AS 4 Contingencies & Events Occurring after the Balance Sheet Date. In the previous articles, we have given AS 7 Accounting for Construction Contracts and AS 12 Accounting for Government Grants. Today we are providing the complete details of accounting standard – 4 contingencies and events occurring after the balance sheet date. You can also download AS 4 notes by ICAI in PDF at the end of this article. This revised notes is also useful for IPCC students.
AS 4 Contingencies & Events Occurring after the Balance Sheet Date
A 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.
If it is likely that a contingency will result in
Contingent Loss :
It is prudent to provide for that loss in the financial statements.
Contingent Gains :
Contingent gains are not recognized in financial statements since their recognition may result in the recognition of revenue which may never be realized. However, when the realization of a gain is virtually certain, then such gain is not a contingency and accounting for the gain is appropriate.
Determining whether the events are certain or uncertain
Estimates are required for determining the amounts to be stated in the financial statements for many on-going and recurring activities of an enterprise.
It is however essential, to 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.
For example, the fact that estimates of useful life are used to determine depreciation does not make depreciation a contingency ;the eventual expiry of the useful life of the asset is not uncertain. Also, amounts owed for services received are not contingencies even though the amounts may have been estimated, as there is nothing uncertain about the fact that these obligations have been incurred.
The amount of a contingent loss should be provided for by a charge in the statement of profit and loss if:
(a) it is probable that future events will confirm that, after taking into account any related probable recovery, an asset has been impaired or a liability has been incurred as at the balance sheet date, and
(b) a reasonable estimate of the amount of the resulting loss can be made.
If either of aforesaid two conditions are not met, e.g where a reasonable estimate of the loss is not practicable, the existence of the contingency should be disclosed by way of note unless the possibility of loss is remote.Such disclosure should provide following information:
- the nature of the contingency;
- the uncertainties which may affect the future outcome;
- an estimate of the financial effect, or a statement that such an estimate cannot be made.
Events Occurring after the Balance Sheet Date
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 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.
Two types of events can be identified:
Those, which provide further evidence of conditions that, existed at the balance sheet date
Actual adjustments in financial statements are required for adjusting event.
- Although, not adjusting event, Proposed dividend is adjusted in books of account.
- Adjustments are required for the events, which occur after balance sheet date that indicates that fundamental accounting assumption of going concern is no longer, appropriate.
Those, which are indicative of conditions that arose subsequent to the balance sheet date.
No adjustments are required to be made for such events. But, disclosures should be made in the report of the approving authority of those events occurring after the balance sheet date that represent material changes and commitments affecting the financial position of the enterprise. Such disclosure should provide following information.
(a) the nature of the events
(b) an estimate of the financial effect, or a statement that such an estimate cannot be made.
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 of the financial effect cannot be made, this fact is disclosed.
When the events occurring after the balance sheet date are disclosed in the report of the approving authority, the information given comprises the nature of the events and an estimate of their financial effects or a statement that such an estimate cannot be made.
Click Here to download AS 4 Contingencies & Events Occurring after the Balance Sheet Date notes by ICAI.
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