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CA Intermediate · Advanced Accounting · AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets

Tungabhadra Mills Ltd. is a defendant in a suit filed by a former supplier claiming Rs 15 lakh. At the balance sheet date, legal opinion is that the chance of the company losing is only possible, not probable. The financial statements were approved on 25 May 2026. On 10 May 2026, the court gave judgment against the company, ordering payment of Rs 15 lakh. The suit related to a supply made in 2024. How should the company treat this in its financial statements for the year ended 31 March 2026?

The company should recognise a provision of Rs 15 lakh in the 2025-26 accounts. The court judgment before approval of the statements gives evidence of an obligation existing at the balance sheet date, making it an adjusting event, so contingent-liability disclosure alone is inadequate.

  1. ADisclose only as a contingent liability, since the opinion at the balance sheet date was possible
  2. BMake no disclosure, since judgment came after the year end
  3. CRecognise a provision of Rs 15 lakh as an adjusting eventCorrect
  4. DRecognise it as a prior period item in the next year

Explanation

The judgment after the balance sheet date but before approval confirms an obligation that existed at the balance sheet date, so it is an adjusting event under AS 4. The earlier assessment of 'possible' is overridden by this evidence. The provision of Rs 15 lakh is therefore made in the year ended 31 March 2026, not as contingent liability or a prior period item.

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