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

Sundaram Textiles Ltd's financial year ended on 31 March 2026 and its financial statements were approved by the board on 20 May 2026. On 5 May 2026 a fire destroyed a warehouse that held inventory worth Rs 8 lakh, and the inventory was uninsured. The fire did not affect the going concern assumption. Under AS 4, how should the loss be treated in the financial statements for 2025-26?

The fire is a non-adjusting event because it arose after 31 March 2026 and reflects no condition existing at the balance sheet date. The accounts are not adjusted, but the nature of the event and its estimated Rs 8 lakh effect must be disclosed in the approving authority's report.

  1. AProvide for the loss of Rs 8 lakh in the 2025-26 profit and loss account
  2. BDisclose the nature of the event and the estimated financial effect in the report of the approving authority, without adjusting the figuresCorrect
  3. CIgnore the event because it occurred after the year end
  4. DShow the Rs 8 lakh as a contingent asset

Explanation

The fire occurred after the balance sheet date and does not provide evidence of conditions existing at 31 March 2026, so it is a non-adjusting event. Figures are not adjusted. Because the loss is material, AS 4 requires disclosure of the nature of the event and an estimate of its financial effect. Providing for the loss would wrongly adjust the statements.

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