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

Narmada Chemicals Ltd approved its financial statements for the year ended 31 March 2026 on 30 June 2026. The following events happened: (i) On 15 April 2026, a court settled a lawsuit pending at the balance sheet date, ordering the company to pay Rs 5,00,000 against a provision of Rs 3,00,000 made earlier. (ii) On 10 May 2026, the company declared a final dividend of Rs 4,00,000 for the year ended 31 March 2026 . What is the total amount by which the profit before the dividend treatment should be reduced as an adjustment, and how is the dividend treated under AS 4 as currently applicable to the company's accounts?

The settlement is an adjusting event, so only the excess over the existing provision, Rs 5,00,000 less Rs 3,00,000, which is Rs 2,00,000, is charged. Dividend declared after the balance sheet date is not recognised as a liability at that date and is disclosed in the notes instead.

  1. ARs 2,00,000 adjustment; the dividend is not shown as a liability at the balance sheet date but disclosed in notesCorrect
  2. BRs 5,00,000 adjustment; the dividend is shown as a liability
  3. CRs 6,00,000 adjustment; the dividend is shown as a liability
  4. DRs 2,00,000 adjustment; the dividend is shown as a liability

Explanation

The court settlement confirms an obligation existing at the balance sheet date, so it is adjusting. Additional charge = 5,00,000 - 3,00,000 = 2,00,000. Under the revised AS 4, dividends proposed or declared after the balance sheet date are not recognised as a liability at the balance sheet date; they are disclosed in the notes. Showing the dividend as a liability is the old treatment.

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