AS 4--CONTINGENCIES AND EVENTS OCCURRING AFTER BALANCESHEET DATE

Introduction:

As we know, at the end of an accounting year an enterprise prepares its financial statements and all the transactions (which are also called financial events) are taken into consideration while preparing those statements. Those prepared financial statements are then approved by the board of directors in case of company or by approving authority in case of others, there is a time lag between the date on which it is prepared and date on which it is approved say 15 days or 1 month. This AS is talking about the accounting treatment of all those events occurred between these two dates and the method of recording contingencies existing at the balance sheet date I,e 31^st march.

First we will know what is contingency and then the method of recording it In financial statements.

Contingency: contingencies are the situation the ultimate outcome of which, gain or loss, will be known or determined by the occurrence or non occurrence of one or more uncertain future events. Examples legal claims, warranty, etc.

IMPORTANT POINTS:

1.       The word “contingencies” used in this standard is restricted to the condition or situation at the balance sheet date, the financial effect of which is determined by the future events which may or may not occur.

2.       Pursuant to AS 29, the ASB has issued an announcement regarding applicability of AS 4 to the impairment of assets not covered by other accounting standards. They decided that all the paragraph in AS 4 which deals with the contingencies would remain operational to the extent they cover the impairment of assets like RECEIVABLES(I,E provision for doubtful debt).

3.       It is necessary to define clearly the word “uncertain “the future events on which the situation depends must be UNCERTAIN. For example we estimate the amount of depreciation for the assets but the wearing out of the assets is not uncertain we all know that one day the asset is going to be scrap and will have no value. So depreciation can’t be the contingency thus we can say that for contingency the future events must be uncertain.  

ACCOUNTING TREATMENT FOR CONTINGENCY:

Amount of contingent loss should be provided for by a charge in profit and loss account if it is probable that the future events will confirmed that asset has been impaired at the balance sheet date and the reasonable estimate of the amount of the loss can be made. If these conditions are not satisfied the existence of contingent loss should be disclosed in the financial statements.

No entry for contingent gain.

EVENTS OCCURRING AFTER BALANCE SHEET DATE:

Events occurring after balance sheet date are those significant events, both favorable and unfavorable those occur between the balance sheet date and the date on which the financial statements are approved by the approving authority.

There are two types of events that occur after balance sheet date:

a)      Those significant events which occurred between the balance sheet date and the date of approval of the financial statements but the condition related to that event was already existed before the balance sheet date. These are called the adjusting events because these type of events needs adjustments in the financial statements. For example – suppose the company was going through the legal case during the year 2012-13. The company made its balance sheet on 31^st march2013 and waiting for the approval from its board of director which happens on 15 may every year. In the meanwhile decision of that case came on 19 April 2013; require the company to pay 50 lakh, in that situation the company needs to adjust this event in its financial statements. Remember one thing events must be significant means it must bring the material effect on the financial statements. [Students should not confused that losses are only needed to adjust, if that court case brought 50 lakh in the company’s favor the adjustment would also require in that situation that’s why the definition says both favorable and unfavorable event].

b)      Those significant events which occurred between the balance sheet date and the date of approval of the financial statements and the condition related to those events also occurred in between these two dates is called Non-adjusting events. These are called Non- adjusting events because these types of events don’t require any adjustments, only disclosure is required in the financial statements. For example, earthquake took place after the balance sheet date but before approval of financial statements, in this case, we can see that no condition was existing during the year so no adjustment is required, only the disclosure (in the directors report) is required** regarding the event and loss of such event if possible to estimate, if it’s not possible to estimate the loss of this type of events, the report should state the loss on earthquake can’t be estimated.

If I were to say in one line I would say, in the adjusting events condition existed earlier and events occurred later to confirm that condition and in non-adjusting event condition and events both occurred later. 

** Disclosure is required to make the users of financial statements aware of the fact that material change in the near future will come.

Exception to the non-adjusting events:

1)      When we find that the destruction of the event is so major that, going concern of the company is affected by such event(means the company is in doubt whether it can continue its business or not), the adjustments in the financial statements of that event must be done no matter condition was earlier or later.

2)      The company proposed the dividend after looking out its profit so they will always propose the dividend after preparing its financial statements means after 31^st march. Although this is the event after balance sheet date and no condition for this was existed earlier I,e before 31^st ,(perfect qualities of non -adjusting events) it will require the adjustments in the financial statements.

THIS WAS ALL ABOUT THE THEORETICAL CONCEPT OF AS 4