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

Kaveri Textiles Ltd. closes its books for the year ended 31 March 2025, and the financial statements are approved by the Board on 20 May 2025. On 5 May 2025, a fire destroyed a warehouse that held finished goods costing Rs 18 lakh. The goods were in good condition and properly valued at 31 March 2025. How should this event be treated in the financial statements for the year ended 31 March 2025?

The fire is a non-adjusting event, because the goods were sound at the balance sheet date and the loss arose afterwards. The figures stay unchanged, but since the loss is material, its nature and estimated financial effect must be disclosed in the report of the approving authority.

  1. AAdjust inventory by Rs 18 lakh and charge the loss to the profit and loss account for 2024-25
  2. BDo not adjust the figures; disclose the nature of the event and an estimate of its financial effect in the report of the approving authorityCorrect
  3. CMake no adjustment and no disclosure, since it occurred after 31 March 2025
  4. DCreate a provision of Rs 18 lakh as a contingent liability in the balance sheet

Explanation

The fire occurred after the balance sheet date and does not give evidence about conditions existing at 31 March 2025, so it is a non-adjusting event. As the loss is material, the nature of the event and an estimate of its financial effect must be disclosed. Adjusting inventory (option A) would wrongly treat it as an adjusting event.

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