Accounting Standard (AS) 4

Contingencies and Events Occurring After the Balance

Sheet Date

Contents

INTRODUCTION Paragraphs 1-3

Definitions 3

EXPLANATION 4-9

Contingencies 4-7

Accounting Treatment of Contingent Losses 5

Accounting Treatment of Contingent Gains 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

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Accounting Standard (AS) 4
Contingencies and Events Occurring After the Balance Sheet Date
(This Accounting Standard includes paragraphs set in bold italic type and plain
type, which have equal authority. Paragraphs in bold italic type indicate the main
principles. This Accounting Standard should be read in the context of the General
Instructions contained in part A of the Annexure to the Notification.)
Introduction
1. 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

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This AS was revised vide Notification G.S.R. 364(E) dated 30th March, 2016.
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All paragraphs of this Standard that deal with contingencies are applicable only to the extent not covered by
other Accounting Standards prescribed by the Central Government. For example, the impairment of financial
assets such as impairment of receivables (commonly known as provision for bad and doubtful debts) is
governed by this Standard.

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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
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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

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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. 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.
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.
Main Principles
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

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 (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. 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.

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 Standard, the

following information

(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 Standard, 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.