Accounting Standard 4

ACCOUNTING STANDARD 4
CONTINGENCIES AND EVENTS OCCURRING
AFTER THE BALANCE SHEET DATE
1. 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

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.

Accounting Treatment of Contingent Gains

Contingent gains are not recognised in financial statements
However, when the realisation of a gain is virtually certain, then such gain
is not a contingency and accounting for the gain is appropriate.

Note: AS 4 that deal with contingencies are applicable only to the extent
not covered by other Accounting Standards. For example, the impairment
of receivables (commonly known as provision for bad and doubtful debts) is
governed AS4.

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2. EVENTS OCCURRING AFTER THE BALANCE SHEET DATE

 Are those significant events
 Which are favourable or 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.

3. TYPES OF EVENTS

Events

Adjusting event Non-adjusting event

Which provides further Which relates to condition

evidence of condition arising after balance sheet
existing on balance date
sheet date

No adjustment required

Adjusted to financial
statements
Disclosure of such event is
required in in the report of
the approving authority if
the amount is material

Examples of adjusting events

(a) the settlement of a court case after the reporting period.
(b) the bankruptcy of a customer that occurs after the reporting period
(c) the sale of inventories after the reporting period may give evidence
about their net realisable value at the end of the reporting period.
(d) the determination after the reporting period of the amount of profit-
sharing or bonus payments.

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(e) the discovery of fraud or errors that show that the financial statements
are incorrect.
Examples of non-adjusting event
(a) Decline in market value of investment
(b) Major business combination
(c) Major purchase of asset
(d) Classification of Non-current asset as held for sale after reporting date
(e) Changes in Forex rate
(f) Major litigation after reporting date.

4. SPECIAL CASE
(a) Going concern
1) An entity shall not prepare financial statements as per going
concern if
 it intends to liquidate (or) ceases trading (OR)
 Has no realistic alternative but to liquidate
2) If 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 after reporting date

If going concern remains

If going concern is not valid
valid

Adjustment to assets and

Non-adjustment event liabilities is required

Disclosure in the report of Disclosure in the

the approving authority is financial statements is
required required

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(b) PROPOSED DIVIDEND

• 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.
• Thus, no liability for proposed dividends needs to be recognised in
the financial statements
• Such dividends are disclosed in the notes.

5. DISCLOSURE REQUIREMENT
Non-adjusting event: Disclosure of events occurring after the balance sheet
date requires the following information be provided in the financial
statements:
• The nature of the event;
• An estimate of the financial effect, or a statement that such an
estimate cannot be made.

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