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

Meenakshi Pharma Ltd has a financial year ending 31 March 2026. A suit was filed against it in December 2025 claiming Rs 15,00,000 for patent infringement. On 25 April 2026, before the accounts were approved on 15 May 2026, the court passed a decree against the company and fixed damages at Rs 11,00,000. The company had earlier disclosed the claim only as a contingent liability. What should the company do?

The company should provide Rs 11,00,000 in its 2025-26 accounts. The suit existed at the balance sheet date and the court decree before approval confirms the obligation and amount, making it an adjusting event, so the earlier contingent liability disclosure is replaced by the provision.

  1. AContinue to show Rs 15,00,000 as a contingent liability
  2. BProvide Rs 11,00,000 in the 2025-26 accounts and remove the contingent liability noteCorrect
  3. CDisclose Rs 11,00,000 only as a non-adjusting event in the notes
  4. DProvide Rs 15,00,000 as the maximum claim in 2025-26

Explanation

The suit existed at the balance sheet date, and the decree after that date confirms the obligation and the amount. This is an adjusting event, so the liability is recognised at the settled amount of Rs 11,00,000 in 2025-26. Rs 15,00,000 is merely the claim, not the amount determined by the court.

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