CA Intermediate · Advanced Accounting

AS 4 Contingencies and Events occurring after the Balance Sheet Date: CA Intermediate Study Guide

AS 4 deals with significant events, favourable or unfavourable, that occur between the balance sheet date and the date the financial statements are approved. Classify each as adjusting (evidence of conditions existing at the balance sheet date) or non-adjusting (conditions arising later). Adjust the first. Disclose material ones of the second.

What this chapter covers

This chapter is about the gap between the balance sheet date and the date the financial statements are approved. Things happen in that gap. A customer goes insolvent, a court case ends, a fire destroys a plant. AS 4 tells you which of these change the numbers and which only need a note.

Note one point of scope first. AS 4 now covers only events occurring after the balance sheet date. Its contingency paragraphs stand withdrawn, except to the extent they deal with impairment of assets not covered by other standards (for example AS 28). The rules on provisions, contingent liabilities and contingent assets sit in AS 29 (Provisions, Contingent Liabilities and Contingent Assets). A contingency is a condition or situation whose outcome, gain or loss, will be known only when one or more uncertain future events occur or do not occur. Study the contingency rules under AS 29, and keep them separate from the AS 4 rules on events after the balance sheet date.

This chapter connects to the rest of Paper 1 in a practical way. Events after the balance sheet date change figures in company final accounts under Schedule III, in inventory valuation (AS 2), in revenue and receivables, and in the notes to accounts. Questions often hide an AS 4 point inside a larger final accounts problem. The chapter is short, but you need to apply it inside other chapters.

This chapter is short and rule-based, which makes it one of the more reliable scoring areas in Paper 1. The classification test is simple once you learn it, and the same few examples keep coming back in MCQs and short written questions. A student who can tell adjusting from non-adjusting events in seconds saves time for longer problems. The chapter also feeds into company final accounts, so a wrong call here can cost marks elsewhere in the same answer. Because MCQs need no reasoning and have no negative marking, this is an easy place to pick up sure marks.

AS 4 Contingencies and Events occurring after the Balance Sheet Date: topics in the order to study them

1AS 4 Scope and DefinitionsStart here because every later rule depends on the definitions: events occurring after the balance sheet date, the balance sheet date and the approval date. Also note that the contingency paragraphs of AS 4 are withdrawn.
2Contingencies, Provisions and Contingent Liabilities under AS 29Study this next to see how a contingency is treated. The working rules on provisions and contingent liabilities are in AS 29, so keep them apart from AS 4 in your answers.
3Events Occurring After the Balance Sheet DateThis is the core of the chapter, so study it once the definitions are clear: adjusting events, non-adjusting events, dividends and going concern.
4Disclosure Requirements and Practical ProblemsFinish with disclosures and numerical problems, because you need all the earlier rules to decide what to adjust and what to disclose.

How to prepare AS 4 Contingencies and Events occurring after the Balance Sheet Date

Prepare this chapter as a classification skill, not a theory chapter. You win marks by deciding quickly, giving a reason, and showing the correct accounting effect.

Learn the definitions in your own words: events after the balance sheet date, balance sheet date, approval date, and the period during which events count. Also know what a contingency is, and that its accounting rules are in AS 29.
Build a two-column list of adjusting and non-adjusting events from the study material. Next to each, write the one-line reason: does it give evidence of a condition that already existed at the balance sheet date?
Learn the special cases separately: dividends proposed or declared after the balance sheet date are not recognised as a liability at the balance sheet date and are disclosed in the notes. If the going concern assumption ceases to be appropriate because of deterioration after the balance sheet date but before approval, the statements must not be prepared on a going concern basis. This is a change of basis, not just a disclosure.
Note which contingency matters are governed by AS 29, so you do not mix the two standards in a written answer.
Solve every practical problem in three steps: state the event and its date, classify it with a reason, then show the adjustment or the disclosure note.
Practise MCQs by asking one question first: did the event only confirm something that was already true at the balance sheet date? If yes, it is adjusting.
Revise by redoing past problems where an AS 4 point is hidden inside a final accounts or inventory question.

Common mistakes in AS 4 Contingencies and Events occurring after the Balance Sheet Date

Classifying an event by whether it is good or bad news instead of by the condition it relates to.
Fix: Ask only whether the event gives evidence of a condition that existed at the balance sheet date. If yes, adjust. If no, disclose if material.
Adjusting for a fire, a new share issue or a merger that happened after the balance sheet date.
Fix: Remember that these conditions arose after the balance sheet date. They are non-adjusting, so you only disclose them if material.
Showing proposed dividend as a liability in the balance sheet.
Fix: State that a dividend proposed or declared after the balance sheet date is not a liability at that date. Disclose it in the notes instead.
Treating a going concern failure after the balance sheet date as a mere disclosure item.
Fix: Write that if going concern ceases to be appropriate, even through deterioration after the balance sheet date but before approval, the statements must not be prepared on a going concern basis.
Mixing AS 4 and AS 29 when a question mentions a contingency.
Fix: Use AS 29 for recognising provisions and contingent liabilities. Use AS 4 for the timing and classification of events after the balance sheet date.
Giving only a classification with no accounting effect or disclosure.
Fix: Always finish: for an adjusting event show the revised figure, and for a non-adjusting event write the disclosure note with nature and financial effect.
Ignoring the dates in the question.
Fix: Mark the balance sheet date and the approval date on the question first. Only events between them are covered.

Last-day revision: AS 4 Contingencies and Events occurring after the Balance Sheet Date

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.

AS 4 Contingencies and Events occurring after the Balance Sheet Date practice questions

AS 4 Contingencies and Events occurring after the Balance Sheet Date in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

AS 4 Contingencies and Events occurring after the Balance Sheet Date: frequently asked questions

What is the difference between adjusting and non-adjusting events under AS 4?

An adjusting event gives further evidence of a condition that already existed at the balance sheet date, so you change the recognised amounts. A non-adjusting event relates to a condition that arose after the balance sheet date, so you do not change the amounts. You disclose it if it is material.

Is AS 4 still relevant for contingencies?

No. AS 4 now covers only events occurring after the balance sheet date. Its contingency paragraphs are withdrawn, except to the extent they deal with impairment of assets not covered by other standards, for example AS 28. Provisions, contingent liabilities and contingent assets are dealt with under AS 29.

How is a dividend declared after the balance sheet date treated?

A dividend proposed or declared after the balance sheet date for that period is not recognised as a liability at the balance sheet date. You disclose it in the notes. Do not show it as a provision in the balance sheet.

Which date decides whether an event is covered by AS 4?

The event must occur between the balance sheet date and the date the financial statements are approved. For a company, that approval is by the board of directors. Events after the approval date are outside the period.

How should I answer a written question on this chapter?

State the dates, classify the event with a one-line reason, then show the accounting effect. For an adjusting event, give the revised figure. For a non-adjusting event, write the disclosure note with its nature and estimated financial effect.