Events and Contingencies Following the Balance Sheet Date

This article discusses the following parts about AS 4 contingencies and events that take place after the balance sheet date:

elevance of AS 4 Events and Contingencies That Take Place After the Balance Sheet Date

Treatment in the financial statements of the following is covered by AS 4:

• Contingencies
• Events that occur after the balance sheet’s date

The followings that might bring about in the contingencies are not covered by the scope of AS 4 considering special circumstances that are relevant to them:

• Liabilities related to general insurance and life assurance that is derived from the insurance policies published
• Obligations that originates from a long-duration lease
• Commitments as part of a retirement benefit plan

What is Contingency?

Contingencies are scenarios, the final result of which, i.e., profit or loss, would be concluded or only discovered upon occurrence, or failure to occur, of an unpredictable future occurrence(s).

Events following the balance sheet date

These are important occurrences, advantageous and disadvantageous, that take place between the balance sheet date and the date these financial statements are prepared and reviewed and approved by the Board of Directors in the case of companies and by appropriate approving authorities in the case of different entities.

There are two types of events that could be detected:

• Events that offers further confirmation of conditions that persisted at balance sheet date.
• Events that demonstrate conditions which happened subsequent to the balance sheet date.

Financial Treatment of Contingent Losses

In the case of a contingent loss, the accounting treatment is ascertained by the expected outcome of such occurrence. In case the likeliness of the occurrence of the contingency would result in the business shutting down, then it’s sensible to include such loss in the enterprise’s financial statements.

In the event of inadequate or contradictory confirmation for the determination of the value of the contingent loss, then the reporting in financial statements is delivered for the essence and occurrence of the contingency. Obligations that may emerge from the discounted bills of exchange and comparable obligations that are carried out by the company are frequently disclosed in the financial statements by means of notes, even if the likelihood of loss is minimal.

Financial Treatment of Contingent Gains

A contingent profit is not considered in the financial disclosures, as their identification may result in the identification of the revenue that might not be actualized. When the attainment of profit is definite and not contingent, no further gain or profit can be reported in the books of accounts.

Identification of the amount of contingency

The figure of the amount at which contingencies are specified in financial statements is based upon the information that is obtainable on the occasion when the financial statements are reviewed and authorized.

Events that take place following the balance sheet date, which indicate that the asset could have been weakened or a liability may have been in existence at a balance sheet, are, as a result, acknowledged in identifying the contingencies and evaluating the value at which the contingencies are involved in the financial disclosures.

Occurrences after the Balance Sheet Date

Events that happened between the balance sheet date and their date of approval might imply the requirements for modification(s) to the assets and liabilities as of the balance sheet date or might require disclosure.

Adjusting Events

Modifications are important to assets and liabilities for incidents that arise after the balance sheet date, which delivers additional information significantly influencing the identification of the amounts that concern the situations that existed on the date of the balance statement.

Non-Adjusting Events

Adjustments are not essential to assets and liabilities for situations that arise following the balance sheet date if such incidents happen and are unrelated to the conditions that were established at the balance sheet.

There are incidents that, although happening after the balance sheet date, are occasionally displayed in financial statements because of their distinct nature or because of regulatory obligations.

Disclosure

As per AS-4, disclosure obligations would be applicable exclusively concerning such contingency or event that impacts financial health to a considerable extent.

In the event of contingent loss is not accounted for, a projection of the financial outcome and character of such loss are typically revealed with the help of notes unless the chance of such loss is extremely low.

In case a dependable estimation of financial outcome cannot be determined, this fact must be revealed.

The authorizing authority’s report contains information on events that transpire after the balance sheet date, such as the nature of the events and an estimate of their financial impact, or a statement stating that such estimates cannot be made.

Questions to Understand your ability

Q1.) Which of these is NOT included under the scope of AS 4?

a) Contingencies

b) Events happening after the balance sheet date

c) Liabilities related to insurance policies

d) Obligations from long-term leases

Q2.) How would you define a contingency?

a) A situation where you know the outcome in advance

b) A result that can be figured out after it happens

c) A scenario where profit or loss depends on some unpredictable event

d) A result that always ends in a loss

Q3.) What happens in the case of adjusting events?

a) No change to assets or liabilities

b) Modifications are needed to assets or liabilities based on new info

c) They don’t affect financial statements

d) Only disclosures are required

Q4.) When is a contingent gain shown in financial statements?

a) When it’s probable

b) When it’s definitely going to happen, no uncertainty

c) Always shown, no matter the situation

d) Never shown in financial statements

Q5.) What must be disclosed in financial statements according to AS 4?

a) All contingent losses, no matter the chances of them happening

b) Only those contingent losses with a low chance of occurring

c) Only contingent losses when they’re certain to happen

d) The nature and impact of events after the balance sheet date when you can’t estimate the outcome

Conclusion

In conclusion, AS 4 provides guidelines for handling contingencies and events after the balance sheet date, emphasizing the need for appropriate financial treatment and disclosure. Contingent losses are reported based on likelihood, while contingent gains are excluded from financial statements. Events that occur post-balance sheet may necessitate adjustments or disclosures. Accurate estimates must be disclosed, especially when the impact of such events cannot be determined, ensuring transparency in financial reporting.