Subsequent events: Overview, definition, and example
What are subsequent events?
Subsequent events refer to significant occurrences that take place after a specific date, such as the signing of a contract, the end of a financial reporting period, or the closing of a transaction. These events may impact the rights, obligations, or financial position of the parties involved and can sometimes require adjustments, disclosures, or renegotiations.
For example, in financial reporting, a company might issue financial statements on December 31, but a major lawsuit filed against the company in January could be considered a subsequent event that needs to be disclosed.
Why are subsequent events important?
Subsequent events are important because they can materially affect business decisions, financial reporting, and contractual obligations. Businesses and investors rely on accurate, up-to-date information, and failing to consider significant post-period events can lead to misrepresentation or financial risk.
For contracts, recognizing subsequent events ensures that unforeseen developments—such as regulatory changes, economic shifts, or legal disputes—are addressed appropriately, preventing disputes and ensuring compliance.
Understanding subsequent events through an example
Imagine a company signs a supply contract with a vendor on June 1, agreeing to a fixed price for materials. However, on June 10, a sudden change in trade regulations increases import costs, making it significantly more expensive for the vendor to fulfill the contract. This regulatory change is a subsequent event that may require renegotiation or an adjustment to pricing terms.
In another scenario, a company’s audited financial statements are finalized on March 1. On March 10, a natural disaster damages one of its major production facilities. This event, occurring after the financial reporting period but before the statements are published, may require a disclosure or adjustment to accurately reflect the company’s financial health.
An example of a subsequent events clause
Here’s how a subsequent events clause might appear in a contract:
“The Parties acknowledge that events occurring after the execution of this Agreement (‘Subsequent Events’) may materially impact the terms of this Agreement. In such cases, the Parties shall engage in good faith discussions to address any necessary modifications.”
Conclusion
Subsequent events are significant developments that occur after a key contractual or financial date, potentially affecting obligations, reporting, or compliance. Recognizing and addressing these events ensures that businesses can adapt to changing circumstances and make informed decisions.
By including a well-drafted subsequent events clause, companies can safeguard against unexpected changes and maintain transparency in contractual and financial matters.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.