AS 4 Contingencies and Events Occurring After the Balance Sheet Date | Advanced Accounting for CA Intermediate PDF Download

Applicability of AS 4 Contingencies and Events Occurring After the Balance Sheet Date

AS 4 addresses the treatment of the following in financial statements:

• Contingencies
• Events occurring after the balance sheet date

The following items that may result in contingencies are excluded from the scope of AS 4, considering the special considerations applicable to them:

• Liabilities of general insurance enterprises and life assurance arising from issued insurance policies
• Commitments arising from long-term lease contracts
• Obligations under a retirement benefit plan

Definitions

Contingency: Contingencies refer to situations or conditions where the final outcome, whether it leads to profit or loss, can only be determined when uncertain future event(s) occur. For example, a company might have a contingency plan in place for unexpected market fluctuations.

Events occurring after the balance sheet date: These are significant events, both positive and negative, that take place between the balance sheet date and the date when financial statements are reviewed and approved by the Board of Directors or equivalent authorities. There are two types of such events:

• Events that provide additional evidence of conditions existing at the balance sheet date
• Events that indicate situations that arose after the balance sheet date

Accounting Treatment of Contingent Losses

• For contingent losses in accounting, the approach taken depends on the anticipated outcome of the contingency. If it is probable that the contingency will lead to a loss for the business, it is advisable to reflect this loss in the financial records of the company.
• When there is insufficient or conflicting information to accurately assess the extent of the contingent loss, the financial statements should include a disclosure detailing the nature and presence of the contingency.
• Any potential obligations arising from discounted bills of exchange or similar commitments undertaken by the company should be disclosed in the financial statements through explanatory notes, even if the likelihood of incurring a loss is minimal.

Accounting Treatment of Contingent Gains

A contingent gain is not recorded in the financial statements because recognizing it could lead to acknowledging revenue that may never materialize. Only when the gain becomes certain and no longer contingent, it is included in the books of accounts.

Determination of the Amount of Contingency

• Determining the Value of Contingencies

• The amount at which contingencies are presented in financial statements is based on the available information at the date when the financial statements are reviewed and approved.

  Events that occur after the balance sheet date, indicating potential impairment of assets or existence of liabilities at the balance sheet date, are considered in recognizing contingencies and establishing the value at which they are included in the financial statements.

Events Occurring after the Balance Sheet Date

Events happening after the balance sheet date are significant occurrences that take place between the balance sheet date and the date of approval. These events may necessitate adjustments to the assets and liabilities reported on the balance sheet, or they may require disclosure.

Adjusting Events

• Adjusting events are those that demand changes to the assets and liabilities due to events occurring after the balance sheet date. These events provide crucial additional information that significantly impacts the assessment of the amounts relating to the conditions existing at the balance sheet date.

Non-Adjusting Events

• Non-adjusting events, on the other hand, do not require adjustments to the assets and liabilities for events that happen after the balance sheet date, as long as these events do not pertain to the conditions existing at the balance sheet date.

There are instances where events occurring after the balance sheet date are included in financial statements due to their unique nature or because of specific statutory requirements.

Disclosure

According to Accounting Standard 4 (AS 4), disclosure requirements are applicable only for contingencies or events that substantially impact the financial position.

• In situations where a contingent loss is not provided for, an estimate of the financial impact and the nature of the loss are typically disclosed in the notes, unless the likelihood of such a loss is considered remote.
• If a reliable estimation of the financial impact cannot be determined, this fact must be disclosed.
• When events occur after the balance sheet date, the report of the approving authority should include information regarding the nature of the events and an estimate of their financial impacts, or a statement indicating that such estimates cannot be determined.

Case Study for AS 4: Contingencies and Events Occurring After the Balance Sheet Date

ABC Limited Company completed its accounting year on June 30, 2015, with the Board of Directors approving the accounts for that period on August 20, 2015. The company, engaged in laying pipelines for oil companies underground, encountered a rocky surface on September 1, 2015, during boring operations. As a result, an additional cost of INR 80 lakhs was anticipated. This case study raises questions about how this event should be reflected in the financial statements for the year ending June 30, 2015.

Case Discussion Keeping in Mind AS 4 Requirements

The scenario under consideration should be analyzed while adhering to the stipulations of AS 4. In this specific instance, the event that was expected to lead to increased costs only became evident subsequent to the date on which the Board of Directors approves the accounts. Consequently, this event does not qualify as occurring after the balance sheet date. Nonetheless, it might still warrant mention in the company's Directors' Report.

Major Differences between AS 4 and Ind AS 10