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

Nirmal Foods Ltd has a financial year ending 31 March 2026. A customer sued the company in January 2026 for Rs 30 lakh for defective goods supplied. Legal advisers at 31 March 2026 considered the claim unlikely to succeed, and it was treated as a contingent liability. On 15 April 2026, before the accounts were approved, the court ordered the company to pay Rs 18 lakh, and the company has accepted the order. Under AS 4 and AS 29, what is the correct treatment?

A provision of Rs 18 lakh should be made in the year ended 31 March 2026. The court judgment after the balance sheet date confirms an obligation arising from a pre-balance-sheet event, so it is an adjusting event, and the liability is measured at the amount ordered, not the Rs 30 lakh claimed.

  1. ARecognise a provision of Rs 18 lakh in the year ended 31 March 2026Correct
  2. BRecognise a provision of Rs 30 lakh in the year ended 31 March 2026
  3. CContinue to disclose a contingent liability of Rs 30 lakh only
  4. DRecognise Rs 18 lakh in the year ending 31 March 2027 as the order was passed in that year

Explanation

The court order after the balance sheet date confirms an obligation that arose from a past event, the defective supply, before 31 March 2026. It is an adjusting event, so the liability is recognised at the settled amount of Rs 18 lakh, not the claimed Rs 30 lakh. Deferring it to the next year ignores the adjusting nature.

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