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

Sagar Textiles Ltd's financial year ends on 31 March 2026 and its financial statements were approved by the board on 20 May 2026. On 10 April 2026, a major customer, Rohan Garments, was declared insolvent. Sagar had a receivable of Rs 8,00,000 from Rohan outstanding at 31 March 2026, and the insolvency arose from financial deterioration that existed at the balance sheet date. How should Sagar treat this event under AS 4?

The financial statements should be adjusted for the Rs 8,00,000 loss. The customer's insolvency after the balance sheet date confirms a condition that existed at 31 March 2026, so it is an adjusting event under AS 4 and the receivable must be provided for in 2025-26.

  1. AAdjust the financial statements by providing for the Rs 8,00,000 loss as it is an adjusting eventCorrect
  2. BOnly disclose the event in the notes without any adjustment
  3. CIgnore it completely because the event occurred after 31 March 2026
  4. DRecognise the loss in the financial year 2026-27 as a current period item

Explanation

Insolvency of a customer after the balance sheet date, where the receivable existed at the balance sheet date, provides evidence of conditions existing at that date. It is an adjusting event, so the Rs 8,00,000 loss is provided for in 2025-26. Treating it only as a note or as a 2026-27 loss is wrong because the condition existed at the balance sheet date.

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