AS 4 - Contingencies & Events Occurring After the Balance Sheet Date

Purpose

This statement deals with the treatment in the financial statements for:

1. contingencies, and
2. events occurring after the balance sheet date

This statement does not deal with:

1. liability of life assurance and general insurance enterprises arising from policies issued,
2. obligations under retirement benefit plans, and
3. commitments arising from long-term lease contracts

Definitions

• 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.
• 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:

• those which provide further evidence of conditions that existed at the balance sheet date, and
• those which are indicative of conditions that arose subsequent to the balance sheet date.

Explanation - Contingencies

We need to estimate the amount for many ongoing and recurring activities of an enterprise, e.g. depreciation. The estimation of depreciation is an event. However, we should distinguish between an event, which is certain and one, which is uncertain. The fact that an estimate is involved does not, by itself, create the type of uncertainty, which characterizes a contingency. In the example of depreciation just because estimate of useful life are used to determine depreciation, it does not become a contingency, as the eventual expiry of the useful life of the asset is certain.

The uncertainty relating to future events is generally described but where reasonable quantification is practicable it is quantified.

The estimation of the outcome and the financial effect of contingencies 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.

Accounting Treatment of Contingent Losses and Gains

The accounting treatment of a contingent loss is determined by the expected outcome of the contingency. If the contingency is likely to result in a loss, then it is prudent to provide for that loss in the financial statements.

Contingent gains are not recognized in financial statements since their recognition may result in the recognition of revenue, which may never be realized. And if the gain is virtually certain, then it is no more a contingency and therefore is accounted in the financial statements.

The amount of a contingent loss should be provided for by a charge to the statement of profit and loss if:

1. 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
2. a reasonable estimate of the amount of the resulting loss can be made.If any of the above two conditions are not met, the existence of a contingent loss should be disclosed in the financial statements unless the possibility of a loss is remote.

A potential loss to an enterprise may be reduced or avoided because a contingent liability is matched by a related counterclaim or claim against a third party, if no significant uncertainty as to its measurability or collectability exists.

Events Occurring after the Balance Sheet Date

Adjustments to assets and liabilities are required for events, which occur between the balance sheet date and the date on which the financial statements are approved, only if:

• they provide additional information materially affecting the determination of the amounts relating to conditions existing at the balance sheet date, or
• they indicate that fundamental accounting assumption of going concern is not appropriate.

Dividends proposed or declared after the balance sheet date but before approval of the financial statements in respect of the period covered by the financial statements should be reflected in the financial statements.

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.

Disclosures

1. With regard to Contingencies, the following information should be provided:
1. the nature of the contingency,
2. the uncertainties which may affect the future outcome,
3. an estimate of the financial affect, or a statement that such an estimate cannot be made.


2. With regard to Events occurring after the balance sheet date the following information should be provided:
1. the nature of the event,
2. an estimate of the financial effect, or a statement that such an estimate cannot be made.