Download Quick Reference on Accounting Standard (AS) 4 Contingencies and Events Occurring After the Balance Sheet Date
This Standard deals with the treatment of contingencies and events occurring after the baance 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.
Events occurring after the balance sheet date 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.
Two types of events can be identified:
- Adjusting events: those which provide further evidence of conditions that existed at the balance sheet date; and
- Non-adjusting events: those which are indicative of conditions that arose subsequent to the balance sheet date.
Accounting Treatment of Contingencies
- Contingent gains should not be recognised in the financial statements.
- Contingent loss should be provided for by a charge in the Statement of Profit and Loss if:
- 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
- a reasonable estimate of the amount of the resulting loss can be made.
If either of the above conditions is not met, the existence of a contingent loss should be disclosed in the financial statements, unless the possibility of the loss is remote.
Requirements relating to contingencies are applicable only to the extent not covered by other Accounting Standards. For example, impairment of financial assets such as, impairment of receivables (commonly known as provisions for bad and doubtful debts) is governed by this Standard.
Events occurring after the Balance Sheet Date
- Adjusting Events – 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 or that indicate that the fundamental accounting assumption of going concern (i.e., the continuance of existence or substratum of the enterprise) is not appropriate.
- Non-Adjusting Events – Disclosure 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.
- Proposed Dividend – If dividend is declared after the balance sheet date, such dividends will not be recognised as a liability at the balance sheet date unless a Statue requires otherwise. Such dividends should be disclosed in the notes.