ACCOUNTING STANDARDS (AS 4 – CONT. & EVENTS OCC.

AFTER THE B/S DATE)

1.1 ACCOUNTING STANDARD – 4 (Contingencies & Events Occurring After the

Balance Sheet Date)
1. Definition:
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.
2. Types of Event:
Two types of events can be identified:
(a) Adjusting Events: those which provide further evidence of conditions that existed at the balance sheet
date; and
(b) Non Adjusting Events: those which are indicative of conditions that arose subsequent to the balance
sheet date.
3. Treatment of Adjusting Events:
Adjustments to assets and liabilities are required to be made for adjusting events. For example, an
adjustment may be made for a loss on a trade receivable account which is confirmed by the insolvency of
a customer which occurs after the balance sheet date.
4. Treatment of Non-Adjusting Events:
Adjustments to assets and liabilities are not required to be made for non-adjusting events. An example is
the decline in market value of investments between the balance sheet date and the date on which the
financial statements are approved.
Following disclosure should be made in the report of the approving authority of these events if they are
material.
(a) the nature of the event;
(b) an estimate of the financial effect, or a statement that such an estimate cannot be made.
5. Special treatment for Proposed Dividend:
If an enterprise declares dividends to shareholders after the balance sheet date, the enterprise should
not recognise those dividends as a liability at the balance sheet date unless a statute requires otherwise.
Such dividends should be disclosed in notes.
6. Events which may indicate that the enterprise ceases to be a Going Concern:
A deterioration in operating results and financial position, or unusual changes affecting the existence or
substratum of the enterprise after the balance sheet date (e.g., destruction of a major production plant
by a fire after the balance sheet date) may indicate a need to consider whether it is proper to use the
fundamental accounting assumption of going concern in the preparation of the financial statements. If it
is so, then management must consider the issue carefully and give suitable adjustments as needed.

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 ACCOUNTING STANDARDS (AS 4 – CONT. & EVENTS OCC. AFTER THE B/S DATE)

Illustrations
Q. 1
You are an Accountant preparing accounts of A Ltd. as on 31.3.2014. After year end the following events have
taken place in April, 2014:
(i) A fire broke out in the premises damaging, uninsured stock worth `10 lakhs (Salvage value `2 lakhs).
(ii) A suit against the company’s advertisement was filed by a party claiming damage of `20 lakhs.
(iii) Dividend proposed @ 20% on share capital of `100 lakhs.
Describe, how above will be dealt with in the account of the company for the year ended on 31.3.2014.
Solution:
(i) Events occurring after the Balance Sheet date that represent material changes and commitments affecting
the financial position of the enterprise must be disclosed. (AS 4). It’s a non-adjusting event. Hence, fire
accident and loss thereof must be disclosed in the Director’s Report.
(ii) Suit filed against the company being a contingent liability must be disclosed with the nature of
contingency, an estimate of the financial effect and uncertainties which may affect the future outcome
must be disclosed as per AS 29 in the year 2014-15 as the suit was filed in April. So it is a contingent liability
in the year 2014-15.
However as the event is material, it can be called a non-adjusting event for which a disclosure in the
current year 2013-14 in the Director’s report
(iii) Proposed dividend must not be recorded as a liability in the financial statements. It should be disclosed
in the Notes on Accounts.
Q. 2
A Limited company closes its accounts on 31 stMarch every year. It issued a cheque in favour of one of its
customers towards the refund of advance in December, 2014. In April 2015, the customer returned the
cheque to the company without presentation to the bank while accounts of the company for that year were
being finalized. Since the cheque was cancelled, the reversal entry was passed in the books of account as on
31.3.2015 with a view to disclose the correct balance as on that date, instead of showing the bank balance
lower by treating the cheque as “issued but not encased as on 31.3.2015”. Whether the reversal entry passed
in the books of account of the company as on 31.3.2015 was proper since the cheque was cancelled before
closing of the accounts for the year?
Solution:
According to 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. Assets and liabilities should not be adjusted for but disclosure should be made in the
report of the approving authority of events occurring after the balance sheet date that represent material
changes and commitments affecting the financial position of the enterprise.” Bank balance as on the date of
balance sheet should not be adjusted by passing a reversal entry since the event of cancellation of cheque
after the balance sheet date did not relate to conditions existing at the balance sheet date. However, if the
amount of the cheque is material enough to affect the financial position of the company, its disclosure should
be made in the report of the approving authority.
Q. 3
X and Y entered into an agreement on 20.12.2015 which provided for the sale of an asset (book value
`2,50,000) for `3,70,000 to Y. The sale deed was to be registered and other formalities completed on
15.1.2016. Y has paid an advance money of `50,000 to X on 20.12.2015. Both X and Y prepare final accounts
on December 31 every year and present in April next. How the transaction be shown in the books of X and for
the year 2015?

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 ACCOUNTING STANDARDS (AS 4 – CONT. & EVENTS OCC. AFTER THE B/S DATE)

Solution:
Books of X: Agreement to sell has been entered on 20.12.2015 and he has received an advance of `50,000 on
the same date. But the actual sale has taken place only on 15.1.2016 (next year). Though, the sale has taken
place before approval of accounts, yet the profit of `1,20,000 (i.e. `3,70,000 – `2,50,000) need not be
recognised in the financial statements for the year 2015. The amount received as advance shall be shown as
a liability in the balance sheet and there should be an disclosure in Notes to Accounts about the agreement
to sell. The profit should be recognized only in the year 2016, when it is actually realized.
Books of Y: He has paid an advance of `50,000 and it should be shown in the balance sheet. There should be
a disclosure in the Notes to Accounts for the year 2015, that agreement for purchase of an asset at a price of
`3,70,000 has been entered and an advance of `50,000 has been paid.

Q. 4
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.

Solution:
According to AS 4 , the unexpected increase in 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. The revenue
should be recognized only in the subsequent year with proper disclosures. The retrospective increase in the
petrol price should not be considered as a prior period item, as per AS 5, because there was no error in the
preparation of previous period’s financial statements.

Q. 5
The financial statement of Constructions Limited for the year ended 31st March, 2017 were considered and
approved by the board of directors on 20th May, 2017.
The company was engaged in construction work involving `10 crores. In the course of execution of work, a
portion of factory shed under construction came crashing down on 30th May, 2017. Fortunately, there was
no loss of life, but the company will have to rebuild the structure at an additional cost of `2 crores which
cannot be recovered from the contractee.
How should this event be reported?

Solution:
Accounting Standard 4 defines ‘Events occurring after the Balance Sheet date’ as follows:
‘Events occurring after the Balance sheet date are those significant events, both favorable and unfavorable
that occurs 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”.
The facts of the case are as under:
· Financial Statements are prepared for the year ended 31st March, 2017.
· Board of Directors of the Company approved the said financial statements on 20th May, 2017.
· Construction crashed down resulted in a loss of `2 crores, on 30th May, 2017.
In view of the above definition, the said unfavorable event does not come under the definition of ‘events
occurring after the balance sheet date’.
Therefore, no adjustment to assets and liabilities need be required. And also it would not require disclosure
in the financial statements.

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 ACCOUNTING STANDARDS (AS 4 – CONT. & EVENTS OCC. AFTER THE B/S DATE)

Q. 6
Pure Oil Ltd. closed the books of accounts on March 31, 2016 for which financial statement was finalized by
the Board of Directors on September 04, 2016. During the month of December 2015, company under took
the project of lying a pipeline across the country and during May 2016 engineers realized that due to
unexpected heavy rain, the total cost of the project will be inflated by `50 lakhs. How this should be provided
for in the balance sheet of 2015-16 accordance to AS 4?
Solution:
This event occurred after March 31, 2016 but before September 04, 2016 it is event occurring after the
balance sheet date. But this event is not affecting financial position on the date of balance sheet therefore it
should be disclosed in the report of the directors.
Q. 7
In preparing the financial statements of R Ltd. for the year ended 31st March, 2016, you come across the
following information. State with reasons, how you would deal with this in the financial statements:
The company invested 100 lakhs in April, 2016 in the acquisition of another company doing similar business,
the negotiations for which had started during the year.
Solution:
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.
Accordingly, 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 31 stMarch, 2016.
However a 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, the investment of `100 lakhs in April, 2016 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.
Q. 8
A Limited Company closed its accounting year on 30.6.2016 and the accounts for that period were considered
and approved by the board of directors on 20th August, 2016. The company was engaged in laying pipe line
for an oil company deep beneath the earth. While doing the boring work on 1.9.2016 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
30.6.2016.
Solution:
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 financial statements are approved by the
Board of Directors in the case of a company'.
In this case the incidence, which was expected to push up cost, became evident after the date of approval of
the accounts. So that was not an 'event occurring after the balance sheet date'.
Q. 9
While preparing its final accounts for the year ended 31 st March, 2016 a company made a provision for bad
debts @ 5% of its total debtors. In the last week of February, 2016 a debtor for `2 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?

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Solution:
Assets and Liabilities should be adjusted for events occurring after the balance sheet date that provide
additional evidence to assist estimation of amounts relating to conditions existing at the balance sheet date.
So full provision for bad debt amounting to `2 lakhs should be made to cover the loss arising due to the
insolvency in the Final Accounts for the year ended 31stMarch, 2016. It is because earthquake took place
before the balance sheet date.
Had the earthquake taken place after 31stMarch, 2016, then mere disclosure would have been sufficient.

Q. 10
M/s. Shishir Ltd., a public Sector Company, provides consultancy and engineering services to its clients. In the
year 2014-15, the Government set up a commission to decide about the pay revision. The pay will be revised
with respect from 1-1-2012 based on the recommendations of the commission. The company makes the
provision of `1250 lakhs for pay revision in the financial year 2014-15 on the estimated basis as the report of
the commission is yet to come. As per the contracts with client on cost plus job, the billing is done on the
actual payment made to the employees and allocated to jobs based on hours booked by these employees on
each job.
The company discloses through notes to accounts:
“Salaries and benefits include the provision of `1250 lakhs in respect of pay revision. The amount chargeable
from reimbursable jobs will be billed as per the contract when the actual payment is made.”
The Accountant feels that the company should also book/recognize the income by `1250 lakhs in Profit & Loss
Account as per the terms of the contract. Otherwise, it will be the violation of matching concept &
understatement of profit.
Comment on the opinion of the Accountant with reference to relevant Accounting Standards.

Solution:
As per AS 29, ‘Provisions, Contingent Liabilities and Contingent Assets’, where some or all of the expenditure
required to settle a provision is expected to be reimbursed by another party, the reimbursement should be
recognized when, and only when, it is virtually certain that reimbursement will be received if the enterprise
settles the obligation. The reimbursement should be treated as a separate asset. The amount recognized for
the reimbursement should not exceed the amount of the provision.
Accordingly, potential loss to an enterprise may be reduced or avoided because a contingent liability is
matched by a related counter-claim or claim against a third party. In such cases, the amount of the provision
is determined after taking into account the probable recovery under the claim if no significant uncertainty as
to its measurability or collectability exists.
In this case, the provision of salary to employees of `1,250 lakhs will be ultimately collected from the client,
as per the terms of the contract. Therefore, the liability of `1,250 lakhs is matched by the counter claim from
the client. Hence, the provision for salary of employees should be matched with the reimbursable asset to be
claimed from the client. It appears that the whole amount of `1,250 lakhs is recoverable from client and there
is no significant uncertainty about the collection. Hence, the net charge to profit and loss account should be
nil.
The opinion of the accountant regarding recognition of income of `1,250 lakhs is not as per AS 29 and also
the concept of prudence will not be followed if `1,250 lakhs is simultaneously recognized as income. `1,250
lakhs is not the revenue at present but only reimbursement of claim for which an asset is created. However
the accountant is correct to the extent as that non- recognition of `1,250 lakhs as income will result in the
understatement of profit. To avoid this, in the statement of profit and loss, expense relating to provision may
be presented net of the amount recognized for reimbursement.

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Q. 11
A Company follows April to March as its financial year. The Company recognizes cheques dated 31stMarch 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 realized in the same month in normal course after deposit in the bank. State with reasons,
whether the collection of cheques bearing date 31 s1 March or before, but received after Balance Sheet date
is an adjusting event and how this fact is to be disclosed by the company?

Solution:
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. Thus, the collection of cheques
after 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 31 S1
March or before as per AS 4 "Contingencies and Events Occurring after the Balance Sheet Date" Moreover,
the collection of cheques after balance sheet date does not represent any material change affecting financial
position of the enterprise, so no disclosure in the Director's Report is necessary.

Q. 12
While preparing its final accounts for the year ended 31 st 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 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 31stMarch, 2010.

Solution:
As per AS 4 'Contingencies and Events Occurring After the Balance Sheet Date', adjustment 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.
A debtor for - `3,00,000 suffered heavy loss due to earthquake in the first week of March, 2010 and he became
bankrupt in April, 2010 (after the balance sheet date). The loss was also not covered by any insurance policy.
Accordingly, full provision for bad debts amounting' `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 31 st March 2010.

Q. 13
An earthquake destroyed a major warehouse of ACO Ltd. on 20.5.2009. The accounting year of the company
ended on 31.3.2009. The accounts were approved on 30.6.2009. The loss from earthquake is estimated at `30
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?

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 ACCOUNTING STANDARDS (AS 4 – CONT. & EVENTS OCC. AFTER THE B/S DATE)

Solution:
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. The destruction of warehouse due to earthquake did
not exist on the balance sheet date i.e. 31.3.2009. Therefore, loss occurred due to earthquake is not to be
recognized in the financial year 2008-2009.
However, according to AS, 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; therefore fundamental accounting assumption of going concern
is called upon. Hence, the fact of earthquake together with an estimated loss of `30 lakhs should be
disclosed in the Report of the Directors for the financial year 2008-2009

Q. 14
In Raj Co. Ltd., theft of cash of `2 lakhs by the cashier in January. 2010 was detected in May, 2010. The
accounts of the company were not yet approved by the Board of Directors of the company.
Whether the theft of cash has to be adjusted in the accounts of the company for the year ended 31.3.2010.
Decide

Solution:
As per AS 4 (revised), '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.
Though the theft by, the cashier `2,00,000, was detected after the balance sheet date (before approval of
financial statements) but it is an additional information materially affecting the determination of the cash
amount relating to conditions existing at the balance sheet date. Therefore, it is necessary to make the
necessary adjustments in the financial statements of the company for the year ended 31 st March, 2010 for
recognition of the 1055 amounting `2,00,000.

Q. 15
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?

Solution:
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 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.
As per the information given in the question, the debtor was already in a great financial difficulty at the time
of closing of accounts. Bankruptcy of the debtor in May 2011 is only an additional information to the condition
existing on the balance sheet date. Also the effect of a debtor becoming bankrupt is material as total amount
of `8 lakhs will be a loss to the company. Therefore, the company is advised to provide for the entire amount
of `8 lakhs in the books of account for the year ended 31st March. 2011.

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 ACCOUNTING STANDARDS (AS 4 – CONT. & EVENTS OCC. AFTER THE B/S DATE)

ASSIGNMENTS FOR CLASS

1).
In the following cases of companies, whose accounting year ended on 31st March, 92, the accounts for that
period were considered and approved by the respective Boards of Directors on 15th May, 92. The following
events took place after April, 92 and you are required to state, with reasons, how each of the events would
be dealt with in the financial statements for the year ended 31st March, 92. In case any disclosures are
deemed necessary, you are required to draft the relevant notes also.
(i) The company had taken a large-sized civil construction contract, for a public sector undertaking valued at
`2 crores. In the course of execution of the work on 29th May, 92, the company found while raising the
foundation work that it had met a rocky surface and costs of contract would go up by an extra `50 lakhs
which would not be recoverable from the contractee.
(ii) A claim for damages of `10 lakhs for breach of patents and copyrights had been served on the company
in January, 92. The Directors sought competent legal advice on the eligibility of the claim and were
advised that the claim was highly frivolous, without any basis and would not survive even in the first trial
court. The company, however, anticipates a long drawn legal battle and huge legal costs.
(iii) A company entered into an agreement to sell its immovable property included in the Balance Sheet at `5
lakhs to another company for `20 lakhs. The agreement to sell was concluded on 31st January, 92 and
the sale deed was registered on 30th April, 92.

2).
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 is not
yet approved by the Board of Director of the company. With the help of provisions of AS 4 "Contingencies and
Event Occurring after the Balance Sheet Date' decide, whether the embezzlement of cash should be adjusted
in the books of a counts 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 Board of Directors of the company?

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