EXPLANATION 4-9
Contingencies 4-7
Accounting Treatment of Contingent Losses 5
Accounting Treatment of Contingent Gain 6
Determination of the Amounts at which
Contingencies
are included in Financial Statements 7
Events Occurring after the Balance Sheet Date 8
Disclosure 9
MAIN PRINCIPLES 10-17
Contingencies 10-12
Events Occurring after the Balance Sheet Date 13-15
Disclosure 16-17
This Standard 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 Standard 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 Standard 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 Standard 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
Explanation
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.
Materialy Affecting -
Adjust
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.
Condition not exist at b/s date – Not Adjust
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.
Amout not affect the figure - normally require disclosure in the financial
statements
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.
Adjusting event – Special Nature and Statutory Requirement
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. For
example, if dividends are declared after the balance sheet date but before the
financial statements are approved for issue, the dividends are not recognised
as a liability at the balance sheet date because no obligation exists at that
time unless a statute requires otherwise. Such dividends are disclosed in the notes.
Enterprise ceases to be a going concern -
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.
Events Occurring after the Balance Sheet Date
Adjustment - Event occure after B/S date but Condition exist on B/s 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.
April dividend diclared not need to adjustment only need to gives notes
14 If an enterprise declares dividends to shareholders after the
balance sheet date, the enterprise should not recognise those dividends
as a liability at the balance sheet date unless a statute requires otherwise.
Such dividends should be disclosed in notes.
Material Affecting disclosure should be maid
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.
Major Differences between AS 4 and Ind AS 10
Particulars
|
AS 4
|
Ind AS 10
|
Disclosure
non-adjusting events
|
non-adjusting events need to be disclosed in the report of
the approving authority.
|
only material non-adjusting events need to be disclosed in
company F/S.
|
Proposed dividend
|
proposed dividend needs to be adjusted in the F/Ss
|
dividend declared or proposed after reporting period,
cannot be recognized as liabilities in F/Ss
|
Distribution of Non-Cash Assets to Owners
|
doesn’t include such appendix
|
provides an appendix labeled “Distribution of Non-Cash
Assets to Owners”, that is an essential part Ind AS 10. Together with this,
this appendix also offers guidance when to recognize the dividends payable to
shareholders.
|
Fundamental accounting assumption of going concern
|
requires adjustment of assets and liabilities for events
that occur after balance sheet date which signify that the fundamental going
concern accounting assumption isn’t appropriate.
|
In case after reporting date, it’s determined that
fundamental going concern accounting assumption isn’t appropriate, a
fundamental change in the basis of accounting is required.
|
Question And Answer
Q1 -April Month : Fire Broke out premises damaging, uninsured stock
Solution : important point should mention :
Event occurring after 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.
8.6 Disclosure is generally made - 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.
Q2 -April Month : theft in march month but theft found in April month
Solution : Event occurring after 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.
AS-5 Extraordinary Items (separate disclosed).
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.
AS-5 Extraordinary Items (separate disclosed).
Q3 - Debtor debts in april debtor bankrupt / insolvent.
Solution : Event occurring after balance sheet date,
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.
Solution : Event occurring after balance sheet date,
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.
Q4 - March month or before Cash theft and deducted in April
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.
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.
Q5 - Acquire Business / investment in April month
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.
Q6 - Agreement to Sell before march and sale deed in April month
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.
AS-5 Extraordinary Items (separate disclosed).
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.
Q6 - Agreement to Sell before march and sale deed in April month
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.
AS-5 Extraordinary Items (separate disclosed).
Q7 - Cheque in hand ( Cheque deposted , Collected,
Collection of cheque after B/s date not an adjusting event
You are required to make the following entries in F.Y. 2013-14 :
1) Reversal entry should be made after 3 months of issuing cheque, i.e. on 15-06-2013
Bank A/c Dr.
To Computer Repairs & Maintenance A/c
Note : Prior period A/c shoudn't not be credited here as it's not due to any mistake or ommission in prior preriod (i.e., 1-4-2012 to 31-3-2013) but only a procedural accounting adjustment by way of reversal entry & there will be no diff in BRS as far as this entry is concerned in the F.Y. 2013-14.
2) First Method (common practice)
Rent A/c Dr.
To Bank A/c
Note : Show the diff. in monthly BRS OR
Second Method (May)
Rent A/c Dr.
To O/s Rent A/c or Uncleared Cheque A/c
(Being cheque issued for rent but not cleared till date) (June)
O/s Rent A/c Dr.
To Bank A/c
(Being cheque issued for payment of rent, now cleared)
Note : No question of reconciliation as far as this entry is concerned in current F.Y.
Collection of cheque after B/s date not an adjusting event
You are required to make the following entries in F.Y. 2013-14 :
1) Reversal entry should be made after 3 months of issuing cheque, i.e. on 15-06-2013
Bank A/c Dr.
To Computer Repairs & Maintenance A/c
Note : Prior period A/c shoudn't not be credited here as it's not due to any mistake or ommission in prior preriod (i.e., 1-4-2012 to 31-3-2013) but only a procedural accounting adjustment by way of reversal entry & there will be no diff in BRS as far as this entry is concerned in the F.Y. 2013-14.
2) First Method (common practice)
Rent A/c Dr.
To Bank A/c
Note : Show the diff. in monthly BRS OR
Second Method (May)
Rent A/c Dr.
To O/s Rent A/c or Uncleared Cheque A/c
(Being cheque issued for rent but not cleared till date) (June)
O/s Rent A/c Dr.
To Bank A/c
(Being cheque issued for payment of rent, now cleared)
Note : No question of reconciliation as far as this entry is concerned in current F.Y.