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 Applicability of Accounting Standard

AS-4 DEALS WITH ±

v CONTINGENCIES
v EVENTS OCCURING AFTER BALANCE SHEET DATE

AS-4 DOES NOT APPLY IN FOLLOWING CASES ±

v Liabilities of life assurance and general life insurance
enterprises
v Obligations under retirement benefit plans
v Commitments arising from long-term lease contracts
CONTINGENCIES

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.

v Result is not known on the date balance sheet

v Estimation of outcome of contingency is determined by
management.
v The fact that an estimate involved-does not make it a
contingency. (E.g. Depreciation not a contingency)
ACCOUNTING TREATMENT OF
CONTINGENT LOSSES
v IF CONTINGENT LOSS LIKELY, PROVIDE
FOR THE LOSS IN FINANCIAL STATEMENTS.

v ILLUSTRATION ±
A company has filed a legal suit against the debtor from
whom Rs.15 lakhs is recoverable as on 31/3/04. The
chances of recovery of legal suit are not good as per
legal opinion.
As per AS-4 company should make a provision for
doubtful debts.
v Third party counter claim to be adjusted

v IN CASE OF INSUFFICIENT EVIDENCE FOR

ESTIMATION OF CONTINGENT LOSS, MAKE
DISCLOSURE.

v IF CONTINGENT LOSS IS REMOTE, IGNORE

IT.
v Discounting of Bills of Exchange
EVENTS OCCURING AFTER BALANCE
SHEET DATE
v Events which occur between the balance
sheet date and the date of approval of financial
statements by competent authority.
Two types of EVENTS:-
1. Those which provide further evidence of
conditions that existed at the balance sheet
date.

2. Those which are indicative of conditions that

arose subsequent to the balance sheet date.
 Accounting Treatment
v Adjustments are required if we get additional information
which can materially affect the amounts relating to
conditions existing at balance sheet date.
(Insolvency confirmation after the balance sheet date)
v NO adjustment is required if the event does not relate to
the conditions existing at the balance sheet date.
(Decline in value of investments)
v Events which do not effect the figures of financial
statements but can significantly influence decision
making must be disclosed in report of approving
authority.
(Information on new projects etc.)
 Contd«..
v Certain events taking place after the balance
sheet date are reflected in financial statements
because of statutory requirements.
(Proposed dividend)

v Events that may indicate that the enterprise

ceases to be a going concern requires a proper
disclosure. ( Due to fire)
 DISCLOSURE
v Disclosure is required only in respect of those
events which materially affect the financial
position.
v Disclosure of events in the report of approving
authority should comprise of the following
information:-
o Nature of the event
o An estimate of their financial effects or a
statement that such estimates can not be made.
 Contingencies

Existing Condition or on Balance

Situation after Balance Sheet Date
Sheet Date

No Accounting Treatment is
Contingent Loss Contingent Gain
required

Covered
Remote, IGNORED
By AS-29

Reasonably Possible,
Disclosure by NOTE

Probable Loss,
PROVISION Should Be made

No 3rd Party,
FULL Provision for Loss

If 3rd Party, Provision made after taking

into account the probable
recovery under the claim
SOURCES:
ACCOUNTING STANDARDS; D.S. RAWAT
ACCOUNTING STANDARDS; S BHATTACHARYA
ICMR TEXT BOOK
WWW.ICAI.ORG