Accounting Standard 4 contingency and event occuring after balance sheet date

1. ACCOUNTING STANDARD - 4
CONTINGENCIES AND EVENTS
OCCURING AFTER BALANCE SHEET
DATE
Presented By:-
Sourav Mondal(15/MBA/28)

2. Objectives
• 1. deals with the treatment in financial statement of
a)Contingencies
b)events occurring after the balance sheet date
• 2. The following subjects, which may result in
contingencies, are excluded from the scope of this Standard
in view of special considerations applicable to them:
• a) liabilities of life assurance and general insurance
enterprises arising from policies issued
• b) obligations under retirement benefit plans; and
• c) commitments arising from long-term lease contracts.

3. Contingency

4. Definition
A contingency is a condition or situation, the ultimate outcome of
which, gain or loss, will be known or determined only on the
occurrenceornon-occurrence,ofoneormoreuncertainfuture
events.
Estimates are required for determining the amounts to
be stated in the financial statements for many on-going
and recurring activities of an enterprise
The uncertainty relating to future events can be
expressed by a range of outcomes
The estimates of the outcome and of the financial
effect of contingencies are determined by the
judgment of the management of the enterprise

5. Explanation
• The term “contingencies” used in this Standard 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.
• Estimates are required for determining the
amounts to be stated in the financial statements
for many on-going and recurring activities of
an enterprise. One must, however, distinguish
between an event which is certain and one which
is uncertain. The fact that an estimate is involved
does not, of itself, create the type of uncertainty
which characterizes a contingency

6. Contingencies(other than covered by
AS-29)
Cotingencies
(other than
covered by AS-
29)
Existing
Condition or
situation at the
balance sheet
date
Contingencies loss
Expected Loss May be
1.Probable loss
2.Reasonably Possible
3. Remote
Contingencies Gaain
Covered By AS 29
Condition or situation
after the Balance sheet
date
No accounting
Treatment is
required,neither by way
of provision nor by
giving accounting notes

7. Accounting Treatment of Contingent
Losses
• The accounting treatment of a contingent loss is
determined by the expected outcome of the contingency. 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.
• 1.2 The estimation of the amount of a contingent loss to be
provided for in the financial statements may be based
on information
• 1.3 If there is conflicting or insufficient evidence for
estimating the amountof a contingent loss, then disclosure
is made of the existence and nature ofthe contingency.

8. Cont’d
• 1.4 A potential loss to an enterprise may be reduced or avoided
because a contingent liability is matched by a related counter-claim
or claim against a third party. In such cases, the amount of the
provision is determined after taking into account the probable
recovery under the claim if no significant uncertainty as to its
measurability or collect ability exists. Suitable disclosure regarding
the nature and gross amount of the contingent liability is also
made.
• 1.5 The existence and amount of guarantees, obligations arising
from discounted bills of exchange and similar obligations
undertaken by an enterprise are generally disclosed in financial
statements by way of note, even though the possibility that a loss
to the enterprise will occur, is remote.
• 1.6 Provisions for contingencies are not made in respect of
general or unspecified business risks since they do not relate to
conditions or situations existing at the balance sheet date.

9. Accounting treatment Doesn’t apply
following cases
• 1. Liabilities of life assurance and general
insurance.
• 2.Obligation under retirement benefit plan
• 3.commitmtnt arising from long term lease
contracts

10. • ILLUSTRATION – 1
1. A company has filed a legal suit against the
debtor from whom Rs.15 lakhs is recoverable
as on 31/3/04. The chances of recovery of
legal suit are not good as per legal opinion.
sol. As per AS-4 company should make a
provision for doubtful debts.

11. ILLUSTRATION -2
• NDA Limited closed its accounting year on 30-6-2016 and the
accounts for that period were considered and the accounts for that
period were considered and approved by the board of directors on
20th august 2010. The company was engaged in laying pipeline for
an oil company, deep beneath the earth, while doing the boring
work on 1/9/10 it had met a rocky surface for which it was
estimated that there would be extra cost to the tune of Rs.80 lakh.
You are required to state with reason, how it would be deal with in
the financial statements for the year ended 30/6/2010
• Sol: AS4 on contingencies and events occurring after the balance
sheet date defines events occurring after the balance sheet date
are those significant events both favorable and unfavorable, that
occur between the balance sheet date and the date on which
financial statement are appovroved by board of director.
In this case the incidence, which was expected to push cost
became evident after the date of approval of the accounts. So that
was not an event occuring after the balance sheet date as per AS-4.
However, this maybe mentioned in the Director’s report.

12. Events Occurring
After the Balance Sheet Date

13. What is Events occuring after
balance sheet date(AS-4)
• Event which Occur Between the balance sheet date and
date which financial statements are approved by
competent authority
• These event are significant events and it may be favorable
and unfavorable
• Example: Balance sheet date is 31st march 2010 and Board
of directors approved the accounts on 30/08/2010.any
event that occurs between 31/03/2010 and 30/08/2010 is
termed as event occurring after the balance sheet date.
Suppose there was a debtor of 10 cr. In accounting year. A
fire in company plant on27th july2010, Which destroyed
plant worth he become in solvent.

14. Types of event
Event
Significant
event
Adjusted
event
Non adjusted
event
Non
significant
event
NA (as per
AS1)

15. SIGNIFICANT EVENTS
Adjusting Events
(Adjust to the Balance sheet figure)
• 1. The condition of
insolvency existed at the
Balance sheet Date
• 2. Events occurred after the
Balance sheet date provide
Additional information
about the condition exist on
the balance sheet date.
Non Adjusting Event
(Not to do any adjustment in balance
sheet)
• 1.If any one condition is not
satisfied
• 2. Make disclosure by way
of notes

16. Adjusting event
• Insolvency of a customer
Example, insolvency of a customer, which
occur after the balance sheet date usually
provides additional information on the
condition that existed at the balance sheet
date . the carrying amount receivables should
be adjusted for the event

17. Examples of non adjusting events
• 1.Decline in the market value of investment
• 2. A major business combination after the
Balance sheet date
• 3.Announcing a plan to discontinue an
operation
• 4.The distraction of a major production plant
by a fire after the reporting period
• 5.Announcing or commencing the
implementation of a major restructuring

18. Cont’d
6.Major ordinary share transaction and potential
ordinary share transaction after the balance
sheet date.
7. Abnormally large changes after the balance sheet
date in asset prices on foreign exchange rates.
8. Commencing major litigation arising solely out of
event that occurred after reporting period.
9.Changes in tax rates or tax law enacted or
announced after the balance sheet date that have
a significant effect on current and deferred tax
asset and liabilities

19. Illustration-1
1.A company entered into an agreement to sell its
immovable property included in the balance sheet at
Rs.5 lakhs to another company for Rs. 20lakhs. The
agreement to sell was concluded on 31/1/2010 and the
sale deed was registered on 31/4/2010.how this will be
treated in balance sheet as on 31/3/2010
sol: 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 this case sale of immovable property was
concluded before approval by the board, This is clearly
an event occurring after the balance sheet date.So
adjustment to assets

20. Illustration-2
While preparing its final accounts for ended 31st march 2010 a
company made a provision for bad debt @5% of its total
debtors. In the last week of february 2010 a debtor for Rs.
2lakhs had suffered heavy loss due to earthquke : the loss was
not covered any insurance policy. In Aptil 2010 the debtor
became a bankrupt. Can company provide for the full loss
arising out of insolvency of the debtor in the final accounts
for the year eended 31st March 2010?
Sol. Yes according to AS 4

21. Exception of AS4
• No condition existed, events occurred after
balance sheet date but have to adjust in
Balance Sheet
• 1.Statuetory requirement: Condition,
transaction, events comes after balance sheet
date( Proposed Dividend to disclosed in
balance sheet to adjust financial statement
disclosed)

22. Cont’d
• 2.Net Realizable value/ Liquidated value : when
not use going concern concept asset and
liabilities show as liquidated value
Example: Suppose a company destruction of a
major Production plant by a fire after the balance
sheet date.
disclosure after the the date of balance sheet the
major fire occurred in a financial year due to the
heavy losses arises not a going concern or
liquidated value

23. Disclosure of AS - 4
The disclosure requirements herein referred to apply only
in respect of those contingencies or events which affect the
financial position to a material extent
If a contingent loss is not provided for, its nature and an
estimate of its financial effect are generally disclosed by
way of note unless the possibility of a loss is remote. If a
reliable estimate cannot be made, this fact is disclosed
When the events occurring after the balance sheet date
are disclosed in the report, the information given comprises
the nature of the events and an estimate of their financial
effects

24. THANK
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