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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 2026, and the financial statements are approved by the board on 20 May 2026. On 5 May 2026, a fire destroyed a warehouse of the company, causing a loss of Rs 12 lakh. The warehouse and its stock were in existence on 31 March 2026. How should the loss be treated under AS 4?

The fire loss is a non-adjusting event because it arose after the balance sheet date and does not reflect conditions existing on 31 March 2026. The books are not adjusted, but its nature and estimated financial effect of Rs 12 lakh must be disclosed in the approving authority's report.

  1. AAdjust the loss in the financial statements for the year ended 31 March 2026
  2. BDo not adjust the financial statements, but disclose the nature of the event and the estimated financial effect in the report of the approving authorityCorrect
  3. CIgnore the loss completely as it occurred after the balance sheet date
  4. DCreate a provision of Rs 12 lakh in the year ended 31 March 2026

Explanation

The fire occurred after the balance sheet date and does not provide evidence of conditions existing at 31 March 2026. It is therefore a non-adjusting event. AS 4 requires disclosure of its nature and estimated financial effect, since non-disclosure could affect users' economic decisions. Adjusting or providing for it is wrong because no obligation existed at the balance sheet date.

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