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

Orchid Engineering Ltd. prepares accounts for the year ended 31 March 2025. A claim for Rs 40 lakh was filed against it in January 2025 for patent infringement. The company's lawyers believe it is only possible, not probable, that it will lose. On 12 April 2025, before approval of the accounts, the court ruled against Orchid and ordered damages of Rs 28 lakh. Which treatment is correct for the 2024-25 accounts?

Orchid should provide Rs 28 lakh in the 2024-25 accounts. The court judgment after the balance sheet date settles a claim that was pending at year-end, so it is an adjusting event, and the awarded amount, not the claimed Rs 40 lakh, is the amount recognised.

  1. ADisclose a contingent liability of Rs 40 lakh only
  2. BProvide Rs 28 lakh as a liability and charge it to the profit and loss account for 2024-25Correct
  3. CProvide Rs 40 lakh as the claimed amount
  4. DIgnore it for 2024-25 and record Rs 28 lakh in 2025-26 when paid

Explanation

The judgment after the balance sheet date gives evidence about an obligation that existed at the balance sheet date (the claim was pending at that date). It is therefore an adjusting event, and the settled amount of Rs 28 lakh is provided in 2024-25. Option A leaves a contingency that has now crystallised; Option C uses the claim rather than the awarded amount.

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