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

Mehta Pharma Ltd. has a year-end of 31 March 2025; accounts were approved on 25 June 2025. A customer filed a suit in January 2025 claiming Rs 12,00,000 damages for defective goods. The company had disclosed it as a contingent liability. On 10 May 2025 the court ordered the company to pay Rs 9,00,000, and the company decided not to appeal. How should this be treated in the 2024-25 accounts?

A provision of Rs 9,00,000 should be made in 2024-25. The court verdict on a suit pending at the balance sheet date confirms an existing obligation, so it is an adjusting event, measured at the awarded amount rather than the original claim of Rs 12,00,000.

  1. AContinue to show it as a contingent liability of Rs 12,00,000
  2. BProvide Rs 9,00,000 as a liability by charging profit for 2024-25Correct
  3. CProvide Rs 12,00,000 because the claim was originally that amount
  4. DRecognise Rs 9,00,000 in the 2025-26 accounts and only disclose in 2024-25

Explanation

A court settlement after the balance sheet date of a case pending at that date confirms the obligation existed at 31 March 2025, so it is an adjusting event. The liability is recognised at the amount settled, Rs 9,00,000, not at the claim of Rs 12,00,000. Deferring to the next year would ignore the adjusting event.

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