FAQs on AS 4 | Contingencies and Events Occurring after Balance Sheet Date
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- Last Updated on 30 June, 2022
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Table of Contents
1. FAQs on Adjustment Events (Based on Para Nos. 3, 8.1 and 8.2)
2. FAQs on Non-Adjusting Events (Based on Para Nos. 3, 8.1, 8.3 and 8.4)
3. FAQs on Events after Approval of Financial Statements (Based on Para No. 3)
4. Mix Questions
5. FAQs on Dividends (Based on Para No. 8.5)
6. FAQs on Going Concern (Based on Para No. 8.6)
1. AS 4: Adjustment Events (Based on Para Nos. 3, 8.1 and 8.2)
FAQ 1. A company entered into an agreement to sell its immovable property to another company for 35 lakhs. The property was shown in the Balance Sheet at ` 7 lakhs. The agreement to sell was concluded on 15th February 2008 and the sale deed was registered on 30th April 2008. The financial statements for the year 2007-08 were approved by the board on 12th May 2008.
How to deal with this transaction in the financial statements for the year ending 31st March 2008?
According to para 13 of AS 4 “Contingencies and Events Occurring After the Balance Sheet Date”, 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.
Analysis:
In the above case, the sale of immovable property was carried out before the closure of the books of account. This is clearly an event occurring after the balance sheet date but the agreement to sell was affected on 15th February 2009 i.e. before the balance sheet date.
Registration of the sale deed on 30th April 2009, simply provides additional information relating to the conditions existing at the balance sheet date.
Conclusion:
Thus, adjustment to assets for sale of immovable property is necessary in the financial statements for the year ended 31st March 2009.
FAQ 2. While preparing its final accounts for the year ended 31st March 2010, a company made a provision for bad debts @ 4% of its total debtors (as per trend follows from the previous years). In the first week of March 2010, a debtor for ` 3,00,000 had suffered heavy loss due to an earthquake; the loss was not covered by any insurance policy. In April 2010 the debtor became bankrupt.
Can the company provide for the full loss arising out of the insolvency of the debtor in the final accounts for the year ended 31st March 2010?
As per para 8 of AS 4 ‘Contingencies and Events Occurring After the Balance Sheet Date’, adjustments to assets and liabilities are required for events occurring after the balance sheet date that provide additional information materially affecting the determination of the amounts relating to conditions existing at the Balance Sheet date.
Analysis:
A debtor for ` 3,00,000 suffered heavy loss due to earthquake in the first week of March 2010 and became bankrupt in April 2010 (after the balance sheet date). The loss was also not covered by any insurance policy.
Conclusion:
Therefore, full provision for bad debts amounting to ` 3,00,000 should be made, to cover the loss arising due to the insolvency of a debtor, in the final accounts for the year ended 31st March 2010.
FAQ 3. MEC Limited could not recover an amount of ` 8 lakhs from a debtor. The company is aware that the debtor is in great financial difficulty. The accounts of the company for the year ended 31-3-2011 were finalized by making a provision @ 25% of the amount due from that debtor. In May 2011, the debtor became bankrupt and nothing is recoverable from him. Do you advise the company to provide for the entire loss of ` 8 lakhs in books of account for the year ended 31-3-2011?
As per para 8 of AS 4, ‘Contingencies and Events Occurring After the Balance Sheet Date’, adjustments to assets and liabilities are required for events occurring after the balance sheet date if such event provides/relates to additional information to the conditions existing at the balance sheet date and is also materially affecting the valuation of assets and liabilities on the balance sheet date.
Analysis:
As per the information given in the question, the debtor was already in great financial difficulty at the time of closing of accounts. The bankruptcy of the debtor in May 2011 is only a piece of additional information to the condition existing on the balance sheet date. Also, the effect of a debtor becoming bankrupt is material as a total amount of ` 8 lakhs will be a loss to the company.
Conclusion:
Thus, the company is should provide for the entire amount of ` 8 lakhs in the books of account for the year ended 31st March 2011.
FAQ 4. Cashier of A-One Limited embezzled cash amounting to ` 6,00,000 during March, 2012. However same comes to the notice of Company management during April, 2012 only financial statements of the company are not yet approved by the Board of Directors of the company. With the help of provisions of AS 4 “Contingencies and Events Occurring after the Balance Sheet Date” decide, whether the embezzlement of cash should be adjusted in the books of account for the year ending March, 2012?
What will be your reply, if embezzlement of cash comes to the notice of company management only after approval of financial statements by the Boar Directors of the company?
As per para no. 13 of 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.
Analysis:
Though the theft, by the cashier ` 6,00,000, was detected after the balance sheet date (before approval of financial statements) but it is a piece of additional information materially affecting the determination of the cash amount relating to conditions existing at the balance sheet date.
Conclusion:
Therefore, it is necessary to make the necessary adjustments in the financial statements of the company for the year ended 31st March 2012 for recognition of the loss amounting `to 6,00,000.
FAQ 5. In its final accounts for the year ended 31st March 2014, a company made a provision of 3% of its total debtors. On 10th March 2014, a debtor of ` 5 lakhs suffered a heavy loss and became insolvent in April 2014. The loss was not insured.
Whether the company may provide for the full loss in its accounts for the year ended 31st March 2014?
According to para 8.2 of Accounting Standard 4 “Contingencies and Events Occurring after the Balance Sheet Date”, adjustments to assets and liabilities are required for events occurring after the balance sheet date that provide additional information materially affecting the determination of the amounts relating to conditions existing at the balance sheet date.
Analysis:
In the above case, though the debtor became insolvent after the balance sheet date, he had suffered a heavy loss (not covered by the insurance), before the balance sheet date and this loss was the cause of the insolvency of the debtor.
Conclusion:
Thus, the company must make full provision for bad debts amounting to 5 lakhs in its final accounts for the year ended 31st March 2014.
FAQ 6. While preparing its final accounts for the year ended 31st March, 2016, a company made provision for bad debts @ 5% of its total debtors. In the last week of February, 2016, a debtor for ` 20 lakhs had suffered heavy loss due to an earthquake; the loss was not covered by any insurance policy. In April, 2016 the debtor became a bankrupt. Can the company provide for the full loss arising out of insolvency of the debtor in the final accounts for the year ended 31st March, 2016?
Comment with reference to relevant Accounting Standard.
As per AS 4 ‘Contingencies and Events Occurring After the Balance Sheet Date’, adjustments to assets and liabilities are required for events occurring after the balance sheet date that provide additional information materially affecting the determination of the amounts relating to conditions existing at the Balance Sheet date.
Analysis:
A debtor for ` 20,00,000 suffered heavy loss due to earthquake in the last week of February 2016 which was not covered by insurance. This information with its implications was already known to the company. The fact that he became bankrupt in April 2016 (after the balance sheet date) is only a piece of additional information related to the condition existing on the balance sheet date. However, the bankruptcy of debtors is an adjusting event.
Conclusion:
Thus, full provision for bad debts amounting to ` 20,00,000 should be made, to cover the loss arising due to the insolvency of a debtor, in the final accounts for the year ended 31st March 2016.
Since the company has already made 5% provision of its total debtors, additional provision amounting ` 19,00,000 shall be made (20,00,000 x 95%).
2. AS 4: Non-Adjusting Events (Based on Para Nos. 3, 8.1, 8.3 and 8.4)
FAQ 7. A company deals in petroleum products. The sale price of petrol is fixed by the government. After the Balance Sheet date, but before the finalization of the company’s accounts, the government unexpectedly increased the price retrospectively. Can the company account for additional revenue at the close of the year? Discuss in line with provisions of AS 4.
Analysis:
According to para 8 of AS 4, the unexpected increase in the sale price of petrol by the government after the balance sheet date cannot be regarded as an event occurring after the Balance Sheet date, which requires an adjustment at the Balance Sheet date, since it does not represent a condition present at the balance sheet date.
Conclusion:
The revenue should be recognized only in the subsequent year with proper disclosures.
FAQ 8. With reference to AS 4 “Contingencies and events occurring after the Balance Sheet Date”, state whether the following events will be treated as contingencies, adjusting events or non-adjusting events occurring after balance sheet date in case of a company which follows April to March as its financial year.
(i) A major fire has damaged the assets in a factory on 5th April, 5 days after the year end. However, the assets are fully insured and the books have not been approved by the Directors.
(ii) A suit against the company’s advertisement was filed by a party on 10th April, 10 days after the year end claiming damages of ` 20 lakhs.
According to AS 4 on ‘Contingencies and Events Occurring after the Balance Sheet Date’, adjustments to assets and liabilities are required for events occurring after the balance sheet date that provide additional information materially affecting the determination of the amounts relating to conditions existing at the balance sheet date.
However, 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. “Contingencies” used in the 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.
(i) Analysis:
Fire has occurred after the balance sheet date and also the loss is totally insured.
Conclusion:
Therefore, the event becomes immaterial and the event is non-adjusting in nature.
(ii) Analysis:
The contingency is restricted to conditions existing at the balance sheet date. However, in the given case, a suit was filed against the company’s advertisement by a party on 10th April for the amount of ` 20 lakhs.
Conclusion:
Therefore, it does not fit into the definition of a contingency and hence is a non-adjusting event.
FAQ 9. A Company follows April to March as its financial year. The Company recognizes cheques dated 31st March or before, received from customers after balance sheet date, but before approval of financial statement by debiting ‘Cheques in hand account’ and crediting ‘Debtors account’. The ‘cheques in hand’ is shown in the Balance Sheet as an item of cash and cash equivalents. All cheques in hand are presented to bank in the month of April and are also realised in the same month in normal course after deposit in the bank. State with reasons, whether the collection of cheques bearing date 31st March or before, but received after Balance Sheet date is an adjusting event and how this fact is to be disclosed by the company?
Analysis:
Even if the cheques bear the date 31st March or before, the cheques received after 31st March do not represent any condition existing on the balance sheet date i.e. 31st March.
Conclusion:
Thus, the collection of cheques after the balance sheet date is not an adjusting event.
3. AS 4: Events after Approval of Financial Statements (Based on Para No. 3)
FAQ 10. A Limited Company dosed its accounting year on 30.6.2017 and the accounts for that period were considered and approved by the board of directors on 20th August, 2017. The company was engaged in laying pipe line for an oil company deep beneath the earth. While doing the boring work on 1.9.2017 it had met a rocky surface for which it was estimated that there would be an extra cost to the tune of 80 lakhs. You are required to state with reasons, how the event would be dealt with in the financial statements for the year ended 30.6.2017.
AS 4 (Revised) on Contingencies and Events Occurring after the Balance Sheet Date defines ‘events occurring after the balance sheet date’ as ‘significant events, both favourable and unfavourable, that occur between the balance sheet date and the date on which financial statements are approved by the Board of Directors in the case of a company’.
Analysis:
In the above case the incidence, which was expected to push up the cost, became evident after the date of approval of the accounts.
Conclusion:
Therefore, it is not an ‘event occurring after the balance sheet date’. However, this may be mentioned in the Report of Approving Authority.
FAQ 11. During the year 2015-16, R Ltd. was sued by a competitor for ` 15 lakhs for infringement of a trademark. Based on the advice of the company’s legal counsel, R Ltd. provided for a sum of ` 10 lakhs in its financial statements for the year ended 31st March, 2016. On 18th May, 2016, the Court decided in favour of the party alleging infringement of the trademark and ordered R Ltd. to pay the aggrieved party a sum of ` 14 lakhs. The financial statements were prepared by the company’s management on 30th April, 2016, and approved by the board on 30th May 2016.
As per AS 4 (Revised), adjustments to assets and liabilities are required for events occurring after the balance sheet date that provide additional information materially affecting the determination of the amounts relating to conditions existing at the balance sheet date.
Analysis:
In the given case, since R Ltd. was sued by a competitor for infringement of a trademark during the year 2015-16 for which the provision was also made by it, the decision of the Court on 18th May, 2016, for payment of the penalty will constitute as an adjusting event because it is an event occurred before approval of the financial statements.
Conclusion:
Therefore, R Ltd. should adjust the provision upward by ` 4 lakhs to reflect the award decreed by the Court to be paid by them to its competitor.
4. AS 4: Mix Questions
FAQ 12. Neel Limited has its corporate office in Mumbai and sells its products to stockists all over India. On 31st March, 2013, the company wants to recognize receipt of cheques bearing date 31st March, 2013 or before, as “Cheques in Hand” by reducing “Trade Receivables”. The “Cheques in Hand” is shown in the Balance Sheet as an item of cash and cash equivalents. All cheques are presented to the bank in the month of April 2013 and are also realized in the same month in normal course after deposit in the bank. State with reasons, whether each of the following is an adjusting event and how this fact is to be disclosed by the company, with reference to the relevant accounting standard.
(i) Cheques collected by the marketing personnel of the company from the stockists on or before 31st March, 2013.
(ii) Cheques sent by the stockists through courier on or before 31st March, 2013.
(i) Analysis:
Cheques collected by the marketing personnel of the company is an adjusting event as the marketing personnel are employees of the company and therefore, are representatives of the company. Handing over cheques by the stockist to the marketing employees discharges the liability of the stockist. Therefore, cheques collected by the marketing personnel of the company on or before 31st March 2013 require adjustment from the stockists’ accounts i.e. from ‘Trade Receivables A/c’ even though these cheques (dated on or before 31st March 2013) are presented in the bank in the month of April 2013 in the normal course.
Conclusion:
Hence, the collection of cheques by the marketing personnel is an adjusting event as per AS 4 ‘Contingencies and Events Occurring after the Balance Sheet Date’. Such ‘cheques in hand’ will be shown in the Balance Sheet as ‘Cash and Cash equivalents’ with a disclosure in the Notes to accounts about the accounting policy followed by the company for such cheques.
(ii) Analysis:
Even if the cheques bear the date 31st March or before and are sent by the stockists through courier on or before 31st March 2013, it is presumed that the cheques will be received after 31st March. Collection of cheques after 31st March 2013 does not represent any condition existing on the balance sheet date i.e. 31st March.
Conclusion:
Thus, the collection of cheques after the balance sheet date is not an adjusting event. Cheques that are received after the balance sheet date should be accounted for in the period in which they are received even though the same may be dated 31st March or before as per AS 4. Moreover, the collection of cheques after the balance sheet date does not represent any material change affecting the financial position of the enterprise, so no disclosure in the Director’s Report is necessary.
FAQ 13. State with reasons, how the following events would be dealt with in the financial statements of Pradeep Ltd. for the year ended 31st March, 2013:
(i) An agreement to sell a land for ` 30 lakh to another company was entered into on 1st March, 2013. The value of land is shown at ` 20 lakh in the Balance Sheet as on 31st March, 2012. However, the Sale Deed was registered on15th April, 2013.
(ii) The negotiation with another company for acquisition of its business was started on 2nd February, 2013. Pradeep Ltd. invested ` 40 lakh on 12th April, 2013.
(i) Analysis:
In the given case, sale of immovable property was carried out before the closure of the books of account. This is clearly an event occurring after the balance sheet date but agreement to sell was effected on 1st March, 2013 i.e. before the balance sheet date. Registration of the sale deed on 15th April, 2013, simply provides additional information relating to the conditions existing at the balance sheet date.
Conclusion:
Therefore, adjustment to assets for sale of land is necessary in the financial statements of Pradeep Ltd. for the year ended 31st March, 2013.
(ii) Analysis:
The acquisition of another company is an event occurring after the balance sheet date. However, 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, 2013.
Conclusion:
The investment of ` 40 lakhs in April, 2013 in the acquisition of another company should be disclosed in the report of the Board of Directors to enable users of financial statements to make proper evaluations and decisions.
FAQ 14. With reference to AS 4 “Contingencies and events occurring after the balance sheet date”, state whether the following events will be treated as contingencies, adjusting events or non-adjusting events occurring after balance sheet date in case of a company which follows April to March as its financial year.
(i) A major fire has damaged the assets in a factory on 5th April, 5 days after the year end. However, the assets are fully insured and the books have not been approved by the Directors.
(ii) A suit against the company’s advertisement was filed by a party on 10th April, 10 days after the year end claiming damages of ` 20 lakhs.
(iii) It sends a proposal to purchase an immovable property for ` 30 lakhs in March. The book value of the property is ` 20 lakhs as on year end date. However, the deed was registered as on 15th April.
(iv) The terms and conditions for acquisition of business of another company have been decided by March end. But the financial resources were arranged in April and amount invested was ` 40 lakhs.
(v) Theft of cash of ` 2 lakhs by the cashier on 31st March but was detected the next day after the financial statements have been approved by the Directors.
(i) Analysis:
Fire has occurred after the balance sheet date and also the loss is totally insured.
Conclusion:
Thus, the event becomes immaterial and the event is non-adjusting in nature.
(ii) Analysis:
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.
Conclusion:
Thus, it does not fit into the definition of a contingency and hence is a non-adjusting event.
(iii) Analysis:
In the given case, proposal for deal of immovable property was sent before the closure of the books of account.
Conclusion:
This is a non-adjusting event as only the proposal was sent and no agreement was effected in the month of March i.e. before the balance sheet date.
(iv) Analysis and conclusion:
As the term and conditions of acquisition of business of another company had been decided by the end of March, acquisition of business is an adjusting event occurring after the balance sheet date.
Adjustment to assets and liabilities is required since the event affects the determination and the condition of the amounts stated in the financial statements for the financial year ended on 31st March.
(v) Analysis and conclusion:
Since the financial statements have been approved before detection of theft by the cashier of ` 2,00,000, it becomes a non-adjusting event and no disclosure is required in the report of the Approving Authority.
5. AS 4: Dividends (Based on Para No. 8.5)
FAQ 15. The Board of Directors of M/s. New Graphics Ltd. in its Board Meeting held on 18th April, 2017, considered and approved the Audited Financial results along with Auditors Report for the Financial Year ended 31st March, 2017 and recommended a dividend of ` 2 per equity share (on 2 crore fully paid up equity shares of 10 each) for the year ended 31st March, 2017 and if approved by the members at the forthcoming Annual General Meeting of the company on 18th June, 2017, the same will be paid to all the eligible shareholders.
Discuss on the accounting treatment and presentation of the said proposed dividend in the annual accounts of the company for the year ended 31st March, 2017 as per the applicable Accounting Standard and other Statutory Requirements.
Analysis:
Dividends declared after the balance sheet date but before approval of financial statements are not recognized as a liability at the balance sheet date because no statutory obligation exists at that time. Hence such dividends are disclosed in the notes to financial statements.
No, provision for proposed dividends is not required to be made. Such proposed dividends are to be disclosed in the notes to financial statements.
Conclusion:
Accordingly, the dividend of ` 4 crores recommended by the company in its Board meeting on 18th April 2017 shall not be accounted for in the books for the year 2016-17 irrespective of the fact that it pertains to the year 2016-17 and will be paid after approval in the Annual General Meeting of the members/shareholders.
6. AS 4: Going Concern (Based on Para No. 8.6)
FAQ 16. An earthquake destroyed a major warehouse of P Ltd. on 30.4.2014. The accounting year of the company ended on 31.3.2014. The accounts were approved on 30.6.2014. The loss from earthquake is estimated at ` 25 lakhs. State with reasons, whether the loss due to earthquake is an adjusting or non-adjusting event and how the fact of loss is to be disclosed by the company.
Para 8.3 of AS 4 “Contingencies and Events Occurring after the Balance Sheet Date”, 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.
Analysis:
The destruction of warehouse due to earthquake did not exist on the balance sheet date i.e. 31.3.2014. Therefore, loss occurred due to earthquake is not to be recognised in the financial year 2013-14.
However, according to para 8.6 of 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 earthquake has caused major destruction.
Conclusion:
Therefore, fundamental accounting assumption of going concern is impacted.
Hence, the fact of earthquake together with an estimated loss of ` 25 lakhs should be disclosed in the Report of the Directors for the financial year 2013-14.
FAQ 17. The accounting year of Dee Limited ended on 31st March, 2018 but the accounts were approved on 30th April, 2018. On 15th April, 2018 a fire occurred in the factory and office premises. The loss by fire is of such a magnitude that it was not possible to expect the enterprise Dee Limited to start operation again.
State with reasons, whether the loss due to fire is an adjusting or non- adjusting event and how the fact of loss is to be disclosed by the company in the context of the provisions of AS 4 (Revised).
As per AS 4 (Revised) “Contingencies and Events occurring after the Balance Sheet Date”, an event occurring after the balance sheet date should be an adjusting event even if it does not reflect any condition existing on the balance sheet date, if the event is such as to indicate that the fundamental accounting assumption of going concern is no longer appropriate.
Analysis:
The fire occurred in the factory and office premises of an enterprise after 31st Marc, 2018 but before the approval of financial statement of 30.4.2018. The loss by fire is of such a magnitude that it is not reasonable to expect the company to start operations again, i.e., the going concern assumption is not valid. Since the fire occurred after 31/03/18, the loss on fire is not a result of any condition existing on 31/03/18.
Conclusion:
Loss due to fire is an adjusting event the entire accounts need to be prepared on a liquidation basis with adequate disclosures by the company by way of note in its financial statements as under:
Draft Notes to Account:
“Major fire occurred in the factory and office premises on 15th April 2018 which has made impossible for the enterprise to start operations again.
Therefore, the financial statements have been prepared on liquidation basis.”
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