Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

Which event occurring after year-end would require disclosure but not adjustment in the financial statements?

1. A significant lawsuit settlement.

2. Selling a fixed asset at a profit.

3. Issuing new convertible bonds.

4. Entering into a major lease agreement.

The correct answer is: Issuing new convertible bonds.

The event that requires disclosure but not adjustment in the financial statements is the issuance of new convertible bonds. Events occurring after the reporting period, which are non-adjusting, generally provide insights or context for users of the financial statements but do not impact the figures in those statements. When a company issues convertible bonds after year-end, it does not change the balances of assets, liabilities, or equity reported as of the end of the reporting period. Instead, it indicates future financial commitments that may affect the company’s financial position and cash flow going forward. Such an event should be disclosed in the notes to the financial statements to provide relevant information to users about potential future changes in the company’s capital structure or obligations. In contrast, a significant lawsuit settlement, selling a fixed asset at a profit, and entering into a major lease agreement all involve events that might materially affect the financial position as of the reporting date. For instance, the settlement of a lawsuit may lead to liabilities incurred that should be recorded, while selling a fixed asset impacts the asset base and possibly income recognition. Similarly, entering into a significant lease agreement could create new financial commitments that need to be recognized as liabilities and assets in the financial statements.