The Accounting Standard 4 specifies that post balance sheet events are of two categories, namely, events after the balance sheet that require adjustments to financial statements, and other events that do not require adjustment to financial statements, but may require suitable disclosures.
The Accounting Standard 4 also lays down principles for classifying the events into adjusting and non-adjusting categories, and requires that accounting adjustments should be made retrospectively on balance sheet date to amounts recognised in the financial statements in respect of events that occur after balance sheet date and qualify to be “adjusting events”. As a corollary, disclosure requirements are prescribed in other material cases.
APPLICABILITY AND SCOPE
The Accounting Standard 4, in its present form, is effective in respect of accounting periods commencing on or after 1st April 2021, and is applicable to all Corporate and Non-corporate reporting entities in Levels I to IV categories.
“Contingencies” may be attributable to items either in the Liabilities side, or in the Assets side of the Balance Sheet. While prescriptions for making provisions to take care of a possible liability or for disclosure of a contingent liability have been laid down in AS 29 (Provisions, Contingent Liabilities and Contingent Assets), ICAI has clarified that the relevant paragraphs of AS 4, which deal with contingencies, would remain operational to the extent they cover impairment of certain assets, such as, impairment of receivables (commonly referred to as the provision for bad and doubtful debts).
Accounting for certain long-term lease commitments and long term or short commitments towards employee benefits are dealt with in other Standards.
The term ‘contingencies’ requires to be interpreted with reference to the conditions or situations at the balance sheet date. A Contingency is defined as 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. A condition or situation may have a financial effect. Yet, the future event that would determine the financial effect may or may not occur.
EVENTS OCCURRING AFTER THE BALANCE SHEET DATE
The Accounting Standard 4 defines this concept as: 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.
The significant events are of two categories: (i) those that provide further evidence of conditions that existed at the balance sheet date – and these are referred to as adjusting events; and (ii) those which are indicative of conditions that arose subsequent to the balance sheet date and these are called non-adjusting events.
Adjusting events are those that require adjustments to assets and liabilities in Balance Sheet, because these events offer information that materially affect the determination of amounts in Balance Sheet. Where, however, the events that emerge after Balance Sheet date do not relate to conditions that existed on BS date, no adjustment is called for. Hence, the crucial aspect of decision relates to whether the events relate to or do not relate to conditions on BS date.
GOING CONCERN ASSUMPTION BEING RENDERED INAPPROPRIATE
The Accounting Standard 4 prescribes as follows:
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 substructure of the enterprise after the balance sheet date, (for example, 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 financial statements (Paragraph 8.6).
Assets and liabilities should be adjusted for events occurring after the BS date, that provide additional evidence to assist the estimation of amounts relating to conditions existing at the BS date or that indicate that the fundamental accounting assumption of going concern (i.e., continuance of existence or substratum of the enterprise) is not appropriate (Paragraph 13).
Events of the nature outlined above can compel reconsideration of the validity of ‘going concern’ assumption. Such an event that might render the future of the enterprise unviable may necessitate adjustment of assets and liabilities. The cancellation of an operating licence issued by regulatory authorities is generally cited as an example.
The process of determining whether the post balance sheet event has in fact rendered the going concern assumption invalid is a judgment call. The considerations include (a) the significance of the event that causes the impact and (b) the long-standing nature (or otherwise) of the impact on the viability of the enterprise.
The Accounting Standard 4 prescribes the following disclosures.
Where disclosure of contingencies is required, the following information should be provided (a) the nature of the contingency, (b) the uncertainties which may affect the future outcome; and (c) an estimate of the financial effect, or a statement that such an estimate cannot be made.
If disclosure of events occurring after the balance sheet date in the report of the approving authority is required, the following information should be provided, i.e., the nature of event and an estimate of the financial effect, or a statement that such an estimate cannot be made.
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