Case Title: Subsequent Events - Disclosure or Financial Statement Adjustment?
Company ABC is a December 31 calendar year-end manufacturer of flammable liquids and powders with its corporate offices in Pennsylvania and manufacturing plants in Nebraska and Wisconsin. Company ABC is a public, large accelerated filer with shares trading on the New York Stock Exchange. Company ABC will file its 2015 Form 10-K with the Securities and Exchange Commission early on February 15, 2016.
Draft a single accounting memo discussing the accounting treatment of each issue below. Specifically, determine whether actual adjustment of the December 31, 2015 financial statements is necessary or if the issue only requires disclosure in the December 31, 2015 financial statements. Cite the FASB ASC guidance used in arriving at your conclusions.
Issue #1: A significant portion of Company ABC's manufacturing plant in Nebraska was destroyed by a suspicious fire on January 2, 2016 which resulted not only in the partial loss of the building and future manufacturing capacity, but also resulted in several million dollars of lost finished goods inventory.
Issue #2: On December 15, 2015, the Wall Street Journal ran a cover story on XYZ Corporation, one of Company ABC's customers, indicating that XYZ Corporation had defaulted on its senior debt facility and had recently failed to successfully defend a material tax evasion lawsuit brought by the United States Justice Department. An analysis of Company ABC's accounts receivable aging as of December 31, 2015 showed a balance due from XYZ Corporation of $1.2 million that has been outstanding for sixty days. The $1.2 million represented 10% of Company ABC's accounts receivable as of December 31, 2015. Accounts receivable turnover for Company ABC is, on average, thirty days. As of December 31, 2015, Company ABC had no allowance for doubtful accounts. On February 1, 2016, XYZ Corporation officially filed for Chapter 7 bankruptcy in the Bankruptcy Court for the District of Delaware where the company was organized. The Wall Street Journal reported that all of XYZ Corporation's creditors would likely receive nothing in liquidation.
Issue #3: Company ABC sold a small joint venture that was accounted for under the equity method of accounting to EFG Limited in a stock acquisition on December 30, 2014. As part of the Stock Purchase Agreement, $1.5 million of total sales proceeds of $15.0 million were to be held in escrow until the one year anniversary of the sale with the escrow being subject to normal representation and warranty claims. Company ABC records gains on escrowed proceeds at the time the company is entitled to receive proceeds from escrow, the amount is fixed or determinable and realization is assured. On January 4, 2016, Company ABC was notified by outside counsel that as of December 30, 2015, no claims had been filed against the escrow. Company ABC was contacted by the escrow agent on January 10, 2016 for their wire payment instructions. Company ABC received the full $1.5 million from the escrow agent on January 12, 2016.