required to have their financial statements audited must have the financial statements audited by an auditor, who will then issue the relevant audit opinion, before they are published in the Collection of Deeds in the Company Register. After the issuance of the auditor’s report, the process of approving the financial statements by the General Meeting follows, and then the publication of the documents in the Collection of Deeds.

Same as an accounting entity that has its statutory obligations, the auditor, too, must address and evaluate subsequent events as part of his assurance engagement. Certain obligations are imposed on the auditor before and after the date of issue of the auditor’s report. Subsequent events can be divided into three stages, according to which the related work of the auditor in his or her audit of the financial statements is identified.

There are events that occurred up to the date of the auditor’s opinion. If the auditor is aware of subsequent events prior to the issuance of the opinion, the auditor is required to proactively obtain information from the entity’s management or review minutes of meetings. In addition, the auditor must obtain a written statement from the accounting entity confirming the completeness of the information provided to the auditor and confirming that the adjustments have been properly incorporated into the financial statements prepared and audited by the auditor. If the auditor identifies a subsequent event that has not been taken into account in the audited financial statements, the auditor may propose a modification of the auditor’s opinion, e.g. in the form of a reservation. In this case, the assessment itself always depends on the significance of the subsequent event and its impact on the financial statements.

If the auditor is aware of subsequent events after the issuance of the auditor's report but before the financial statements are presented to the general meeting for approval, the auditor is required to discuss those events with the entity’s management and, at the same time, assess the need to adjust the financial statements. At the same time, it should be noted that after the issuance of the auditor’s report, the auditor is no longer obliged to obtain information on whether or not subsequent adjusting or non-adjusting events occurred after that period.

There are also events that come to the auditor’s attention after the date of publication of the financial statements. In this case, it is necessary for the auditor to discuss further action with the management of the audited company. If the accounting entity decides to “issue” corrected financial statements, the auditor must issue a new auditor’s report. Subsequently, the auditor must verify that the entity has followed the individual steps to ensure that anyone who receives the unadjusted version of the financial statements with the auditor’s report is informed of the change. If the audited company declares that it will not adjust the financial statements, then it is at the auditor’s discretion whether or not to take steps to ensure that third parties do not rely on the published financial statements.

In conclusion...

Correctly assessing the materiality of events recorded after the balance sheet date until the date the financial statements are approved and published in the Company Register can sometimes be very challenging. The user of the financial statements (internal and external) may be influenced in their economic decision-making by the intentional or unintentional judgement of the management. Therefore, we recommend that entities inform the auditor (if the company is statutorily audited) of an event occurring after the balance sheet date as soon as possible to avoid the possibility of misstatement of the financial statements as such. If the entity is not subject to an auditor’s review of its financial statements, we still recommend that these subsequent events be closely monitored and evaluated on an ongoing basis.

Author: Daniel Chrebet, Eva Dinh Thi