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

Sundaram Textiles Ltd. closes its books on 31 March 2025 and its financial statements are approved by the Board on 20 May 2025. On 5 May 2025 a fire destroyed a warehouse and the stock in it. The fire was not related to conditions existing on 31 March 2025. The loss is material. Under AS 4, how should the company treat this event in the financial statements for the year ended 31 March 2025?

The fire is a non-adjusting event because it arose after the balance sheet date from conditions not existing at that date. The accounts are not adjusted, but since the loss is material, its nature and estimated financial effect must be disclosed in the report of the approving authority.

  1. AAdjust the stock and profit for the year ended 31 March 2025 by the amount of the loss
  2. BDo not adjust the assets and liabilities, but disclose the nature of the event and an estimate of its financial effect in the report of the approving authorityCorrect
  3. CIgnore the event completely because it occurred after the balance sheet date
  4. DCreate a provision for the loss in the 2024-25 accounts and disclose nothing further

Explanation

The fire occurred after the balance sheet date and does not provide evidence of conditions at 31 March 2025, so it is a non-adjusting event. Assets and liabilities are not adjusted. Because the loss is material, the nature of the event and an estimate of its financial effect must be disclosed. Adjusting the stock (option A) would wrongly treat it as an adjusting event.

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