CA Intermediate · Advanced Accounting

AS 4 Contingencies and Events occurring after the Balance Sheet Date: formula sheet

Full chapter guide

Key formulas

Definition of contingency: Contingency = condition or situation whose outcome (gain or loss) depends on uncertain future events; The outcome is confirmed only when the future event occurs or does not occur. Recognition is governed by AS 29.
Period of events after balance sheet date: Balance sheet date → date of approval of financial statements by the board; Events outside this window are not covered by AS 4. Both favourable and unfavourable events count.
Adjusting event: Event gives evidence of a condition existing at the balance sheet date → adjust the amounts; Example: insolvency of a debtor confirming that the debt was doubtful at year end.
Non-adjusting event: Event relates to a condition arising after the balance sheet date → no adjustment; disclose if material; Example: fire destroying a warehouse after the year end.
Provision (AS 29): Present obligation from a past event AND outflow probable AND reliable estimate → provide; otherwise → contingent liability, disclose (unless outflow remote); All three conditions must be met for a provision. Remote outflows need no disclosure.
Contingent asset (AS 29): Contingent asset → not recognised in the financial statements; Do not show it as income or a receivable. When realisation is virtually certain, the asset is no longer contingent and is recognised.
Dividends after balance sheet date: Dividends for the year, proposed or declared after the balance sheet date but before approval → not recognised as a liability at balance sheet date; disclose in notes; No obligation existed at the balance sheet date, so do not provide. Disclose by note.
Provision: recognise: Present obligation from a past event AND outflow probable AND reliable estimate → provide by charging Profit and Loss; All three conditions must hold together. The charge is made in the year of the balance sheet date. Disclose the reconciliation of the provision and the nature and expected timing of the outflow.
Contingent liability: disclose: Possible obligation, or present obligation with outflow not probable or not reliably estimable → disclose nature and estimate of financial effect (where practicable); No entry in the books. Disclosure is made in the notes.
Contingent liability: ignore: Chance of outflow remote → no provision and no disclosure; Remote means the likelihood is very small.
Contingent asset: Contingent asset → not recognised and not disclosed in the financial statements; described in the Board's report if inflow is probable; Do not book it. Recognise only when realisation is virtually certain, and then it is no longer a contingent asset.
Amount to be provided: Provision = best estimate of the expenditure to settle the obligation at the balance sheet date; Use the best estimate, based on experience and expert opinion, with events up to the approval date as evidence.
Period covered: Balance sheet date → date of approval of financial statements; Only events in this window are treated under AS 4. Events after approval are outside it.
Adjusting event rule: Evidence of condition existing at balance sheet date → adjust assets and liabilities; Illustrative examples: customer insolvency confirming a doubtful debt, court settlement of a case based on a past event, sale of inventory after year end showing NRV, discovery of fraud or error.
Non-adjusting event rule: Condition arose after balance sheet date → no adjustment, disclose nature and estimate of financial effect; If the effect cannot be estimated, state that fact. These are illustrative examples, not a fixed list: fire after year end, new share issue, major purchase of assets, announcement of a restructuring plan. Always apply the cause test. An amalgamation after year end is handled through disclosure (with AS 14 for the amalgamation itself), not by a fixed rule here.
Dividend after balance sheet date: Dividend proposed or declared after balance sheet date → no liability at balance sheet date → disclose in notes; Do not show a provision or liability for it in the year-end balance sheet. It is recognised in the year in which it is declared or approved.
Going concern override: Event shows going concern no longer appropriate → adjust financial statements even if event is after balance sheet date; Signs: serious deterioration in results and financial position, or intention to liquidate or stop trading. Disclose the changed basis as required by AS 1.
Adjusting event rule: Condition existed at balance sheet date → adjust the assets and liabilities; Examples: debtor becomes insolvent due to a condition that existed at year end, court settles a case pending at year end, discovery of fraud or error showing the financial statements were incorrect.
Non-adjusting event rule: Condition arose after balance sheet date → no adjustment, disclose if material; Examples: a fire or flood after year end that destroys a major asset, a major acquisition, a major purchase or disposal of assets, and litigation arising from events that occur after the balance sheet date. The materiality test applies to these events.
Dividend rule (after 2016 amendment): Proposed or declared dividend after balance sheet date → no liability at balance sheet date; disclose in notes; The Companies (Accounting Standards) Amendment Rules, 2016 amended AS 4 so that a dividend proposed or declared after the balance sheet date for the period covered by the statements is not provided for and is not recognised as a liability at the balance sheet date. It is disclosed in the notes. The dividend is recognised as a liability in the period in which it is declared (approved by shareholders at the AGM). This is the effect of the amendment, not a new principle.
Disclosure content: Nature of the event + estimate of financial effect (or statement that estimate cannot be made); Material non-adjusting events should be disclosed. Where they are not disclosed in the financial statements, they should be disclosed in the report of the approving authority (for example, the Board's report).
Going concern exception: Events showing the enterprise is no longer a going concern → financial statements not prepared on a going concern basis; This applies even if the event occurs after the balance sheet date. It is an adjustment of the basis of preparation, not just a disclosure.
Window of events: Balance sheet date to date of approval of financial statements; Events outside this window are not covered by AS 4. Mark the two dates on the question first.

Quick revision

Events after the balance sheet date are significant events, favourable or unfavourable, occurring between the balance sheet date and the date the financial statements are approved.
For a company, the approval date is the date the board of directors approves the financial statements.
Adjusting events give further evidence of conditions that existed at the balance sheet date. Adjust the amounts.
Non-adjusting events relate to conditions arising after the balance sheet date. Do not adjust, but disclose if material.
Court settlement confirming an obligation that existed at the balance sheet date is an adjusting event.
Insolvency of a customer after the balance sheet date, confirming a debt was doubtful at that date, is adjusting.
Sale of inventory after the balance sheet date that gives evidence of net realisable value at that date is adjusting.
Fire destroying a plant after the balance sheet date is non-adjusting. Disclose it if material.
Dividends proposed or declared after the balance sheet date are not recognised as a liability at that date. Disclose them in the notes.
For a material non-adjusting event, disclose its nature and an estimate of its financial effect, or state that no estimate can be made.
If the going concern assumption ceases to be appropriate, the financial statements must not be prepared on a going concern basis. This applies even if the deterioration occurs after the balance sheet date but before approval.
A contingency is an uncertain outcome resolved by future events. AS 4's contingency paragraphs are withdrawn (except impairment not covered by other standards, e.g. AS 28). Provisions and contingent liabilities are governed by AS 29.

Common mistakes

Adjusting the accounts for every event after the balance sheet date. Fix: Adjust only if the event confirms a condition existing at the balance sheet date. Events like a post-year-end fire are only disclosed.
Treating an event after the approval date as covered by AS 4. Fix: Always mark the approval date. Events after it are outside the period in this standard.
Recognising a contingent asset because the case looks likely to be won. Fix: Remember that AS 29 is asymmetric. A contingent asset is not recognised or disclosed in the financial statements. If an inflow is probable, it is described in the Board's report. Do not book it.
Providing for a possible loss as well as disclosing it. Fix: Provide only when there is a present obligation, outflow is probable and the amount is reliably estimable. Possible means disclosure only.
Treating every unfavourable event as adjusting because it looks like a loss. Fix: Ask only whether the condition existed at the balance sheet date. A fire in May is a big loss but is non-adjusting.
Providing for a dividend proposed after the balance sheet date as a liability in the year-end accounts. Fix: No obligation existed at the balance sheet date. Do not provide. Disclose the amount in the notes. Recognise it in the year it is declared or approved.
Treating a proposed dividend as a liability at the balance sheet date. Fix: Remember that a dividend proposed or declared after the balance sheet date is not provided for. It is only disclosed in the notes. It is not a liability at the year end.
Adjusting for a fire or flood that happened after year end. Fix: The fire did not exist at the balance sheet date. Do not change the figures. Disclose the nature of the event and the estimated financial effect, showing the gross loss and the expected insurance recovery, with the estimated net effect if the claim is admitted.

Exam tips

Always list the balance sheet date and the approval date first. Many marks in scenario questions go to correct date reasoning.
Write the reason with the treatment. 'Adjusting, because the debt existed at the year end' scores more than 'Adjusting'.
In MCQs, any option that books a contingent gain as income is almost certainly wrong.
Keep the two standards separate in theory answers: AS 4 for adjusting and non-adjusting events (one example each), AS 29 for contingencies and provisions.
If a question mentions provisions or contingent liabilities from past events, say that AS 29 governs them and answer using its recognition tests. AS 4 (revised) covers only events after the balance sheet date.
Look for the words probable, possible and remote in the question. They decide the answer.
Always state the tests for a provision: present obligation from a past event, probable outflow and reliable estimate.
For contingent asset questions, the one-line answer is enough: not recognised, because of prudence; Board's report if inflow is probable.