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

Sagar Pharma Ltd. has a year end of 31 March 2026. A customer filed a suit in January 2026 claiming Rs 12 lakh as damages for defective goods. Until the accounts were approved on 25 June 2026, the company's lawyers considered the outcome uncertain and the loss only possible, so no provision was made. On 5 May 2026 the court decided the case against the company and awarded Rs 9 lakh. What is the correct treatment in the accounts for FY 2025-26?

A provision of Rs 9 lakh should be made in FY 2025-26. The litigation existed at the balance sheet date and the court's decision on 5 May 2026 confirms the liability, making it an adjusting event. The amount provided is the amount awarded, not the original claim of Rs 12 lakh.

  1. ADisclose a contingent liability of Rs 12 lakh only
  2. BMake no adjustment and no disclosure because the judgment came after year end
  3. CProvide Rs 9 lakh in the FY 2025-26 accountsCorrect
  4. DProvide Rs 12 lakh in the FY 2025-26 accounts

Explanation

The suit existed at the balance sheet date, and the judgment after that date confirms the obligation, so it is an adjusting event. The amount to be provided is the amount awarded, Rs 9 lakh, not the claim of Rs 12 lakh. Disclosing only a contingent liability ignores that the event gives evidence of a condition existing at year end.

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