Advanced Accounting · AS 4 Contingencies and Events occurring after the Balance Sheet Date

Accounting Treatment of Contingencies: Provision, Disclosure and Contingent Assets

Updated 4 October 2026 · Fact-checked

Under AS 29, you recognise a provision when there is a present obligation from a past event, an outflow is probable and the amount can be reliably estimated. Provisions are also disclosed. A possible obligation, or one not reliably estimable, is a contingent liability that is disclosed unless remote. A contingent asset is not recognised.

Understand Accounting Treatment of Contingencies

A contingency is a condition or situation whose final outcome, gain or loss, will be known only when one or more uncertain future events happen or fail to happen. A pending court case, a guarantee given for another party and a disputed claim are typical examples.

The treatment of contingencies is in AS 29 (Provisions, Contingent Liabilities and Contingent Assets). AS 4 (Revised) is titled 'Contingencies and Events Occurring After the Balance Sheet Date', but its contingency paragraphs were withdrawn when AS 29 came into effect. So AS 4 (Revised) now deals only with events occurring after the balance sheet date. Keep the two apart in your answers.

AS 29 follows prudence. You must not overstate profit or assets, so losses are treated more strictly than gains. A loss is recorded early, once the recognition tests are met. A gain waits until it is realised.

A provision needs all three conditions together: a present obligation arising from a past event, a probable outflow of resources, and a reliable estimate of the amount. Here, probable means more likely than not. If any one condition fails, no provision is made.

Once a provision is recognised, AS 29 also requires disclosure for each class of provision. You give a reconciliation of the carrying amount: the opening balance, additions made during the year, amounts used, unused amounts reversed, and the closing balance. You also give a brief description of the nature of the obligation and the expected timing of the outflow.

For a contingent liability (a possible obligation, or a present obligation where an outflow is not probable or the amount cannot be reliably estimated), you disclose the nature of the contingency and, where practicable, an estimate of its financial effect. If the chance of an outflow is remote, you do nothing.

For a contingent asset, you do not recognise it in the financial statements and you do not disclose it in the notes to accounts. Only where an inflow of economic benefits is probable, it is described in the Board's report. Being hopeful of a gain does not by itself make the inflow probable. Once the gain becomes virtually certain, it is no longer a contingent asset and is recognised as an asset.

The amount of a provision is the best estimate of the expenditure needed to settle the obligation at the balance sheet date. Management uses judgement, past experience and, where needed, expert opinions such as those of lawyers. Events up to the date the financial statements are approved give further evidence of conditions at the balance sheet date.

In exam questions, the test is simple: present obligation from a past event, probable and reliably estimable means provide and disclose the provision; otherwise disclose the contingent liability or ignore it.

Key rules to remember

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.

How to solve Accounting Treatment of Contingencies questions

Use this sequence for any question on contingent liability or contingent asset.

1Identify the uncertain item and decide whether it is a possible outflow (loss) or a possible inflow (gain).
2If it is a gain, do not recognise it and do not disclose it in the notes. Say it may be described in the Board's report only if an inflow is probable. Stop unless the question says it has become virtually certain.
3If it is a loss, check whether there is a present obligation arising from a past event.
4If there is, judge the likelihood of outflow: probable, possible or remote.
5If probable, check whether the amount can be reliably estimated. If yes, compute the amount.
6Pass the entry: debit Profit and Loss (or the relevant expense), credit provision or liability, for the estimated amount.
7If the obligation is only possible, or probable but not reliably estimable, make no entry and write a disclosure note stating the nature and the financial effect.
8If the chance of outflow is remote, make no entry and no disclosure.
9Write a one-line reason linking your answer to prudence and AS 29.

Quickest way: Obligation, likelihood and estimate filter

When to use it: Use this for MCQs and for short written answers where time is tight.

Gain? Answer: not recognised. This eliminates any option that books the gain as income or an asset.
Present obligation from a past event, outflow probable and reliably estimable? Answer: provide.
Loss but only possible, or not reliably estimable? Answer: disclose only.
Loss and remote? Answer: neither provide nor disclose.
In written answers use this format: state the rule, apply it to the facts with the figure, give the entry or note, then conclude. This earns step marks even if the final figure is wrong.

Common mistakes in Accounting Treatment of Contingencies

Recognising a contingent asset because the case looks likely to be won.
Students treat gains and losses symmetrically.
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.
Students mix up 'possible' and 'probable'.
Fix: Provide only when there is a present obligation, outflow is probable and the amount is reliably estimable. Possible means disclosure only.
Disclosing a remote contingency.
Students think more disclosure is always safer.
Fix: For remote losses neither provision nor disclosure is required.
Providing a probable loss without checking that an amount can be estimated.
Students focus only on likelihood.
Fix: Check all conditions, including a reliable estimate. If the amount cannot be reliably estimated, disclose instead.
Passing an entry for a disclosed contingent liability.
Students think every contingency needs a journal entry.
Fix: Disclosure items are shown only in notes. Entries are for provisions.
Ignoring information that arrives after the balance sheet date when estimating the amount.
Students stop at the date of the balance sheet.
Fix: Use events up to the approval date that give evidence of conditions existing at the balance sheet date.
Citing AS 4 as the standard for contingencies.
Older material linked contingencies with AS 4, and the title of AS 4 (Revised) still mentions them.
Fix: Cite AS 29 for provisions, contingent liabilities and contingent assets. AS 4 (Revised) now covers only events after the balance sheet date, because its contingency paragraphs were withdrawn when AS 29 came into effect.

Worked examples

Example 1

A company is defendant in a damages suit. At the balance sheet date, its lawyers say it is probable the company will lose and that damages will be about ₹8,00,000. The company's profit before this item is ₹40,00,000. Give the treatment.

Show the solution

The lawyers' view that the company will probably lose means it is more likely than not that a present obligation exists at the balance sheet date. The past event is the act that led to the suit.
The outflow is probable, and the lawyers' opinion gives a reasonable estimate of ₹8,00,000.
All three conditions are met, so a provision is recognised.
Entry: Profit and Loss (damages) Dr ₹8,00,000 to Provision for damages ₹8,00,000.
Profit after the provision = ₹40,00,000 − ₹8,00,000 = ₹32,00,000.
Disclose a brief description of the nature of the obligation and the expected timing of the outflow, and a reconciliation of the provision: opening balance nil, addition ₹8,00,000, amounts used nil, unused amounts reversed nil, closing balance ₹8,00,000.

Answer: Provide ₹8,00,000 by charging Profit and Loss. Profit becomes ₹32,00,000.

Example 2

A company has filed a claim of ₹5,00,000 against a supplier for defective goods and is hopeful of winning. It has also given a guarantee for a subsidiary's loan, and the bank has demanded nothing. The chance that the guarantee will be invoked is possible but not probable, with a potential amount of ₹12,00,000. How are these treated?

Show the solution

The claim of ₹5,00,000 is a contingent asset.
A contingent asset is not recognised, so no income or receivable is booked. It is not disclosed in the notes.
Being hopeful of winning does not by itself make the inflow probable. The claim is described in the Board's report only if the company judges the inflow to be probable.
The guarantee is a possible obligation, so it is a contingent liability.
The outflow is only possible, not probable, so no provision is made.
Since it is not remote, disclose the nature of the guarantee and the possible financial effect of ₹12,00,000 in the notes.

Answer: The ₹5,00,000 claim is not recognised in the financial statements. It is mentioned in the Board's report only if the inflow is judged probable. Do not provide for the guarantee, but disclose it with its financial effect of ₹12,00,000.

Exam tips

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.
Show the journal entry only where a provision is made, and write a disclosure note where it is not. When you do provide, add the provision's reconciliation and the nature and timing of the outflow.
In MCQs, the traps are options that treat gains like losses or that disclose remote items.
Name AS 29 for contingencies. Name AS 4 (Revised) only for events after the balance sheet date, since its contingency paragraphs were withdrawn.

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

Accounting Treatment of Contingencies: frequently asked questions

When should a provision be made for a contingent loss under AS 29?

Provide when there is a present obligation arising from a past event, an outflow is probable and the amount can be reliably estimated. Charge it to the Statement of Profit and Loss. If any condition fails, you disclose a contingent liability instead, unless the chance is remote.

Why are contingent assets not recognised?

Prudence says you should not recognise income that may never be realised. Recognising it too early could overstate profit. It is not disclosed in the financial statements, but is described in the Board's report if an inflow is probable. Once realisation is virtually certain, it is no longer a contingent asset and is recognised.

What is the difference between provision and disclosure of a contingent liability?

A provision is an entry in the books that reduces profit and creates a liability. Disclosure of a contingent liability is only a note in the financial statements giving the nature and financial effect of the contingency. A recognised provision is itself also disclosed, with a reconciliation of its carrying amount.

How is the amount of a provision estimated?

Management uses its judgement, past experience and, where needed, expert opinion such as that of lawyers. It takes the best estimate at the balance sheet date and considers events up to the date the financial statements are approved.

Does AS 4 deal with contingencies?

Not now. AS 4 (Revised) is titled 'Contingencies and Events Occurring After the Balance Sheet Date', but its contingency paragraphs were withdrawn when AS 29 came into effect. It now deals only with events occurring after the balance sheet date, and contingencies are covered by AS 29.