AS – 4 = CONTINGENCIES AND EVENTS OCCURING AFTER THE BALANCE SHEET DATE
JULY 2021
Surya Limited follows the financial year from April to March. It has provided the following information.
a) A suit against the Company's Advertisement was filed by a party on 5th April, 2021, claiming damages of ` 5 lakhs.
b) Company sends a proposal to sell an immovable property for ` 45 lakhs in March 2021. The book value of the property is ` 30 lakhs as on year end date. However, the Deed was registered on 15th April, 2021.
c) The terms and conditions for acquisition of business of another company have been decided by the end of March 2021, but the financial resources were arranged in April 2021. The amount invested was ` 50 lakhs.
d) Theft of cash amounting to ` 4 lakhs was done by the Cashier in the month of March 2021 but was detected on the next day after the Financial Statements have been approved by the Directors.
Keeping in view the provisions of AS-4, you are required to state with reasons whether the above events are to be treated as Contingencies, Adjusting Events or Non-Adjusting Events occurring after Balance Sheet date. ANS.
(i) Suit filed against the company is a contingent liability but it was not existing as on date of balance sheet date as the suit was filed on 5th April after the balance sheet date. As per AS 4, 'Contingencies' is restricted to conditions or situations at the balance sheet date, the financial effect of which is to be determined by future events which may or may not occur. However, it may be disclosed with the nature of contingency, being a contingent liability.
This event does not pertain to conditions on the balance sheet date. Hence, it will have no effect on financial statements and will be a non-adjusting event.
(ii) In this case, no adjustment to assets and liabilities is required as the event does not affect the determination and the condition of the amounts stated in the financial statements for the year ended 31st March, 2021. There was just a proposal before 31st March, 2021 and hence sale cannot be shown in the financial statements for the year ended 31st March, 2021.
Sale of immovable property is an event occurring after the balance sheet date and is a non-adjusting event. (iii) In the given case, terms and conditions for acquisition of business were finalized before the balance sheet date and carried out before the closure of the books of accounts but transaction for payment of financial resources was effected in April, 2021.
Hence, it is an adjusting event and necessary adjustment to assets and liabilities for acquisition of business is necessary in the financial statements for the year ended 31st March 2021.
(iv) Only those events which occur between the balance sheet date and the date on which the financial statements are approved, may indicate the need for adjustments to assets and liabilities as at the balance sheet date or may require disclosure.
In the given case, as the theft of cash was detected after approval of financial statements, no adjustment is required. Hence it is non-adjusting event.
DEC 2021
As per the provision of AS 4, you are required to state with reason whether the following transactions are adjusting event or non-adjusting event for the year ended 31.03.2021 in the books of NEW Ltd. (accounts of the company were approved by board of directors on 10.07.2021):
Equity Dividend for the year 2020-21 was declared at the rate of 7% on 15.05.2021.
On 05.03.2021, ` 53,000 cash was collected from a customer but not deposited by the cashier. This fraud was detected on 22.06.2021.
One building got damaged due to occurrence of fire on 23.05.221. Loss was estimated to be ` 81,00,000.
ANS.
(i) If dividends are declared after the balance sheet date but before the financial statements are approved, the dividends are not recognized as a liability at the balance sheet date because no obligation exists at that time unless a statute requires otherwise. Such dividends are disclosed in the notes. Thus, no liability for dividends needs to be recognized in financial statements for financial year ended 31 st March, 2021 and declaration of dividend is non-adjusting event.
(ii) As per AS 4 ‘Contingencies and Events occurring after the Balance Sheet Date’ an event occurring after the balance sheet date may require adjustment to the reported values of assets, liabilities, expenses or incomes if such events relate to conditions existing at the balance sheet date. In the given case, fraud of the accounting period is detected after the balance sheet date but before approval of the financial statements, it is necessary to recognize the loss. Thus loss amounting ` 53,000 should be adjusted in the accounts of the company for the year ended 31st March, 2021 as it is adjusting event.
(iii) AS 4 states that adjustments to assets and liabilities are not appropriate for events occurring after the balance sheet date, if such events do not relate to conditions existing at the balance sheet date. The damage of one building due to fire did not exist on the balance sheet date i.e. 31.3.2021. Therefore, loss occurred due to fire is not to be recognized in the financial year 2020-2021 as it is non-adjusting event.
However, according to the standard, unusual changes affecting the existence or substratum of the enterprise after the balance sheet date may indicate a need to consider the use of fundamental accounting assumption of going concern in the preparation of the financial statements. As per the information given in the question, the fire has caused major destruction; therefore, fundamental accounting assumption of going concern would have to be evaluated. Considering that the going concern assumption is still valid, the fact of fire together with an estimated loss of ` 81 lakhs should be disclosed in the report of the approving authority for financial year 2020 -21 to enable users of financial statements to make proper evaluations and decisions.
MAY 2021
A case is going on between ABC Ltd. and Tax department on claiming the exemption for certain items, for the year 2019-2020. The court has issued the order on 15th April and rejected the claim of the company. Accordingly, company is liable to pay the additional tax. The financial statements were approved on 31st May, 2020. Shall company account for such tax in the year 2019-2020 or shall it account for in the year 2020-2021? ANS
To decide whether, the event is adjusting or not adjusting two conditions need to be satisfied, There has to be evidence
The event must have been related to period ending on reporting date.
Here both the conditions are satisfied. Court order is a conclusive evidence which has been received before approval of the financial statements since the liability is related to earlier year. The event will be considered as an adjusting event and accordingly the amount will be adjusted in accounts of 2019-2020.
NOV 2021
XYZ Ltd. operates its business into various segments. Its financial year ended on 31st March, 2020 and the financial statements were approved by their approving authority on 15th June, 2020. The following material events took place:
1. A major property was sold (it was included in the balance sheet at ` 25,00,000) for which contracts had been exchanged on 15th March, 2020. The sale was completed on 15th May, 2020 at a price of ` 26,50,000.
2. On 2nd April, 2020, a fire completely destroyed a manufacturing plant of the entity. It was expected that the loss of ` 10 million would be fully covered by the insurance company.
3. A claim for damage amounting to ` 8 million for breach of patent had been received by the entity prior to the year-end. It is the director's opinion, backed by legal advice that the claim will ultimately prove to be baseless. But it is still estimated that it would involve a considerable expenditure on legal fees.
You are required to state with reasons, how each of the above items should be dealt with in the financial statements of XYZ Ltd. for the year ended 31st March, 2020.
ANS
Treatment as per AS 4 ‘Contingencies and Events Occurring After the Balance Sheet Date’
(a)
(b)
(c)
MAY 2022
Tee Ltd. closes its books of accounts every year on 31st March. The financial statements for the year ended 31st March 2020 are to be approved by the approving authority on 30th June 2020. During the first quarter of
The sale of property should be treated as an adjusting event since contracts had been exchanged prior to the year-end. The effect of the sale should be reflected in the financial statements ended on 31.3.2020 and the profit on sale of property` 1,50,000 would be considered.
The event is a non-adjusting event since it occurred after the year- end and does not relate to the conditions existing at the year-end. However, it is necessary to consider the validity of the going concern assumption having regard to the extent of insurance cover. Also, since it is said that the loss would be fully recovered by the insurance company, the fact should be disclosed by way of a note to the financial statements.
On the basis of evidence provided, the claim against the company will not succeed. Thus, ` 8 million should not be provided in the account, but should be disclosed by means of a contingent liability with full details of the facts. Provision should be made for legal fee expected to be incurred to the extent that they are not expected to be recovered.
2020-2021, the following events / transactions has taken place. The accountant of the company seeks your guidance for the following:
1. Tee Ltd. has an inventory of 50 stitching machines costing at ` 5,500 per machine as on 31st March 2020. The company is expecting a heavy decline in the demand in next year. The inventories are valued at cost or net realizable value, whichever is lower. During the month of April 2020, due to fall in demand, the prices have gone down drastically. The company has sold 5 machines during April, 2020 at a price ` 4,000 per machine.
2. A fire has broken out in the company's godown on 15th April 2020. The company has estimated a loss of ` 25 lakhs of which 75% is recoverable from the Insurance company.
3. A suit against the company's advertisement was filed by a party on 10 th April, 2020 10 days after the year end claiming damages of ` 20 lakhs.
You are required to state with reasons, how the above transactions will be dealt with in the financial statements for the year ended 31 March 2020.
ANSWER
Events occurring after the balance sheet date are those significant events, both favourable and 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. 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 or that indicate that the fundamental accounting assumption of going concern is not appropriate. In the given case, financial statements are approved by the approving authority on 30 June 2020. On the basis of above principles, following will be the accounting treatment in the financial statements for the year ended at 31 March 2020:
1. Since on 31 March 2020, Tee Ltd. was expecting a heavy decline in the demand of the stitching machine. Therefore, decline in the value during April, 2020 will be considered as an adjusting event. Hence, Tee Ltd. needs to adjust the amounts recognized in its financial statements w.r.t. net realizable value at the end of the reporting period. Accordingly, inventory should be written down to ` 4,000 per machine. Total value of inventory in the books will be 50 machines x ` 4,000 =` 2,00,000.
2. A fire took place after the balance sheet date i.e. during 2020-2021 financial year. Hence, the financial statements for the year 2019-2020 should not be adjusted for loss occurred due to fire. However, in this circumstance, the going concern assumption will be evaluated. In case the going concern assumption is considered to be appropriate even after the occurrence of fire, no disclosure of the same is required in the financial statements.
3. 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 lakhs. Therefore, it does not fit into the definition of a contingency and hence is a non-adjusting event.
NOV 2022
Explain accounting treatment of Contingent Gains as per AS 4 “Contingencies and Events occurring after the Balance Sheet Date”.
ANS
Contingent gains are not recognised in financial statements since their recognition may result in the recognition of revenue which may never be realised. However, when the realisation of a gain is virtually certain, then such gain is not a contingency and accounting for the gain is appropriate.