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

Zenith Textiles Ltd closes its books on 31 March 2026, and the financial statements were approved by the board on 20 May 2026. On 5 May 2026 a fire destroyed a warehouse holding finished goods worth Rs 40 lakh, which were in stock at 31 March 2026. The goods were uninsured. Under AS 4, how should the loss be treated in the financial statements for the year ended 31 March 2026?

No adjustment is made in the accounts for the year ended 31 March 2026. The fire happened after the balance sheet date and does not show conditions existing at that date, so it is a non-adjusting event. Being material, its nature and estimated financial effect must be disclosed.

  1. AAdjust inventory and recognise a loss of Rs 40 lakh in the year ended 31 March 2026
  2. BMake no adjustment, as the fire occurred after the balance sheet date, but disclose the nature of the event and the estimated financial effectCorrect
  3. CIgnore the event completely because it occurred after the balance sheet date
  4. DCreate a provision of Rs 40 lakh by debiting the general reserve

Explanation

The fire is an event arising after the balance sheet date and does not provide evidence of conditions existing at 31 March 2026, since the goods were intact then. It is therefore a non-adjusting event. Because it is material, AS 4 requires disclosure of its nature and estimated financial effect in the report of the approving authority. Adjusting the accounts would be wrong.

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