Applicability of AS 4 Contingencies and Events Occurring After the Balance Sheet Date
AS 4 deals with treatment in the financial statements of:
(B) events which occur after balance sheet date
The followings that might result in the contingencies are excluded from the scope of AS 4 bearing in mind special considerations which are applicable to them:
(a) liabilities of general insurance enterprises and life assurance which arises from the insurance policies issued
(b) commitments which arise from a long-term lease contract
(c) obligations under a retirement benefit plan
Contingencies are situations or conditions, the eventual outcome of which, profit or loss, would be determined or known only on happening, or non- happening, of an uncertain future event(s).
2. Events occurring after the balance sheet date
These are those noteworthy events, favorable as well as unfavorable, which occurs between balance sheet date and date on which such financial statements are considered and approved by the BoD (Board of Directors) in case of companies, and, by equivalent approving authorities in the of other entities.
There are two kinds of events that could be identified:
i. Events that gives further evidence of situations which subsisted at balance sheet date
ii. Events that are indicative of situations which occurred following balance sheet date.
Accounting Treatment of Contingent Losses
For a contingent loss, the accounting treatment is determined by likely outcome of such contingency. In case it’s likely that such contingency would result in the loss of the business, then it’s prudent to account for such loss in the enterprise’s financial statements.
In case there is insufficient or conflicting evidence for assessing the value of the contingent loss, then the disclosure in financial statements is provided for the nature and existence of the contingency. Obligations which might arise from the discounted bills of exchange and such similar obligations which are undertaken by the enterprise are usually disclosed in the financial statements by way of notes, even if the possibility of loss is remote.
Accounting Treatment of Contingent Gains
A Contingent gain isn’t recognized in the financial statements as their recognition could result in recognition of revenue that might never be realized. When the realization of gain is certain and not contingent anymore, the gain can be accounted in the books of accounts.
Determination of the amount of contingency
The value at which contingencies are stated in financial statements depends on the information that is available on a date when the financial statements are considered and approved.
Events which occurs after balance sheet date which suggest that the asset might have been impaired, or a liability might have existed, at balance sheet date are, hence, taken into consideration in recognizing the contingencies and determining the value at which the contingencies are included in the financial statements
Events Occurring after the Balance Sheet Date
Events that occur between balance sheet date and date on which these are approved, might suggest the requirement for an adjustment(s) to the assets and the liabilities as at balance sheet date or might need disclosure.
(a) Adjusting Events: Adjustments are required to assets and liabilities for events which occur after balance sheet date which offer added information substantially affecting the determination of the amounts which relates to the conditions that existed at balance sheet date.
(b) Non-Adjusting Events: Adjustments aren’t required to assets and liabilities for events which occur after balance sheet date, in case such events don’t relate to the conditions which existed at balance sheet date.
There’re events which, though occurring after balance sheet date, are sometimes presented in financial statements because of their special nature or due to statutory requirements.
According to AS 4, disclosure requirements would be applicable only with respect to such contingency or event that affect financial position to a substantial extent.
A. In case the contingent loss isn’t provided for, an estimate of the financial impact and nature of such loss are usually disclosed through notes unless the probability of such loss is remote
B. In case a reliable estimation of financial impact cannot be arrived at, this fact needs to be disclosed
C. When events that occur after the balance sheet date are disclosed in the report of approving authority, information provided includes nature of events and the estimate of their financial impacts or the statement that such estimates cannot be arrived at
Case Study for AS 4 Contingencies and Events Occurring After the Balance Sheet Date ABC Limited Company ended the accounting year on 30/6/15 and accounts for that accounting period were approved by the BoD on 20th August 2015. The enterprise was in the business of laying pipeline for oil companies beneath the earth. While executing its boring work on 1.9.2015 it met with a rocky surface and due to this, it was expected an extra cost of INR 80 lakhs would be required. How this event will be dealt with financial statements for the year ended 30.6.2015. The given case should be discussed keeping in mind the requirements of AS 4. In the present case the occurrence, that was anticipated to increase the cost became apparent only after the date on which the accounts are approved by the BoD. Hence, it wasn’t an event that occurred after balance sheet date. Still, this might be cited in company’s Directors’ Report
Major Differences between AS 4 and Ind AS 10
|Particulars||AS 4||Ind AS 10|
|Disclosure of non-adjusting events||As per AS 4, non-adjusting events need to be disclosed in the report of the approving authority.||As per Ind AS 10, only material non-adjusting events need to be disclosed in company’s financial statements|
|Proposed dividend||As per AS 4, proposed dividend needs to be adjusted in the financial statements||According to Ind AS 10, dividend declared or proposed after reporting period, cannot be recognized as liabilities in financial statements|
|Distribution of Non-Cash Assets to Owners||AS 4 doesn’t include such appendix||Ind AS 10 provides an appendix labeled “Distribution of Non-Cash Assets to Owners”, that is an essential part Ind AS 10. Together with this, this appendix also offers guidance when to recognize the dividends payable to shareholders.|
|Fundamental accounting assumption of going concern||AS 4 requires adjustment of assets and liabilities for events that occur after balance sheet date which signify that the fundamental going concern accounting assumption isn’t appropriate.||As per Ind AS 10, in case after reporting date, it’s determined that fundamental going concern accounting assumption isn’t appropriate, a fundamental change in the basis of accounting is required|