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.
|
