Guide to AS 4: Contingencies and Events Occurring after the Balance Sheet Date
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- Last Updated on 12 July, 2022
Table of Contents:
This standard deals 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 Even though the Standard’s name starts with contingencies, all the paragraphs related to ‘contingencies’ have been withdrawn by ICAI.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 by AS-29 – “Provisions, Contingent Liabilities and Contingent Assets”.
Before we start the main discussion, you need to understand the sequence of approval of financial statements in case of companies.
Step 1: After the financial year end, Board of Directors (BoD)/Management prepare the financial statements and approve the same;
Step 2: Auditor of the company conducts audit and issues a report on the financial statements;
Step 3: Audited financial statements are adopted by the Members of the company in the AGM;
Concept Capsule 1
Who is responsible to prepare the financial statements of an entity and who approves the financial statements?
Preparation and presentation of financial statements is the responsibility of the management of the entity.
Look at the above diagram, financial statements of 2015-16 are approved by the approving authority (BoD in case of company) on 31st Aug, 2016.
Financial statements approved means that, the books of account of the financial year are closed. Based on the above diagram, the entity can record any journal entry related to FY 2015-16 till 31st Aug., 2016 only. If an entity identifies any income or expenditure related to FY 2015-16 subsequent to 31st Aug., 2016, that income or expenditure should be recorded in FY 2016-17 as a prior period item. (Refer AS 5 for more information on this).
Concept Capsule 2
The factory is painted in March 2016, and the painter submitted the bill in April 2016. The accountant of the company did not make a provision for the expense as on 31-3-2016. FY 2015-16 financials are approved on 30-9-2016.
(a) The expense is incurred during FY 2015-16 and it should be recognised as an expense in the same year. Information of the expense is received before the date of approval of financial statements; hence the entity should recognise the transaction as on the balance sheet date i.e. in FY 2015-16.
(b) If the bill is received after 30th Sep., 2016, it should be recognised as a prior period expense in FY 2016-17 as per AS 5. Refer AS 5 – Prior period expense for further information.
Events occurring after the balance sheet date: These are significant events, which occur between the balance sheet date and financial statements approval date. These significant events can be favourable or unfavourable to the entity.
Significant events – Material events, which can influence the economic decisions of the users of financial statements.
The whole discussion in this standard is whether the events occurring after the balance sheet date should be recorded as on balance sheet date OR in the next financial year. [e.g. (look at the above diagram) whether it should be recognised in FY 2015-16 OR FY 2016-17];
Events occurring after the balance sheet date are classified into two i.e. adjusting events and non-adjusting events; let us understand this concept from the below picture:
The primary objective of the standard is to ensure the completeness, that all the transactions and related information should be updated in financial statements.
3. Important points for noting
- Conditions 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.
- 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.
The above concepts can be clearly understood with the help of the following the concept capsules:
Concept Capsule 3
While preparing the financial statements for the year ended 31-3-2018, X Ltd. made a provision for doubtful debts @ 5% on accounts receivables balance. In Feb., 2018, a debtor for ` 2 lakh had suffered heavy loss due to an earthquake. The loss of debtor was not covered by any insurance policy. In April, 2018, the same debtor became insolvent. Financial statements are approved on 30-9-2018. Discuss the accounting treatment as per AS 4 in the financial statements ended 31st March, 2018.
Concept Capsule 4
Continuing with the above question – The accounts receivable balance is ` 2 lakh as on 31-3-2018. But earthquake took place in April 2018 and the debtor became insolvent in May 2018. Discuss the accounting treatment as per AS 4.
Concept capsule 5
Continuing with the above question – There was no balance of accounts receivable as on 31-3-2018 and X Ltd. sold goods in April 2018 and earthquake took place in May 2018 and the debtor became insolvent in July 2018. Discuss the accounting treatment as per AS 4.
Concept Capsule 6
A company has filed a legal suit against the debtor from whom ` 15 lakh is recoverable as on 31.3.2017. The chances of recovery by way of legal suit are not good as per legal opinion given by the counsel in April, 2017. Can the company provide for full amount of ` 15 lakhs as provision for doubtful debts? Discuss.
As per AS 4, assets and liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date.
In the given case, subsequent information is giving more clarity that the balance as on the balance sheet date is not recoverable hence it is appropriate to make a provision for doubtful debts. Therefore, provision for doubtful debts should be made for the year ended on 31st March, 2017.
Concept Capsule 7
X Ltd. invested `100 lakh in Y Ltd. in April 2018 but the negotiations had started in Jan. 2018. As per AS 4 – In which financial year X Ltd. should account for the investment?
Concept Capsule 8
X Ltd. purchased a building for `50 lakh in Jan. 2018, and the agreement to purchase was concluded in Jan. 2018. X Ltd’s financial year ends on 31st March. In the month of April 2018, the same building is registered in the name of X Ltd. In which financial year X Ltd. should account for the building?
Looking at the substance of the transaction, the agreement was concluded in Jan. 2018 and registration is required for security purpose. The subsequent registration is confirming the agreement. So the building should be recorded in 2017-18 only.
Concept Capsule 9
X Ltd. holds current investments as on 31-3-2018. Cost of investments is ` 50 lakh and fair market value is `55 lakh (on 31-3-2018) and the company measured it at ` 50 lakh as per AS 13 (i.e. Cost or FMV whichever is less). Financial statements are approved by BODs on 30-09-2018. Due to subsequent market conditions the value of investments fell down to `40 lakh. Whether X Ltd. needs to value the investments at `50 lakh or `40 lakh on 31-3-2018? Discuss.
Market conditions on 31st March are different from 30th Sep. market conditions. The value of investments as on 30th Sep. does NOT affect the conditions on 31st March. Hence it is a non-adjusting event and there is no need to adjust the balance on 31-3-2018 and the value of investments will continue at `50 lakh.
If the approving authority wants to disclose non-adjusting events in their report, they should disclose the following information:
- Nature of the events;
- Estimation of the financial effect;
- If it is not possible to estimate, disclose the fact 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.
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:
- If it is a STATUTORY requirement OR it is of special nature;
- 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 Statutes (Laws). If any statute requires the accounting in a particular manner, entity should follow the guidance of the Statute. Accounting standard 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 statements 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) as discussed in AS 1.
Concept Capsule 10 (PROPOSED DIVIDEND)
On 31-08-2017, the Board of Directors of X Ltd. proposed dividend of 10% for FY 2016-17. Financials of 2016-17 are approved by BoD on 30-09-2017. Discuss the accounting treatment of the proposed dividend as per AS 4.
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 31-3-2017, 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.
Concept Capsule 11
After the closure of financial year i.e. 31-3-2018, there was a severe earthquake. The company lost its building and major plant and the extent of loss is beyond repair. The company doesn’t have adequate funds to replace the same. Discuss your views based on AS 4.
The subsequent event of earthquake occurred after the balance sheet and no condition exists on balance sheet date. It is a non-adjusting event. Even though the above event occurred after the BS date, the event materially affects the solvency of the company and it indicates clearly that the company is not a going concern. Even though it is not an adjusting event, as per AS 4 – Company has to prepare the financial statements on 31-3-2018 on NRV basis (liquidation basis) and any gain or loss should be transferred to P&L.
Concept Capsule 12
X Ltd. financial statements of 2017-18 are approved by the BoD on 30-09-2018 & financial statements are adopted by the AGM on 15-10-2018. On 30-11-2018, the company identified an expenditure (omission of expense) which is relating to 2017-18. How to deal with the expenditure? Discuss.
Once the financial statements are approved by the BoD and adopted by the AGM, the expenditure of
5. Frequently Asked Questions
Ques No. 1 A company deals in Petroleum products. The sale price of petroleum is fixed by the Government.
After the balance sheet date, but before the finalization of the company’s accounts, the Government unexpectedly increased the price retrospectively. Can the company account for additional revenue at the close of the year?
Ans: As per AS-4, the unexpected increase in the sale price of petrol by the Government after the balance sheet date cannot be regarded as an adjusting event as it doesn’t represent a condition existing as on the balance sheet date. Hence revenue (due to increase in sales price) should be recognized only in the subsequent year with proper disclosure.
Ques No. 2 A Company follows April-March as its financial year. The company recognizes cheques dated 31st March or before, received after the balance sheet date but before approval of FS by debiting cheques in hand a/c & crediting Debtors a/c. The cheques in hand are shown in the balance sheet as an item of Cash & Cash equivalents. All cheques in hand are presented to bank in the month of April & are also realized in the same month in normal courses after deposit in the Bank. What treatment is correct as per AS-4?
Ans: Even if the cheques bear the date 31st March or before, the cheques received after 31st March do not represent any condition existing as on 31st March. It means, it is not an asset under the control of the entity as on the balance sheet date. Hence, there is no situation/condition exist as on 31st March.
Considering the above points, collection of cheques after the balance sheet date is NOT an adjusting event. So recognising these as cheques in hand is not consistent with AS-4. Moreover, the collection of cheques after the balance sheet date does not represent any material change or commitments affecting the financial position of the enterprise and therefore no disclosure in the Director’s Report are necessary.
Ques No. 3 Company entered into a construction contract to lay a pipeline before 31-3-2018. Financial statements for that year were finalized on 15-5-2018. While doing grounding work it met a rocky substance for which it had to incur an additional `50 crore on 16-5-2018. Should company make provision? If yes, in which year should it be making 2017-18 or 2018-19?
Ans: The Company’s financial statements were finalized on 15-5-2018. But it discovered that it has to expend an additional `50 crore only on 16-5-2018, therefore it does not amount to an event occurring after the balance sheet date.
The company has to make a provision in the financial year 2018-19 i.e. in the next financial year.
Ques No. 4 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.
Ans: In this case the incidence, 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 i.e. Board of Director’s report.
Ques No. 5 IAS Ltd. has received a demand notice on 15-6-2018 for `78 lakh from the excise deptt. in respect of duty payable for several years. The Financial Statements were approved on 31-8-2018. In July, 2018, it deposited `16 lakh and appealed for `62 lakh. Company is expecting to bring down `62 lakh claim to `27 lakh only (based on its advocate’s opinion). How should the company deal with the situation in the financial statements of 2017-18?
Ans: Since the demand already existed as on the balance sheet date, and later the Company received the notice, it becomes an adjusting event and the company has to make a provision for `43 lakh (27 + 16).
(As the company has already deposited ` 16 lakh in the subsequent year hence it should make a provision for the same as of 31-03-2018 and the remaining claim which is a probable outflow ` 27 lakh also to be provided).
The remaining amount of ` 35 lakh (62-27 lakh) should be disclosed as contingent liability as per AS 29.
Ques No. 6 In Raj Co. Ltd., theft of cash of `2 lakhs by the cashier in January, 2018 was detected in May, 2018. The accounts of the company were not yet approved by the Board of Directors of the company. Whether the theft of cash has to be adjusted in the accounts of the company for the year ended 31.3.2018. Decide.
Ans: Though the theft, by the cashier `2,00,000, was detected after the balance sheet date (before approval of financial statements) but it is an additional information materially affecting the determination of the cash amount relating to conditions existing at the balance sheet date. Therefore, it is necessary to make the necessary adjustments in the financial statements of the company for the year ended 31st March, 2018 for recognition of the loss amounting to `2,00,000.
Ques No. 7 With reference to AS 4, state whether the following events will be treated as contingencies, adjusting events or non-adjusting events occurring after balance sheet in case of a company which follows April to March as its financial year.
(i) A major fire has damaged the assets in a factory on 5th April, 5 days after the year end. However, the assets are fully insured and the books have not been approved by the Directors.
(ii) A suit against the company’s advertisement was filed by a party on 10th April, 10 days after the year end claiming damages of ` 20 lakh.
(iii) It sent a proposal to purchase an immovable property for ` 30 lakhs in March. The book value of the property is ` 20 lakh as on year end date. However, the deed was registered as on 15th April.
(iv) The terms and conditions for acquisition of business of another company have been decided by March end. But the financial resources were arranged in April and amount invested was ` 40 lakh.
(v) Theft of cash of ` 2 lakh by the cashier on 31st March but was detected the next day after the financial statements have been approved by the Directors.
Ans: As per AS 4—
(i) Fire has occurred after the balance sheet date and also the loss is totally insured. Therefore, the event becomes immaterial and the event is non-adjusting in nature.
(ii) The contingency is restricted to conditions existing at the balance sheet date. However, in the given case, suit was filed against the company’s advertisement by a party on 10th April for amount of ` 20 lakh. Therefore, it does not fit into the definition of a contingency and hence is a non-adjusting event.
(iii) In the given case, proposal for deal of immovable property was sent before the closure of the books of account. This is a non-adjusting event as only the proposal was sent and no agreement was effected in the month of March i.e. before the balance sheet date.
(iv) As the term and conditions of acquisition of business of another company had been decided by the end of March, acquisition of business is an adjusting event occurring after the balance sheet date. Adjustment to assets and liabilities is required since the event affects the determination and the condition of the amounts stated in the financial statements for the financial year ended on 31st March.
(v) Since the financial statements have been approved before detection of theft by the cashier of `2,00,000, it becomes a non-adjusting event and no disclosure is required in the BoD report.
Ques No. 8 During the year 2017-18, Raj Ltd. was sued by a competitor for ` 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 31st March, 2018. On 18th May, 2018, the Court decided in favour of the party alleging infringement of the trademark and ordered Raj Ltd. to pay the aggrieved party a sum of ` 14 lakhs. The financial statements were prepared by the company’s management on 30th April, 2018, and approved by the Board on 30th May, 2018. Comment.
Ans: As per 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.
In the given case, since Raj Ltd. was sued by a competitor for infringement of a trademark during the year 2017-18 for which the provision was also made by it, the decision of the Court on 18th May, 2018, 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 ` 4 lakhs to reflect the award decreed by the Court to be paid by them to its competitor.
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