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Statements of Accounting
Standards (AS 4) Revised
Contingencies and Events Occurring
After the Balance Sheet Date
The following is the text of the revised
Accounting Standard (AS) 4, 'Contingencies and Events Occurring
after the Balance Sheet Date', issued by the Council of the Institute
of Chartered Accountants of India.
This revised standard comes into effect in respect of accounting
periods commencing on or after 1.4.1995 and is mandatory in nature.
It is clarified that in respect of accounting periods commencing
on a date prior to 1.4.1995, Accounting Standard 4 as originally
issued in November 1982 (and subsequently made mandatory) applies.
Introduction
1. This Statement deals with the treatment
in financial statements of
(a) contingencies, and
(b) events occurring after the balance sheet date.
2. The following subjects, which
may result in contingencies, are excluded from the scope of this
Statement in view of special considerations applicable to them:
(a) liabilities of life assurance
and general insurance enterprises arising from policies issued;
(b) obligations under retirement benefit
plans; and
(c) commitments arising from long-term
lease contracts.
Definitions
3. The following terms are used in
this Statement with the meanings specified:
3.1 A contingency is a condition or situation, the ultimate
outcome of which, gain or loss, will be known or determined only
on the occurrence, or non-occurrence, of one or more uncertain
future events.
3.2 Events occurring after the balance sheet date are those
significant events, both favourable and unfavourable, that occur
between the balance sheet date and the date on which the financial
statements are approved by the Board of Directors in the case
of a company, and, by the corresponding approving authority in
the case of any other entity.
Two types of events can be identified:
(a) those which provide further evidence
of conditions that existed at the balance sheet date; and
(b) those which are indicative of
conditions that arose subsequent to the balance sheet date.
Explanation
4. Contingencies
4.1 The term "contingencies" used
in this Statement is restricted to conditions or situations at
the balance sheet date, the financial effect of which is to be
determined by future events which may or may not occur.
4.2 Estimates are required for determining
the amounts to be stated in the financial statements for many
on-going and recurring activities of an enterprise. One must,
however, distinguish between an event which is certain and one
which is uncertain. The fact that an estimate is involved does
not, of itself, create the type of uncertainty which characterises
a contingency. For example, the fact that estimates of useful
life are used to determine depreciation, does not make depreciation
a contingency; the eventual expiry of the useful life of the asset
is not uncertain. Also, amounts owed for services received are
not contingencies as defined in paragraph 3.1, even though the
amounts may have been estimated, as there is nothing uncertain
about the fact that these obligations have been incurred.
4.3 The uncertainty relating to future
events can be expressed by a range of outcomes. This range may
be presented as quantified probabilities, but in most circumstances,
this suggests a level of precision that is not supported by the
available information. The possible outcomes can, therefore, usually
be generally described except where reasonable quantification
is practicable.
4.4 The estimates of the outcome and
of the financial effect of contingencies are determined by the
judgement of the management of the enterprise. This judgement
is based on consideration of information available up to the date
on which the financial statements are approved and will include
a review of events occurring after the balance sheet date, supplemented
by experience of similar transactions and, in some cases, reports
from independent experts.
5. Accounting Treatment of Contingent Losses
5.1 The accounting treatment of a
contingent loss is determined by the expected outcome of the contingency.
If it is likely that a contingency will result in a loss to the
enterprise, then it is prudent to provide for that loss in the
financial statements.
5.2 The estimation of the amount of
a contingent loss to be provided for in the financial statements
may be based on information referred to in paragraph 4.4.
5.3 If there is conflicting or insufficient
evidence for estimating the amount of a contingent loss, then
disclosure is made of the existence and nature of the contingency.
5.4 A potential loss to an enterprise
may be reduced or avoided because a contingent liability is matched
by a related counter-claim or claim against a third party. In
such cases, the amount of the provision is determined after taking
into account the probable recovery under the claim if no significant
uncertainty as to its measurability or collectability exists.
Suitable disclosure regarding the nature and gross amount of the
contingent liability is also made.
5.5 The existence and amount of guarantees,
obligations arising from discounted bills of exchange and similar
obligations undertaken by an enterprise are generally disclosed
in financial statements by way of note, even though the possibility
that a loss to the enterprise will occur, is remote.
5.6 Provisions for contingencies are
not made in respect of general or unspecified business risks since
they do not relate to conditions or situations existing at the
balance sheet date.
6. Accounting Treatment of Contingent Gains
Contingent gains are not recognised
in financial statements since their recognition may result in
the recognition of revenue which may never be realised. However,
when the realisation of a gain is virtually certain, then such
gain is not a contingency and accounting for the gain is appropriate.
7. Determination of the Amounts at which Contingencies
are included in Financial Statements
7.1 The amount at which a contingency
is stated in the financial statements is based on the information
which is available at the date on which the financial statements
are approved. Events occurring after the balance sheet date that
indicate that an asset may have been impaired, or that a liability
may have existed, at the balance sheet date are, therefore, taken
into account in identifying contingencies and in determining the
amounts at which such contingencies are included in financial
statements.
7.2 In some cases, each contingency
can be separately identified, and the special circumstances of
each situation considered in the determination of the amount of
the contingency. A substantial legal claim against the enterprise
may represent such a contingency. Among the factors taken into
account by management in evaluating such a contingency are the
progress of the claim at the date on which the financial statements
are approved, the opinions, wherever necessary, of legal experts
or other advisers, the experience of the enterprise in similar
cases and the experience of other enterprises in similar situations.
7.3 If the uncertainties which created
a contingency in respect of an individual transaction are common
to a large number of similar transactions, then the amount of
the contingency need not be individually determined, but may be
based on the group of similar transactions. An example of such
contingencies may be the estimated uncollectable portion of accounts
receivable. Another example of such contingencies may be the warranties
for products sold. These costs are usually incurred frequently
and experience provides a means by which the amount of the liability
or loss can be estimated with reasonable precision although the
particular transactions that may result in a liability or a loss
are not identified. Provision for these costs results in their
recognition in the same accounting period in which the related
transactions took place.
8. Events Occurring after the Balance Sheet Date
8.1 Events which occur between the
balance sheet date and the date on which the financial statements
are approved, may indicate the need for adjustments to assets
and liabilities as at the balance sheet date or may require disclosure.
8.2 Adjustments to assets and liabilities
are required for events occurring after the balance sheet date
that provide additional information materially affecting the determination
of the amounts relating to conditions existing at the balance
sheet date. For example, an adjustment may be made for a loss
on a trade receivable account which is confirmed by the insolvency
of a customer which occurs after the balance sheet date.
8.3 Adjustments to assets and liabilities
are not appropriate for events occurring after the balance sheet
date, if such events do not relate to conditions existing at the
balance sheet date. An example is the decline in market value
of investments between the balance sheet date and the date on
which the financial statements are approved. Ordinary fluctuations
in market values do not normally relate to the condition of the
investments at the balance sheet date, but reflect circumstances
which have occurred in the following period.
8.4 Events occurring after the balance
sheet date which do not affect the figures stated in the financial
statements would not normally require disclosure in the financial
statements although they may be of such significance that they
may require a disclosure in the report of the approving authority
to enable users of financial statements to make proper evaluations
and decisions.
8.5 There are events which, although
they take place after the balance sheet date, are sometimes reflected
in the financial statements because of statutory requirements
or because of their special nature. Such items include the amount
of dividend proposed or declared by the enterprise after the balance
sheet date in respect of the period covered by the financial statements.
8.6 Events occurring after the balance
sheet date may indicate that the enterprise ceases to be a going
concern. A deterioration in operating results and financial position,
or unusual changes affecting the existence or substratum of the
enterprise after the balance sheet date (e.g., destruction of
a major production plant by a fire after the balance sheet date)
may indicate a need to consider whether it is proper to use the
fundamental accounting assumption of going concern in the preparation
of the financial statements.
9. Disclosure
9.1 The disclosure requirements herein
referred to apply only in respect of those contingencies or events
which affect the financial position to a material extent.
9.2 If a contingent loss is not provided
for, its nature and an estimate of its financial effect are generally
disclosed by way of note unless the possibility of a loss is remote
(other than the circumstances mentioned in paragraph 5.5). If
a reliable estimate of the financial effect cannot be made, this
fact is disclosed.
9.3 When the events occurring after
the balance sheet date are disclosed in the report of the approving
authority, the information given comprises the nature of the events
and an estimate of their financial effects or a statement that
such an estimate cannot be made.
Accounting Standard
(The Accounting Standard comprises
paragraphs 10–17 of this Statement. The Standard should be read
in the context of paragraphs 1–9 of this Statement and of the
'Preface to the Statements of Accounting Standards'.)
Contingencies
10. The amount of a contingent
loss should be provided for by a charge in the statement of profit
and loss if:
(a) it is probable that future
events will confirm that, after taking into account any related
probable recovery, an asset has been impaired or a liability has
been incurred as at the balance sheet date, and
(b) a reasonable estimate of
the amount of the resulting loss can be made.
11. The existence of a contingent
loss should be disclosed in the financial statements if either
of the conditions in paragraph 10 is not met, unless the possibility
of a loss is remote.
12. Contingent gains should
not be recognised in the financial statements.
Events Occurring after the Balance Sheet Date
13. Assets and liabilities should
be adjusted for events occurring after the balance sheet date
that provide additional evidence to assist the estimation of amounts
relating to conditions existing at the balance sheet date or that
indicate that the fundamental accounting assumption of going concern
(i.e., the continuance of existence or substratum of the enterprise)
is not appropriate.
14. Dividends stated to be in
respect of the period covered by the financial statements, which
are proposed or declared by the enterprise after the balance sheet
date but before approval of the financial statements, should be
adjusted.
15. Disclosure should be made
in the report of the approving authority of those events occurring
after the balance sheet date that represent material changes and
commitments affecting the financial position of the enterprise.
Disclosure
16. If disclosure of contingencies
is required by paragraph 11 of this Statement, the following information
should be provided:
(a) the nature of the contingency;
(b) the uncertainties which
may affect the future outcome;
(c) an estimate of the financial
effect, or a statement that such an estimate cannot be made.
17. If disclosure of events
occurring after the balance sheet date in the report of the approving
authority is required by paragraph 15 of this Statement, the following
information should be provided:
(a) the nature of the event;
(b) an estimate of the
financial effect, or a statement that such an estimate cannot
be made.
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