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AS 4:- CONTINGENCIES AND EVENTS OCCURRING
AFTER THE BALANCESHEET DATE
Introduction
This standard deal only with Events occurring after the Balance sheet date. Even though the
Standard’s name starts with contingencies, all the paragraphs related to “contingencies”
have been withdrawn by ICAI. From 1-4-2004, contingencies are dealt with AS-29-
“Provisions, Contingent Liabilities and Contingent Assets”
Definitions
Events occurring after the balance sheet date. These are significant events, which occur
between the balance sheet date and financial statement approval date. These significant
events can be favorable or unfavorable to entity.
Significant events- Material events, which can influence the economic decisions of the users
of financial statements.
Events occurring after the balance sheet date are classified into two i.e. adjusting events
and non –adjusting events;
Events occurring after the Balance sheet date
Adjusting event Non- adjusting events
i. Conditions exist on the Balance i. NO Condition exists on the BS
sheet date date.
ii. Events occurring after the ii. Subsequent events don't affect
balance sheet date provide amounts on the BS date.
additional information on the
conditions existing on the BS
date.
iii. The additional information
materially affects the Amounts
on the BS date.
If it is significant, DISCLOSE in the
Approving authority's Report, NOT
Adjust the balances of Assets and in FS.
Liabilities as on balance sheet date.
DON'T adjust the balances as on
BS date.
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ADJUSTING EVENTS
➢ Condition must be existing on the Balance sheet date;
➢ The entity doesn’t have the complete or correct information about the items on the
balance sheet date; if such information was available, the entity could have adjusted
(accounted for) accordingly on the balance sheet date only.
➢ Events occurring after the balance sheet date are confirming or giving more
information about the conditions which were existing on the BS date.
➢ If the subsequent event is an adjusting event, the entity should record the
transaction as on balance sheet date. Entity should consider all such adjusting events
till the date of approval of financial statements by the approving authority.
NON – ADJUSTING EVENTS
➢ No condition exists on the balance sheet date;
➢ Subsequent event doesn’t affect the balances as on balance sheet date. So NO need
to account for as on balance sheet date;
➢ Non – adjusting events SHOULD NOT be disclosed in financial statements.
➢ If non- adjusting events are SIGNIFICANT, APPROVING authority, (like Board of
Directors in case of company, partners in case of partnership firm) can disclose the
same in their report (Board’s Report) so as to enable the users of financial
statements to make proper evaluations and decisions.
If the approving authority wants to disclose non-adjusting events in their report, they should
disclose the following information;
1. Nature of the events ;
2. Estimating of the financial effect;
3. If it is not possible to estimate, disclose the facts that such estimation cannot be
made.
Some examples of non – adjusting events
➢ Acquisition of a subsidiary OR disposal of a subsidiary ;
➢ Announcing or commencing of major restructuring of business ;
➢ Entering into significant commitments or contingent liabilities ;
➢ Destruction or fire accident in plant after the balance sheet date, etc
Exceptions
1. Statutory requirement/items of special nature
2. Events affecting going concern assumption
Exception means even though it is a non-adjusting event it should be adjusted as on
balance sheet date. There are two exceptions to the rule of adjusting events;
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1. If it is a STATUTORY requirement OR it is of special nature;
2. If events occurring after the balance sheet date affects the GOING CONCERN
ASSUMPTION of the entity.
➢ By its very nature Accounting Standards cannot override the statues (laws). If any
statute requires the accounting in a particular manner, entity should follow the
guidance of the statue and accounting standards should not be applied in that
situation.
➢ If any event occurring after the balance sheet date affects the going concern
assumption of the entity, such events should be considered and financial statement
should be adjusted as on the balance sheet date. If the entity doesn’t have going
concern assumption, it should prepare financial statements on liquidation basis. (i.e.
NRV) .
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Questions
Q1.
While preparing the financial statements for the year ended 31-3-2009, X Ltd. made a
provision for doubtful debts @ 5% on accounts receivables balance. In Feb 2009, a debtor
for 2 lakhs had suffered heavy loss due to an earthquake. The loss of debtor was not
covered by any insurance policy. In April 2009 the same debtor became insolvent. Financial
statements are approved on 30-9-2009. Discuss the accounting treatment as per AS 4 in the
financial statements ended 31st March, 2009.
Q2.
On 31-08-2012, the Board of directors of X Ltd, proposed dividend of 10% for FY 2011-12.
Financials of 2011-12 are approved by BOD on 30-09-2012. Discuss the accounting
treatment of the proposed dividend as per AS 4.
Q3.
You are an accountant preparing accounts of A Ltd. as on 31.3.2019. After year end the
following events have taken place in April, 2019:
i. A fire broke out in the premises damaging, uninsured stock worth 10 lakhs (Salvage
value 2 lakhs).
ii. A suit against the company's advertisement was filed by a party claiming damage of
20 lakhs.
Describe, how above will be dealt with in the accounts of the company for the year ended
on 31.3.2019
Q4.
A company follows April to March as its financial year. The company recognizes cheques
dated 31st March or before, received from customers after the balance sheet date, but
before approval of financial statement by debiting 'Cheques in hand account' and crediting
'Debtors account'. The 'cheques in hand' is shown in the Balance Sheet as an item of cash
and cash equivalents. All cheques in hand are presented to bank in the month of April and
are also realised in the same month in normal course after deposit in the bank. State with
reasons, whether the collection of cheques bearing date 31st March or before, but received
after Balance Sheet date is an adjusting event and how this fact is to be disclosed by the
company?
Q5.
In X Co. Ltd., theft of cash of 5 lakhs by the cashier in January, 2017 was detected only in
May, 2017. The accounts of the company were not yet approved by the Board of Directors
of the company.
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Whether the theft of cash has to be adjusted in the accounts of the company for the year
ended 31.3.2017. Decide.
Q6.
A Limited Company closed its accounting year on 30.6.2017 and the accounts for that period
were considered and approved by the board of directors on 20th August, 2017. The
company was engaged in laying pipe line for an oil company deep beneath the earth. While
doing the boring work on 1.9.2017 it had met a rocky surface for which it was estimated
that there would be an extra cost to the tune of 80 lakhs. You are required to state with
reasons, how the event would be dealt with in the financial statements for the year ended
30.6.2017.
Q7.
During the year 2015-2016, Raj Ltd. was sued by a competitor for Rs. 15 lakhs for
infringement of a trademark. Based on the advice of the company's legal counsel, Raj Ltd.
provided for a sum of 10 lakhs in its financial statements for the year ended 31 st March
2016. On 18th May, 2016, the Court decided in favour of the party alleging infringement of
the trademark and ordered Raj Ltd. to pay the aggrieved party sum of Rs. 14 lakhs. The
financial statements were prepared by the company's management on 30th April 2016, and
approved by the board on 30th May, 2016.
Q8.
In preparing the financial statements of Lotus Limited for the year ended 31 March, 2010
you come across the following information. State with reason, how you would deal with this
in the financial statements?
The company invested 50 lakhs in April, 2010 in the acquisition of another company doing
similar business, the negotiations for which had just started.
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Answer
Q1.
As per AS 4. Contingencies and Events Occurring after the Balance Sheet Date, adjustments
to assets and liabilities are required for events occurring after the balance sheet date if such
event provides/relates to additional information to the conditions existing at the balance
sheet date and is also materially affecting the valuation of assets and liabilities on the
balance sheet date.
On 31st March 2009, the financial position of the debtor was not good and such condition
existed on the balance sheet date. The entity may or may not be sure of the position on the
balance sheet date. The subsequent event of insolvency is confirming the financial position
of the debtor. So it is an adjusting event and it requires an adjustment to accounts
receivable balance by way of making provision for doubtful debts for the entire amount.
Q2.
Proposed dividend is an event occurring after the balance sheet date. The company
DOESN'T have any liability to pay dividend on balance sheet date. The reason being dividend
will be a liability to the company only when it is approved by the members of company in
the General Meeting. As there are NO conditions existing as on 31-3-2012, the subsequent
proposal for dividend is a NON-adjusting event, as per the Schedule III proposed dividend
information should be disclosed in the notes on accounts separately.
Q3.
Events occurring after the Balance Sheet date that represent material changes and
commitments affecting the financial position of the enterprise must be disclosed according
to para 15 of AS 4 on "Contingencies and Events Occurring after the Balance Sheet Date. The
key point here is whether the impact of the loss is material or not. As the loss has arisen
from non-insurance the event becomes very material not merely on account of the current
loss but the future vulnerability. Hence, fire accident and loss thereof must be disclosed as
also the fact that the stocks of the company are uninsured with a value of the future risk (if
possible)..
Suit filed against the company being a contingent liability must be disclosed with the nature
of contingency, an estimate of the financial effect and uncertainties which may affect the
future outcome must be disclosed as per AS 4.
Q4.
Even if cheques bear the date 31st March or before, the cheques received after 31st March
do not represent any conditions existing on the balance sheet date i.e. 31st March. Thus, the
collection of cheques after balance sheet date is not an adjusting event. Cheques that are
received after the balance sheet date should be accounted for in the period in which they
are received even though the same may be dated 31st March or before as per AS 4
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“Contingencies and Events Occurring after the Balance Sheet Date". Moreover, the
collection of cheques after balance sheet date does not represent any material change
affecting financial position of the enterprise on the balance sheet date, so no disclosure is
necessary.
Q5.
As per AS 4 (Revised) 'Contingencies and Events occurring after the Balance Sheet Date', an
event occurring after the balance sheet date may require adjustment to the reported values
of assets, liabilities, expenses or incomes.
If a fraud of the accounting period is detected after the balance sheet date but before
approval of the financial statements, it is necessary to recognise the loss amounting Rs
5,00,000 and adjust the accounts of the company for the year ended 31st March, 2017.
Q6.
AS 4 (Revised) on Contingencies and Events Occurring after the Balance Sheet Date defines
'events occurring after the balance sheet date' as 'significant events, both favourable and
unfavourable, that occur between the balance sheet date and the date on which financial
statements are approved by the Board of Directors in the case of a company'. The given
case is discussed in the light of the above-mentioned definition and requirements given in
AS 4 (Revised).
In this case the incident, which was expected to push up cost, became evident after the date
of approval of the accounts. So it is not an ‘event occurring after the balance sheet date'.
However, this may be mentioned in the Report of Approving Authority
Q7.
AS 4, adjustments to assets and liabilities are required for events occurring after the balance
sheet date that provide additional information materially affecting the determination of the
amounts relating to conditions existing at the balance sheet date.
The given case, since Raj Ltd. was sued by a competitor for infringement of a trademark
during the year 2015-16 for which the provision was also made by it, the decision of the
Court on 18th May, 2016, for payment of the penalty will constitute as an adjusting event
because it is an event occurred before approval of the financial statements. Therefore, Raj
Ltd. should adjust the provision upward by Rs 4 lakhs to reflect the award decreed by the
Court to be paid by them to its competitor.
Had the judgment of the Court been delivered on 1st June 2016, it would be considered as
an event occurring after the approval of the financial statements which is not covered by AS
4. In that case, no adjustment in the financial statements of 2015-16 would have been
required.
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Q8.
As per AS 4 "Contingencies and Events Occurring after the Balance Sheet Date", events
occurring after the balance sheet date which do not affect the figures stated in the financial
statements would not normally require disclosure in the financial statements although they
may be of such significance that they may require a disclosure in the report of the approving
authority to enable users of financial statements to make proper evaluations and decisions.
The investment of 50 lakhs in April 2010 for acquisition of another company is under
negotiation stage, and has not been finalized yet. On the other hand it is also not affecting
the figures stated in the financial statements of 2009-10, hence the details regarding such
negotiation and investment planning of 50 lakhs in April, 2010 in the acquisition of another
company should be disclosed in the Directors' Report to enable users of financial statements
to make proper evaluation and decision.
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