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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 major customer, Rajan Garments, was declared insolvent. Rajan owed Rs 8,00,000 at 31 March 2026, and the debt had been treated as fully good. The insolvency was caused by losses that built up over the year. How should this be treated in the financial statements for 2025-26?

The Rs 8,00,000 should be provided for in the 2025-26 books. The customer's insolvency after the year end confirms a condition that existed at the balance sheet date, so AS 4 treats it as an adjusting event requiring adjustment of assets and profit, not just a disclosure.

  1. AAdjust the books by providing for the Rs 8,00,000 loss as the event gives evidence of conditions existing at the balance sheet dateCorrect
  2. BOnly disclose the event in the notes, with no adjustment to the books
  3. CIgnore the event because it occurred after the balance sheet date
  4. DRecognise the loss in the financial year 2026-27 as it happened in that year

Explanation

Insolvency of a debtor after the balance sheet date, caused by conditions that existed at the balance sheet date, is an adjusting event under AS 4. The receivable must be written off or provided for in 2025-26. Treating it as a mere disclosure or deferring it to 2026-27 would overstate assets and profit.

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