What is a Type 1 adjusting subsequent event?

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AcadiFi · Accepted Answer

Type 1 (adjusting) subsequent events provide new evidence about conditions that EXISTED at the balance sheet date. The financial statements must be ADJUSTED to reflect this information. Classic triggers: (1) settlement of litigation where the loss contingency existed at year-end; (2) bankruptcy of a customer whose receivable was outstanding at year-end — confirms uncollectibility that existed; (3) sale of inventory at prices indicating impairment of year-end carrying value. Example: Willowbrook Foods has December 31, 2025 year-end. A customer, BayMarket Grocers, owed $4.2M at year-end and filed Chapter 7 on February 10, 2026. Auditors learn BayMarket was insolvent at December 31 based on its audited financials. This is Type 1 — adjust allowance for doubtful accounts and take the charge in FY2025: Dr Bad debt expense $4.2M, Cr Allowance for doubtful accounts $4.2M. Disclosure: note the event and adjustment. Contrast this with a hurricane destroying a warehouse on February 5, 2026 — that's Type 2 (non-adjusting) because the condition didn't exist at year-end.

What is a Type 1 adjusting subsequent event?

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