To Recognize or Not to Recognize

Topics: Financial statements, Balance sheet, Income statement Pages: 4 (1074 words) Published: June 13, 2013
Memo

Date: June 3, 2013

To: Shakespeare Inc.

From: Group 104

Re: Management’s Review

Shakespeare Inc. is a privately held book printing and publishing company with a December 31 year-end. There are five accounting issues that management must consider during the course of proper financial statement presentation. This memo will break down the accounting issues and provide guidance per section.

1. Should the information pertaining to actual claims incurred as of the balance sheet date that became available after the balance sheet date be considered in determining management’s best estimate of the medical benefits payable? If so, how does this information impact the amount recognized or disclosed?

Yes, the information pertaining to actual claims incurred as of the balance sheet date must be considered in order to provide management with the best estimate for Medical Benefits Payable. This new information increases Medical Benefits Expense by $0.75 million and decreases Medical Benefits Payable by $0.75 million.

The Accounting Standards Codification (ASC) defines subsequent events as “Events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued”. In addition, recognized subsequent events are defined as “events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements”.

On March 18, 2011, two days before the financial statements are issued, a management review uncovered that Shakespeare had received $0.75 million for medical care costs incurred before the balance sheet date of December 31, 2010. ASC 855-10-25 dictates that this new information must translate directly into the financial statements, since it pertains to the previous year’s estimated amount. The result of this information is an increase in Medical...
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