ICAI Notes- Unit 1: Accounting Standards Based on Items Impacting Financial Statements | Advanced Accounting for CA Intermediate PDF Download

 Page 1


 
LEARNING OUTCOMES 
    
CHAPTER 
7
 
ACCOUNTING STANDARDS 
BASED ON ITEMS 
IMPACTING FINANCIAL 
STATEMENTS 
 
UNIT 1: ACCOUNTING STANDARD  4 
CONTINGENCIES AND EVENTS OCCURRING  
AFTER THE BALANCE SHEET DATE 
After studying this unit, you will be able to elucidate the – 
? Meaning of Contingencies and accounting treatment of contingent 
gains and contingent losses.  
? Events Occurring after the Balance Sheet Date: Adjusting and  
Non-adjusting events  
? Necessary Disclosures required as per the standard.  
 
 1.1 INTRODUCTION 
All paragraphs of AS 4 (Revised) that deal with contingencies are applicable only 
to the extent not covered by other Accounting Standards prescribed by the 
Central Government. For example, the impairment of financial assets such as 
impairment of receivables (commonly known as provision for bad and doubtful 
debts) is governed by this Standard. Thus, the present standard (AS 4 (Revised)) 
CHAPTER
© The Institute of Chartered Accountants of India
Page 2


 
LEARNING OUTCOMES 
    
CHAPTER 
7
 
ACCOUNTING STANDARDS 
BASED ON ITEMS 
IMPACTING FINANCIAL 
STATEMENTS 
 
UNIT 1: ACCOUNTING STANDARD  4 
CONTINGENCIES AND EVENTS OCCURRING  
AFTER THE BALANCE SHEET DATE 
After studying this unit, you will be able to elucidate the – 
? Meaning of Contingencies and accounting treatment of contingent 
gains and contingent losses.  
? Events Occurring after the Balance Sheet Date: Adjusting and  
Non-adjusting events  
? Necessary Disclosures required as per the standard.  
 
 1.1 INTRODUCTION 
All paragraphs of AS 4 (Revised) that deal with contingencies are applicable only 
to the extent not covered by other Accounting Standards prescribed by the 
Central Government. For example, the impairment of financial assets such as 
impairment of receivables (commonly known as provision for bad and doubtful 
debts) is governed by this Standard. Thus, the present standard (AS 4 (Revised)) 
CHAPTER
© The Institute of Chartered Accountants of India
 
 
7.2 
 
ADVANCED ACCOUNTING 
deals with the treatment and disclosure requirements in the financial statements 
of events occurring after the balance sheet. 
1.2 CONTINGENCIES 
Contingency is a condition or situation, the ultimate outcome of which, gain or 
loss, will be known or determined only on the occurrence, or non-occurrence, of 
one or more uncertain future events.  
Accounting Treatment of Contingent Losses  
The accounting treatment of a contingent loss is determined by the expected 
outcome of the contingency. If it is likely that a contingency will result in a loss to 
the enterprise, then it is prudent to provide for that loss in the financial 
statements.  
Example: ABC has filed case against a debtor for a recovery of ` 25 Lakhs. 
According to the legal team, the chances of recovery is nil. Therefore, ABC should 
make provision for doubtful debt. 
The estimation of the amount of a contingent loss to be provided for in the 
financial statements, may be based on judgement made, by the management. If 
there is conflicting or insufficient evidence for estimating the amount of a 
contingent loss, then disclosure is made of the existence and nature of the 
contingency.  
The estimates of the outcome and of the financial effect of contingencies are 
determined by the judgment of the management of the enterprise. This judgment 
is based on consideration of the information available up to the date on which 
the financial statements are approved and will include a review of events 
occurring after the balance sheet date, supplemented by experience of similar 
transactions and, in some cases, reports from independent experts. 
The existence and amount of guarantees, obligations arising from discounted bills 
of exchange and similar obligations undertaken by an enterprise are generally 
disclosed in financial statements by way of note, even though the possibility that 
a loss to the enterprise will occur, is remote.  
© The Institute of Chartered Accountants of India
Page 3


 
LEARNING OUTCOMES 
    
CHAPTER 
7
 
ACCOUNTING STANDARDS 
BASED ON ITEMS 
IMPACTING FINANCIAL 
STATEMENTS 
 
UNIT 1: ACCOUNTING STANDARD  4 
CONTINGENCIES AND EVENTS OCCURRING  
AFTER THE BALANCE SHEET DATE 
After studying this unit, you will be able to elucidate the – 
? Meaning of Contingencies and accounting treatment of contingent 
gains and contingent losses.  
? Events Occurring after the Balance Sheet Date: Adjusting and  
Non-adjusting events  
? Necessary Disclosures required as per the standard.  
 
 1.1 INTRODUCTION 
All paragraphs of AS 4 (Revised) that deal with contingencies are applicable only 
to the extent not covered by other Accounting Standards prescribed by the 
Central Government. For example, the impairment of financial assets such as 
impairment of receivables (commonly known as provision for bad and doubtful 
debts) is governed by this Standard. Thus, the present standard (AS 4 (Revised)) 
CHAPTER
© The Institute of Chartered Accountants of India
 
 
7.2 
 
ADVANCED ACCOUNTING 
deals with the treatment and disclosure requirements in the financial statements 
of events occurring after the balance sheet. 
1.2 CONTINGENCIES 
Contingency is a condition or situation, the ultimate outcome of which, gain or 
loss, will be known or determined only on the occurrence, or non-occurrence, of 
one or more uncertain future events.  
Accounting Treatment of Contingent Losses  
The accounting treatment of a contingent loss is determined by the expected 
outcome of the contingency. If it is likely that a contingency will result in a loss to 
the enterprise, then it is prudent to provide for that loss in the financial 
statements.  
Example: ABC has filed case against a debtor for a recovery of ` 25 Lakhs. 
According to the legal team, the chances of recovery is nil. Therefore, ABC should 
make provision for doubtful debt. 
The estimation of the amount of a contingent loss to be provided for in the 
financial statements, may be based on judgement made, by the management. If 
there is conflicting or insufficient evidence for estimating the amount of a 
contingent loss, then disclosure is made of the existence and nature of the 
contingency.  
The estimates of the outcome and of the financial effect of contingencies are 
determined by the judgment of the management of the enterprise. This judgment 
is based on consideration of the information available up to the date on which 
the financial statements are approved and will include a review of events 
occurring after the balance sheet date, supplemented by experience of similar 
transactions and, in some cases, reports from independent experts. 
The existence and amount of guarantees, obligations arising from discounted bills 
of exchange and similar obligations undertaken by an enterprise are generally 
disclosed in financial statements by way of note, even though the possibility that 
a loss to the enterprise will occur, is remote.  
© The Institute of Chartered Accountants of India
AS BASED ON ITEMS IMPACTING FINANCIAL 
STATEMENTS 
   
 7.3 
 
Accounting Treatment of Contingent Gains  
Contingent gains are not recognised in financial statements since their 
recognition may result in the recognition of revenue which may never be realised. 
However, when the realisation of a gain is virtually certain, then such gain is not a 
contingency and accounting for the gain is appropriate.  
The amount at which a contingency is stated in the financial statements is based 
on the information which is available at the date on which the financial 
statements are approved.  
1.3 EVENTS OCCURRING AFTER THE BALANCE 
SHEET DATE 
Events occurring after the balance sheet date are those significant events, both 
favourable and unfavourable, that occur between the balance sheet date and the 
date on which the financial statements are approved by the Board of Directors in 
the case of a company, and, by the corresponding approving authority in the case 
of any other entity. 
For example, for the year ending on 31
st
 March 20X1, financial statement is 
finalized and approved by the Board of the directors of the company in its 
meeting held on 04
th
 September 20X1. In this case the events taking place 
between 01
st
 April 20X1 to 04
th
 September 20X1 are termed as events occurring 
after the balance sheet date.  
Two types of events can be identified: 
a. Adjusting events- those which provide further evidence of conditions that 
existed at the balance sheet date. For example, a trade receivable declared 
insolvent after reporting date and unable to pay full amount against whom 
provision for doubtful debt was created. 
b. Non-adjusting events- those which are indicative of conditions that arose 
subsequent to the balance sheet date. For example, plant got damaged due 
to occurrence of fire. 
© The Institute of Chartered Accountants of India
Page 4


 
LEARNING OUTCOMES 
    
CHAPTER 
7
 
ACCOUNTING STANDARDS 
BASED ON ITEMS 
IMPACTING FINANCIAL 
STATEMENTS 
 
UNIT 1: ACCOUNTING STANDARD  4 
CONTINGENCIES AND EVENTS OCCURRING  
AFTER THE BALANCE SHEET DATE 
After studying this unit, you will be able to elucidate the – 
? Meaning of Contingencies and accounting treatment of contingent 
gains and contingent losses.  
? Events Occurring after the Balance Sheet Date: Adjusting and  
Non-adjusting events  
? Necessary Disclosures required as per the standard.  
 
 1.1 INTRODUCTION 
All paragraphs of AS 4 (Revised) that deal with contingencies are applicable only 
to the extent not covered by other Accounting Standards prescribed by the 
Central Government. For example, the impairment of financial assets such as 
impairment of receivables (commonly known as provision for bad and doubtful 
debts) is governed by this Standard. Thus, the present standard (AS 4 (Revised)) 
CHAPTER
© The Institute of Chartered Accountants of India
 
 
7.2 
 
ADVANCED ACCOUNTING 
deals with the treatment and disclosure requirements in the financial statements 
of events occurring after the balance sheet. 
1.2 CONTINGENCIES 
Contingency is a condition or situation, the ultimate outcome of which, gain or 
loss, will be known or determined only on the occurrence, or non-occurrence, of 
one or more uncertain future events.  
Accounting Treatment of Contingent Losses  
The accounting treatment of a contingent loss is determined by the expected 
outcome of the contingency. If it is likely that a contingency will result in a loss to 
the enterprise, then it is prudent to provide for that loss in the financial 
statements.  
Example: ABC has filed case against a debtor for a recovery of ` 25 Lakhs. 
According to the legal team, the chances of recovery is nil. Therefore, ABC should 
make provision for doubtful debt. 
The estimation of the amount of a contingent loss to be provided for in the 
financial statements, may be based on judgement made, by the management. If 
there is conflicting or insufficient evidence for estimating the amount of a 
contingent loss, then disclosure is made of the existence and nature of the 
contingency.  
The estimates of the outcome and of the financial effect of contingencies are 
determined by the judgment of the management of the enterprise. This judgment 
is based on consideration of the information available up to the date on which 
the financial statements are approved and will include a review of events 
occurring after the balance sheet date, supplemented by experience of similar 
transactions and, in some cases, reports from independent experts. 
The existence and amount of guarantees, obligations arising from discounted bills 
of exchange and similar obligations undertaken by an enterprise are generally 
disclosed in financial statements by way of note, even though the possibility that 
a loss to the enterprise will occur, is remote.  
© The Institute of Chartered Accountants of India
AS BASED ON ITEMS IMPACTING FINANCIAL 
STATEMENTS 
   
 7.3 
 
Accounting Treatment of Contingent Gains  
Contingent gains are not recognised in financial statements since their 
recognition may result in the recognition of revenue which may never be realised. 
However, when the realisation of a gain is virtually certain, then such gain is not a 
contingency and accounting for the gain is appropriate.  
The amount at which a contingency is stated in the financial statements is based 
on the information which is available at the date on which the financial 
statements are approved.  
1.3 EVENTS OCCURRING AFTER THE BALANCE 
SHEET DATE 
Events occurring after the balance sheet date are those significant events, both 
favourable and unfavourable, that occur between the balance sheet date and the 
date on which the financial statements are approved by the Board of Directors in 
the case of a company, and, by the corresponding approving authority in the case 
of any other entity. 
For example, for the year ending on 31
st
 March 20X1, financial statement is 
finalized and approved by the Board of the directors of the company in its 
meeting held on 04
th
 September 20X1. In this case the events taking place 
between 01
st
 April 20X1 to 04
th
 September 20X1 are termed as events occurring 
after the balance sheet date.  
Two types of events can be identified: 
a. Adjusting events- those which provide further evidence of conditions that 
existed at the balance sheet date. For example, a trade receivable declared 
insolvent after reporting date and unable to pay full amount against whom 
provision for doubtful debt was created. 
b. Non-adjusting events- those which are indicative of conditions that arose 
subsequent to the balance sheet date. For example, plant got damaged due 
to occurrence of fire. 
© The Institute of Chartered Accountants of India
 
 
7.4 
 
ADVANCED ACCOUNTING 
1.4 ADJUSTING EVENTS 
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. For example, an adjustment may be made for a loss on a trade receivable 
account which is confirmed by the insolvency of a customer which occurs after 
the balance sheet date. 
1.5 NON-ADJUSTING EVENTS 
Adjustments to assets and liabilities are not appropriate for events occurring after 
the balance sheet date, if such events do not relate to conditions existing at the 
balance sheet date. An example is the decline in market value of investments 
between the balance sheet date and the date on which the financial statements 
are approved. Ordinary fluctuations in market values do not normally relate to the 
condition of the investments at the balance sheet date but reflect circumstances 
which have occurred in the following period. 
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.  
Dividend declared after balance sheet date 
There are events which, although take place after the balance sheet date, are 
sometimes reflected in the financial statements because of statutory requirements 
or because of their special nature. For example, if dividends are declared after the 
balance sheet date but before the financial statements are approved, the 
dividends are not recognised as a liability at the balance sheet date because no 
obligation exists at that time unless a statute requires otherwise. Such dividends 
are disclosed in the notes. Thus, no liability for proposed dividends needs to be 
recognised in the financial statements for financial year ended 31
st
 March, 2017 
© The Institute of Chartered Accountants of India
Page 5


 
LEARNING OUTCOMES 
    
CHAPTER 
7
 
ACCOUNTING STANDARDS 
BASED ON ITEMS 
IMPACTING FINANCIAL 
STATEMENTS 
 
UNIT 1: ACCOUNTING STANDARD  4 
CONTINGENCIES AND EVENTS OCCURRING  
AFTER THE BALANCE SHEET DATE 
After studying this unit, you will be able to elucidate the – 
? Meaning of Contingencies and accounting treatment of contingent 
gains and contingent losses.  
? Events Occurring after the Balance Sheet Date: Adjusting and  
Non-adjusting events  
? Necessary Disclosures required as per the standard.  
 
 1.1 INTRODUCTION 
All paragraphs of AS 4 (Revised) that deal with contingencies are applicable only 
to the extent not covered by other Accounting Standards prescribed by the 
Central Government. For example, the impairment of financial assets such as 
impairment of receivables (commonly known as provision for bad and doubtful 
debts) is governed by this Standard. Thus, the present standard (AS 4 (Revised)) 
CHAPTER
© The Institute of Chartered Accountants of India
 
 
7.2 
 
ADVANCED ACCOUNTING 
deals with the treatment and disclosure requirements in the financial statements 
of events occurring after the balance sheet. 
1.2 CONTINGENCIES 
Contingency is a condition or situation, the ultimate outcome of which, gain or 
loss, will be known or determined only on the occurrence, or non-occurrence, of 
one or more uncertain future events.  
Accounting Treatment of Contingent Losses  
The accounting treatment of a contingent loss is determined by the expected 
outcome of the contingency. If it is likely that a contingency will result in a loss to 
the enterprise, then it is prudent to provide for that loss in the financial 
statements.  
Example: ABC has filed case against a debtor for a recovery of ` 25 Lakhs. 
According to the legal team, the chances of recovery is nil. Therefore, ABC should 
make provision for doubtful debt. 
The estimation of the amount of a contingent loss to be provided for in the 
financial statements, may be based on judgement made, by the management. If 
there is conflicting or insufficient evidence for estimating the amount of a 
contingent loss, then disclosure is made of the existence and nature of the 
contingency.  
The estimates of the outcome and of the financial effect of contingencies are 
determined by the judgment of the management of the enterprise. This judgment 
is based on consideration of the information available up to the date on which 
the financial statements are approved and will include a review of events 
occurring after the balance sheet date, supplemented by experience of similar 
transactions and, in some cases, reports from independent experts. 
The existence and amount of guarantees, obligations arising from discounted bills 
of exchange and similar obligations undertaken by an enterprise are generally 
disclosed in financial statements by way of note, even though the possibility that 
a loss to the enterprise will occur, is remote.  
© The Institute of Chartered Accountants of India
AS BASED ON ITEMS IMPACTING FINANCIAL 
STATEMENTS 
   
 7.3 
 
Accounting Treatment of Contingent Gains  
Contingent gains are not recognised in financial statements since their 
recognition may result in the recognition of revenue which may never be realised. 
However, when the realisation of a gain is virtually certain, then such gain is not a 
contingency and accounting for the gain is appropriate.  
The amount at which a contingency is stated in the financial statements is based 
on the information which is available at the date on which the financial 
statements are approved.  
1.3 EVENTS OCCURRING AFTER THE BALANCE 
SHEET DATE 
Events occurring after the balance sheet date are those significant events, both 
favourable and unfavourable, that occur between the balance sheet date and the 
date on which the financial statements are approved by the Board of Directors in 
the case of a company, and, by the corresponding approving authority in the case 
of any other entity. 
For example, for the year ending on 31
st
 March 20X1, financial statement is 
finalized and approved by the Board of the directors of the company in its 
meeting held on 04
th
 September 20X1. In this case the events taking place 
between 01
st
 April 20X1 to 04
th
 September 20X1 are termed as events occurring 
after the balance sheet date.  
Two types of events can be identified: 
a. Adjusting events- those which provide further evidence of conditions that 
existed at the balance sheet date. For example, a trade receivable declared 
insolvent after reporting date and unable to pay full amount against whom 
provision for doubtful debt was created. 
b. Non-adjusting events- those which are indicative of conditions that arose 
subsequent to the balance sheet date. For example, plant got damaged due 
to occurrence of fire. 
© The Institute of Chartered Accountants of India
 
 
7.4 
 
ADVANCED ACCOUNTING 
1.4 ADJUSTING EVENTS 
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. For example, an adjustment may be made for a loss on a trade receivable 
account which is confirmed by the insolvency of a customer which occurs after 
the balance sheet date. 
1.5 NON-ADJUSTING EVENTS 
Adjustments to assets and liabilities are not appropriate for events occurring after 
the balance sheet date, if such events do not relate to conditions existing at the 
balance sheet date. An example is the decline in market value of investments 
between the balance sheet date and the date on which the financial statements 
are approved. Ordinary fluctuations in market values do not normally relate to the 
condition of the investments at the balance sheet date but reflect circumstances 
which have occurred in the following period. 
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.  
Dividend declared after balance sheet date 
There are events which, although take place after the balance sheet date, are 
sometimes reflected in the financial statements because of statutory requirements 
or because of their special nature. For example, if dividends are declared after the 
balance sheet date but before the financial statements are approved, the 
dividends are not recognised as a liability at the balance sheet date because no 
obligation exists at that time unless a statute requires otherwise. Such dividends 
are disclosed in the notes. Thus, no liability for proposed dividends needs to be 
recognised in the financial statements for financial year ended 31
st
 March, 2017 
© The Institute of Chartered Accountants of India
AS BASED ON ITEMS IMPACTING FINANCIAL 
STATEMENTS 
   
 7.5 
 
and subsequent years. Such proposed dividends are to be disclosed in the notes 
as per Companies (Accounting Standards) Amendment Rules, 2016 issued on 30 
March 2016. 
Events indicating going concern assumption inappropriate  
Events occurring after the balance sheet date may indicate that the enterprise 
ceases to be a going concern. A deterioration in operating results and financial 
position, or unusual changes affecting the existence or substratum of the 
enterprise after the balance sheet date (e.g., destruction of a major production 
plant by a fire after the balance sheet date) may indicate a need to consider 
whether it is proper to use the fundamental accounting assumption of going 
concern in the preparation of the financial statements. In case the going concern 
assumption is not valid (based on events occurring after the balance sheet date), 
the financial statements are prepared on a liquidation basis. 
 
Event occuring after the Balance 
Sheet date
Evidence of such condition 
been existed at the Balance 
Sheet date
Adjusting event
Adjustment to assets and 
liabilities is required
Disclosure in the financial 
statements is required
No evidence of such condition 
been existed at the Balance 
Sheet date
Non-adjusting event
Adjustment to assets and 
liabilities is not required
Disclosure in the report of 
the approving authority is 
required
© The Institute of Chartered Accountants of India