New Rule FAS 165

Last month, the Financial Accounting Standards Board (FASB) issued a new rule, which will be applied to the accounting for, and disclosure of, subsequent events not addressed in other applicable Generally Accepted Accounting Principles (GAAP).  FAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The rule explains that corporate financial statements are considered issued when they are widely distributed to shareholders and other financial statement users for "general use and reliance" in a form and format that complies with GAAP. Further, financial statements are considered available to be issued when they are complete, which again means that they are in a form and format that complies with GAAP, and all approvals necessary for issuance have been obtained.  FAS 165 provides that companies should recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. The settlement of litigation after the balance sheet date, but before the date the financial statements are issued or available to be issued, falls within this category of subsequent events in cases where the events which "gave rise to" the litigation had taken place before the balance sheet date.  When a company is required to issue a restatement, FAS 165 provides that it should not recognize events occurring between the time the financial statements were issued or available to be issued, and the time the financial statements were re-issued, unless the adjustment is required by GAAP or by regulatory requirements.  FAS 165 will apply with respect to interim or annual reporting periods ending after June 15, 2009.  Click here to see the rule.