CA Final Course

Paper 1 Financial Reporting Chapter 1 Unit 5

CA. Arun K. Agarwal, ACA & ACS

Recorded on: 30-September-2014

The Institute of Chartered Accountants of India
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 This lecture has been delivered by faculty members to supplement the Study
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September 30, 2014
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1. Financial statements of any
enterprise are compiled for a period of
time, generally not over one financial
year known as the accounting period.
The financial statements are meant to
give a true and fair view of the profits
or losses earned or incurred by the
enterprise during the accounting
period and the state of its assets and
liabilities as at the end of that period.
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2. The financial statements of an
enterprise for its financial year are a
source of vital information to a large
number of people classified into
creditors, bankers, investors etc.
These people use the information in
the financial statements for major
decisions and hence it is vital for the
financial statements to be properly
drawn up in accordance with the best
accounting practices and propriety to
be reliable.
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 The financial statements are prepared for the accounting period but
are formally approved and authenticated at a later date. Thus the
financial statements may be prepared for the period ending 31st March
2013 but will be approved only by say, 30th Sept 2013 when the BOD
approves them.

The key question that arises is that what should be done if some
events come to light during the intervening period, which have a
significant effect on the financial results of the company. Such events
are called Events Occurring After the Balance Sheet Date

Accounting standard AS 4 lays down the treatment of such events in

the financial statements of an enterprise.

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 Accounting Standard AS 4 prescribes the treatment in the financial
statements of:
Contingencies; and
Events occurring after the Balance Sheet date;

AS 4 does not apply to the following subjects, which may result in

contingencies, in view of special considerations applicable to them:
Liabilities of life assurance and general insurance enterprises arising from policies
issued;
Obligations under retirement benefit plans; and
Commitments arising from long term lease contracts

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 The treatment of contingencies and events occurring after the balance
sheet date may require adjustment of values of assets and liabilities in
the balance sheet or a disclosure in the financial statements or in the
report of the approving authority of such statements depending on
circumstances. These have been explained in AS 4.

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 A contingency is a condition or a situation, the ultimate outcome
of which, will be known only on the occurrence or non
Definition of a occurrence of one or more uncertain events.
contingency

Those events which are significant in nature (both favorable and

What are events unfavorable) AND which occur between the date of the balance sheet
and the date on which the financial statements are approved by the
occurring after the Board of Directors in the case of a company, and by the
balance sheet date corresponding approving authority in the case of any other entity.

The Balance Sheet date is the date on which the Balance Sheet is
drawn up. Generally, it is the last date of the financial year that an
What is the enterprise follows, e.g. if the financial year of X Ltd is from 1st April to
Balance Sheet date 31st March, the balance sheet date will be 31st March for every year, in
the normal course.

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 Making a provision for contingency loss

The amount of a contingent loss should be provided for by way of a

charge against income in the statement of profit and loss ONLY IF:
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
A reasonable estimate of the loss can be made

The fact of the existence of a

contingent loss should be
disclosed in the financial
Disclosure of contingency loss
statement if either of the
in the financial statements
conditions mentioned above is
not met, unless the possibility
of a loss is remote.

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 Contingency gains should not be recognized in
Contingency the financial statement.

gains

The following information should be

provided in the disclosure of contingency
losses:
Manner of The nature of the contingency;
The uncertainties which may affect the
disclosure future outcome;
An estimate of the financial effect, or a
statement that such an estimate cannot
be made

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 Under the following situations, the values of certain assets / liabilities
will require adjustment due to events occurring after the balance sheet
date:

1. When such events provide additional information which materially

affect the determination of the amounts relating to conditions
existing at the balance sheet date;
2. When such events indicate that the fundamental accounting
assumption of going concern is no longer appropriate.
3. 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.
On the other hand no such adjustment will be required nor will be
appropriate when such events do not relate to conditions existing at the
balance sheet date.

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 Events occurring after the balance sheet date may not necessarily require
adjustment to the values of assets and liabilities. However, such events,, if
material, may have to be disclosed nevertheless. Such disclosure may either
be in
1. The financial statements by way of Notes to Accounts; and

2. The .report of the approving authority (Board of Directors in case of

companies)
The disclosure is intended to enable the users of the financial statements to
make a Proper evaluation of such events in their decisions. The information to
be provided on such disclosure should be:
a. the nature of such event;

b. an estimate of the financial effect, or a statement that such an estimate

cannot be made

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 The disclosure requirements in respect of contingencies and
events occurring after the balance sheet date apply only for those
items which affect the financial position to a material extent.

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 X Ltd has drawn up its balance sheet on 31st March 2013 which is the last
date of its financial year. In the balance sheet under creditors is a balance of
Rs 1.50 Crores in the name of Y Pvt Ltd. This is an amount outstanding since
July 2012. On 5th April 2013 Y Pvt Ltd filed a winding up petition in the Delhi
High Court on the grounds of X Ltd being unable to pay its debts. The petition
was admitted by the Delhi HC on 14th May 2013.

The financial statements of X Ltd are to be approved at the Board Meeting on

20th August 2013. Please explain the treatment of the above information in the
financial statements of X Ltd for the financial year ending 31st March 2013,
under AS 4

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 In the above case an event after the balance sheet date
has occurred which may impact the very continuation of
the company as a going concern. Hence, this is a material
event and must be disclosed in the financial statement in
the Notes to Accounts with full particulars of the legal
case, the strength of the companys position and the
nature of impact this event can have.

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 X Ltd has drawn up its balance sheet on 31st March
2013 which is the last date of its financial year.
In the balance sheet under debtors is a balance of
Rs 1.50 Crores in the name of A Pvt Ltd. This is an
amount outstanding since July 2012.
On 5th June 2013 A Pvt Ltd was ordered by the Delhi
High Court to be wound up on the grounds of being
unable to pay its debts.
The liquidators appointed by the court have declared
on 8th Sept 2013 that unsecured creditors will be paid
30% of their dues in full satisfaction.

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 X Ltd has shown this debtor as good and has made a
provision for doubtful debts at 20% of the due amount.

The financial statements of X Ltd are to be approved at the

Board Meeting on 20th Sept 2013. Please explain the treatment
of the above information in the financial statements of X Ltd for
the financial year ending 31st March 2013, under AS 4

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 In this case the debt of A Pvt Ltd of Rs 1.5 Crores has been provided for at 20%.
In other words, the balance sheet shows a provision for doubtful debts to the tune
of Rs 30 Lakhs. However, due to the insolvency and winding up of A Pvt Ltd which
is an event after the balance sheet date, the amount actually receivable from A
Pvt Ltd is only 30% i.e. Rs 45 Lakhs. The balance Rs 105 Lakhs is non
recoverable where as the provision for doubtful debts is only Rs 30 Lakhs.

Presuming the impact to be a material one, the financial statements of X Ltd

should disclose this event and its impact in the note to accounts. The disclosure
may be made as follows (indicative only):

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 A debtor namely A Pvt Ltd for a value of Rs 1.50 Crores
has been declared insolvent and winding up has been
ordered by the Delhi High Court. The amount unrecoverable
from A Pvt Ltd is only Rs 105 Lakhs against which the
company has made a provision for doubtful debts for Rs 30
Lakhs. Due to this event the profit of the company as
appearing in the statement of profit and loss will be reduced
by Rs 75 Lakhs

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 X Ltd has drawn up its balance sheet on 31st March 2013 which is the last date of its financial
year. In the balance sheet on the Asset side under Investments is a balance of Rs 1.00 Crore
which is in respect of 1 Lakh equity shares of Rs 10 each at the purchase price of Rs 100 each
in a listed company A Ltd.

The value of the equity shares of A Ltd on the balance sheet date was Rs 150 per share in the
BSE Index.

On 18th July 2013 the market price of the share had declined to Rs 70 per share had been
hovering at around Rs 70 to Rs 75 per share during the intervening period upto the date of the
approval of the financial statements of X Ltd by the Board Meeting on 20th August 2013.

Please explain the treatment of the above information in the financial statements of X Ltd for
the financial year ending 31st March 2013, under AS 4.

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 In this case the movement in share prices do not constitute an event
either warranting a note to accounts nor adjustment in books as they
are of a routine nature and such movements are normal.

On the Balance Sheet date the shares were at Rs 150/- each and the
recognition of these investments was on cost or MV which ever was
less. Hence, no further action is warranted.

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