Accounting Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date (Revised)
This Standard deals with the treatment in financial statements of (a) contingencies, and (b) events occurring after the balance sheet date.
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.
The following terms are used in this Standard
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.
Contingencies are of two types:
Contingencies relating to existing condition or situation at the balance sheet date, the expected outcomes are two:
- Contingent loss, it may be —
→ Probable Loss
→ Reasonably possible
- Contingent gain, it is covered by AS – 29
No accounting treatment is required, neither by way of provision nor by giving accounting notes.
- Probable – future event or events are likely to occur.
- Reasonably possible – chance of the future event or events occurring is more than remote but less than likely.
- Remote – chance of the future event or events occurring is slight.
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 estimates of the outcome and of the financial effect of contingencies are determined by the judgement of the management of the enterprise. This judgement is based on consideration of information available up to the date on which the financial statements are approved and will include a review of events occurring after the balance sheet date, supplemented by experience of similar transactions and, in some cases, reports from independent experts.
Provision for loss is estimated on the basis of information available up to the date of approval of accounts by competent authority. But the contingency must exist on the date of balance sheet. If contingency does not exist on balance sheet date no provision nor notes to accounts is required.
Accounting Treatment of Contingent Gains
Contingent gains are not recognised in financial statements since their recognition may result in the recognition of revenue which may never be realized. The contingent gains are not disclosed in the financial statements. If the realization of a gain is virtually certain, then such gain is not a contingency and accounting for the gain is appropriate.
Events occurring after the Balance Sheet date are as under
Events, which occur between the balance sheet date and date on which financial statements are approved by competent authority.
For the purpose of accounting treatment the events are classified in two categories
- The events related to circumstances existing on the date of Balance Sheet — the loss should be accounted in the accounts and assets & liabilities to be adjusted. (Known as adjusting events)
- The events not related to circumstances existing on the date of Balance Sheet — to be disclosed by way of notes to accounts only, no adjustment in accounts are required. (Known as non-adjusting events)
Insolvency of a customer is an Adjusting event as insolvency of a customer, occurs after the balance sheet date usually, provides additional information on the condition that existed at the balance sheet date. Therefore, the carrying amount receivables should be adjusted for the event.
It is assumed that —
- The condition of insolvency existed at the balance sheet date
- The entity could not collect the complete information about the collectability of the receivable
- it could not estimate the insolvency of the customer
However, insolvency due to a major casualty occurring after the balance sheet date is not an adjusting event.
Event occurring after approval of accounts
Event occurring after the balance sheet date and also after approval of accounts by board of directors of a company such event should be disclosed in the director’s report if material.
- 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.