← Accounting concepts for a New Zealand reporting entity

Subsequent events, and the solvency test

Two related but distinct concepts that recur across recent papers — knowing which applies avoids a common mix-up.

📖 The two concepts

2 terms

Cover the right column and check you can say what each one means.

Subsequent event
Something that happens AFTER balance date but before the financial statements are finalised — disclosed in the notes, but not recognised (adjusted) in the current year's figures unless it existed as a condition AT balance date.
Solvency test
Two parts a company must pass before paying a dividend: (1) it can pay its debts as they fall due, and (2) the value of its assets exceeds the value of its liabilities, both immediately after the dividend is paid.

Why directors test solvency AFTER, not before, the dividend

  • The test must confirm the company can STILL pay its debts and still hold more assets than liabilities ONCE the dividend cash has actually left the business — testing before the payment would miss the very risk the test exists to catch.
✕

Confusing "disclosed" with "recognised"

A dividend approved AFTER balance date is disclosed in the notes as a subsequent event, but it is NOT recognised (recorded) in the current year's financial statements — no obligation existed at balance date. Recognising it anyway is a common and specifically-tested error. Exam-style Justifying two subsequent events' usefulness to an investor A company discloses (1) a dividend approved after balance date and (2) an alert-level escalation judged to have no material impact. Justify how each helps an investor's decision. DIVIDEND: signals the directors' confidence in the company's cash position and ongoing performance, giving the investor a forward-looking signal about future returns even though it is not yet recorded as a liability. ALERT-LEVEL ESCALATION: even though judged immaterial financially, disclosing it shows the company's risk-monitoring process is transparent, letting an investor judge the RELIABILITY of future disclosures too. BOTH: neither event changes the current year's recorded figures, but both are RELEVANT information the investor would want before making an investment decision. ✓ The strongest answers state clearly that disclosure alone (with no change to the recorded figures) can still be genuinely decision-useful — relevance does not require recognition.

Practise just this