How to deal with Contingencies and Events Occurring After the Balance Sheet Date

Navigating the complexities of contingencies and post-balance sheet events? Udaipur CA experts share practical strategies to ensure your financial reporting is accurate and compliant.

Applicability of AS 4 Contingencies and Events Occurring After the Balance Sheet Date

AS 4 deals with treatment in the financial statements of:

• Contingencies
• events which occur after balance sheet date

Definitions

A. Contingency

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.

B. Events occurring after the balance sheet date

These events 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

There are two kinds of events that could be identified:

• Events that gives further evidence of situations which  existed at balance sheet date
• Those which are indicative of conditions that arose subsequent to the balance sheet date.
• A. Contingency

1. Accounting Treatment of Contingent Losses

For a contingent loss, the accounting treatment is determined by likely outcome of such contingency. In case it’s likely that such contingency would result in the loss of the business, then it’s prudent to account for such loss in the enterprise’s financial statements.

In case there is insufficient or conflicting evidence for assessing the value of the contingent loss, then the disclosure in financial statements is provided for the nature and existence of the contingency. Obligations which might arise from the discounted bills of exchange and such similar obligations which are undertaken by the enterprise are usually disclosed in the financial statements by way of notes, even if the possibility of loss is remote.

2. Accounting Treatment of Contingent Gains

A Contingent gain isn’t recognized in the financial statements as their recognition could result in recognition of revenue that might never be realized. When the realization of gain is certain and not contingent anymore, the gain can be accounted in the books of accounts.

3. Determination of the amount of contingency

The value at which contingencies are stated in financial statements depends on the information that is available on a date when the financial statements are considered and approved.

Events which occurs after balance sheet date which suggest that the asset might have been impaired, or a liability might have existed, at balance sheet date are, hence, taken into consideration in recognizing the contingencies and determining the value at which the contingencies are included in the financial statements

4. Exclusion

The followings that might result in the contingencies are excluded from the scope of AS 4 bearing in mind special considerations which are applicable to them:

• liabilities of general insurance enterprises and life assurance which arises from the insurance policies issued
• commitments which arise from a long-term lease contract
• obligations under a retirement benefit plan

5. Disclosure requirements

• In case the contingent loss isn’t provided for, an estimate of the financial impact and nature of such loss are usually disclosed through notes unless the probability of such loss is remote
• In case a reliable estimation of financial impact cannot be arrived at, this fact needs to be disclosed

B. Events Occurring after the Balance Sheet Date

Events that occur between balance sheet date and date on which these are approved, might suggest the requirement for an adjustment(s) to the assets and the liabilities as at balance sheet date or might need disclosure.

1. Adjusting Events

Adjustments are required to assets and liabilities for events which occur after balance sheet date which offer added information substantially affecting the determination of the amounts which relates to the conditions that existed at balance sheet date.

2. Non-Adjusting Events

Adjustments aren’t required to assets and liabilities for events which occur after balance sheet date, in case such events don’t relate to the conditions which existed at balance sheet date.

There’re events which, though occurring after balance sheet date, are sometimes presented in financial statements because of their special nature or due to statutory requirements.

3. Disclosure requirement

When events that occur after the balance sheet date are disclosed in the report of approving authority, information provided includes nature of events and the estimate of their financial impacts or the statement that such estimates cannot be arrived at

Conclusion

AS 4 addresses contingencies and occurrences that take place after the balance sheet date. The accounting treatment for contingencies is contingent upon the outcomes that arise. Adjusting events affect the values of assets and liabilities, whereas non-adjusting events may necessitate disclosure. Events that transpire following the balance sheet date have a significant impact on financial reporting. Notable distinctions between AS 4 and Ind AS 10 include the recognition of dividends.

Learn about AS 4’s approach to post-balance sheet occurrences, emphasizing the importance of adjusting events and their implications for asset and liability values with the Udaipur CA experts.