Which of the following is the most likely to require an adjustment to the financial statements as a result of a subsequent event?

• A. Material change in the amount of settlement of a lawsuit which had been estimated at year end
• B. Entry into a significant-new line of products and business
• C. Proceeds received from a related party note payable
• D. Signing of a letter-of-intent to acquire 55% of another entity for stock

Answer: (A)

Post‑balance‑sheet events are evaluated to see whether they reveal information about conditions that existed at the date of the financial statements. An adjusting event requires updating the financial statements, while a non‑adjusting event is generally disclosed only.

A material change in the amount of a lawsuit that had been estimated at year end is adjusting because the liability existed at the balance sheet date and the final settlement amount provides more accurate measurement of that obligation. The actual settlement affects the amount recognized for liabilities and expense and, therefore, the numbers on the financial statements.

The other scenarios involve events that arise after the reporting date and do not change conditions that existed at year end. They are typically disclosed in the notes if material but do not prompt changes to the recorded amounts.