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

Ravi Textiles Ltd. closed its books for the year ended 31 March 2026 and the board approved the financial statements on 20 May 2026. On 5 May 2026, a fire destroyed a warehouse holding finished goods worth Rs 18 lakh, uninsured. The warehouse and stock were in good condition on 31 March 2026. How should the loss be treated under AS 4?

The loss should not be adjusted in the 2025-26 accounts because the fire happened after the balance sheet date and the goods were intact on 31 March 2026. Being material, its nature and estimated financial effect must be disclosed in the report of the approving authority.

  1. AAdjust the stock and provide for the loss in the financial statements for 2025-26
  2. BDo not adjust the figures; disclose the nature of the event and estimated financial effect in the report of the approving authorityCorrect
  3. CIgnore it completely as it occurred after the year end
  4. DShow it as a prior period item in 2026-27 only, without any disclosure

Explanation

The fire occurred after the balance sheet date and does not provide evidence of conditions existing on 31 March 2026. It is a non-adjusting event. Since it is material, AS 4 requires disclosure of its nature and estimated financial effect, not adjustment. Option A wrongly adjusts the books.

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