Accounting is not just about recording what has already happened; it’s also about the process of anticipating and disclosing what might happen or occur in the near future. Financial statements basically aim to present a true and fair view of an enterprise’s financial position and status. However, there are certain events or uncertainties that can occur after the balance sheet date that significantly affect this view.
To address this, the Institute of Chartered Accountants of India (ICAI) has introduced the Accounting Standard (AS) 4, titled “Contingencies and Events Occurring After the Balance Sheet Date.” This standard guides on how to deal with situations that involve uncertain events and how to reflect the subsequent developments in the financial statements.
Let’s explore AS 4 in detail—its meaning, objectives, scope, key principles, and practical implications.
What is AS 4?
AS 4 deals with two key aspects:
- Contingencies, and
- Events occurring after the balance sheet date.
The standard prescribes when such events or contingencies should be recognized, disclosed or adjusted in the financial statements.
1. Contingencies
Meaning
A contingency, basically, refers to a condition or a situation whose outcome depends on the occurrence or non-occurrence of one or more uncertain future events.
In simpler terms, it’s an uncertain event that may result in a gain or loss for the company, depending on how things unfold.
Examples of contingencies:
- A pending court case that could result in compensation payable or receivable.
- A guarantee given to another entity that may or may not be invoked.
- A claim for damages is under negotiation.
- Possible tax disputes await resolution.
2. Events Occurring After the Balance Sheet Date
Meaning
Events occurring after the balance sheet date are those significant events (favourable or unfavourable) that take place between the balance sheet date and the date the financial statements are approved by the Board of Directors.
Classification of Events
AS 4 divides these events into two categories:
- Adjusting Events:
These are events that provide additional evidence of conditions that existed as of the balance sheet date.
→ Example: Settlement of a lawsuit confirming a liability that already existed on the balance sheet date. - Non-Adjusting Events:
These are events indicative of conditions that arose after the balance sheet date.
→ Example: Destruction of a factory by fire after the balance sheet date or issuance of shares.
Objective of AS 4
The main objective of AS 4 is to ensure that:
- Financial statements reflect all relevant information that affects the company’s financial position up to the date of approval.
- Users of financial statements (investors, creditors, regulators) get a true and fair view of the company’s affairs, considering both known and significant subsequent events.
It provides clarity on when to adjust the financial statements and when to merely disclose information in the notes.
Scope of AS 4
AS 4 applies to all enterprises in the preparation and presentation of financial statements. However, it does not cover:
- Liabilities or provisions for employee retirement benefits (governed by AS 15).
- Insurance contracts or other similar arrangements that are specifically covered under other accounting standards.
Key Provisions of AS 4
- Treatment of Contingent Losses
- A contingent loss should be recognised as a liability and charged to the Profit and Loss Account if:
- The loss is probable; and
- The amount can be reasonably estimated.
- If both conditions are not satisfied, only disclosure is required.
Example:
If a company is facing a lawsuit and its legal team expects a high probability of losing ₹5 lakh, a provision for ₹5 lakh should be made in the financial statements.
1. Treatment of Contingent Gains
- Contingent gains are not recognized in the financial statements until the realization becomes virtually certain.
- This is due to the principle of prudence—one should not anticipate profits but must provide for losses.
Example:
If a company expects to win a court case with a claim of ₹10 lakh, it should not record income until the judgment is in its favour and the receipt becomes almost certain.
2. Adjusting Events After Balance Sheet Date
If events occurring after the balance sheet date provide further evidence of conditions existing on that date, adjustments must be made in the financial statements.
Examples:
- A debtor declared bankrupt after the balance sheet data indicates that the debt was already doubtful — the amount should be written off or provided for.
- The outcome of a lawsuit confirming an existing liability should be adjusted.
3. Non-Adjusting Events After Balance Sheet Date
If events are indicative of conditions that arose after the balance sheet date, no adjustment should be made.
However, significant non-adjusting events should be disclosed in the notes to the accounts if non-disclosure would affect users’ decisions.
Examples:
- A major fire or flood damages assets after the year-end.
- Announcement of dividend after the balance sheet date.
- Issue of shares or debentures after the year-end.
Disclosure should include:
- Nature of the event; and
- Estimate of its financial effect (if possible).
4. Dividends Declared After Balance Sheet Date
According to AS 4 (Revised), dividends proposed or declared after the balance sheet date are not recognized as a liability as of that date.
They are disclosed in the notes to the accounts instead.
Example:
If the balance sheet date is March 31, 2025, and the company declares dividends on May 15, 2025 (after board approval), it should not be shown as a liability as of March 31, 2025.
5. Disclosure Requirements Under AS 4
Companies are required to:
- Disclose the nature and estimated financial impact of each contingency or subsequent event, unless the probability of loss is remote.
- Mention any adjustments made to reflect post-balance-sheet events.
- State significant non-adjusting events that may influence users’ understanding of the financial position.
Proper disclosure enhances the transparency, comparability, and reliability of financial statements.
Why AS 4 Matters?
AS 4 ensures that financial statements:
- It reflects the economic reality by incorporating material post-balance-sheet information.
- It protects the stakeholders by preventing manipulation through the selective event disclosure.
- It helps to promote consistency and prudence in the accounting treatment across the various industries.
In today’s fast-changing business environment—where events like lawsuits, mergers, and disasters can quickly alter a company’s position—AS 4 remains a vital tool for credible financial reporting.
Conclusion
The Accounting Standard (AS) 4 plays an important role in the process of ensuring financial statements present a true and fair view, even when it is faced with uncertainties or subsequent developments. By setting clear rules for the purpose of recognising, adjusting or disclosing contingencies and the post-balance-sheet events, it upholds the principles of prudence, transparency and reliability.
Every accountant, auditor and business leader needs to understand AS 4 not merely as a compliance requirement, but as an ethical commitment to honest and transparent financial reporting.
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