A Contingent liability is one which is not an actual liability but which will become one on the happening of some

event which is uncertain.

Contingent liabilities have two characteristics :

Uncertainty as to whether the amount will be payable at all.

Uncertainty about the amount involved.

It is sufficient for the amount of contingent liability to be stated on the face of the Balance sheet by way of a note, unless there is probability that a loss will materialize and its reasonable estimates can be made. In this case, it is no more a contingent liability and a specific provision should be made therefore.

Some of the examples of Contingent Liability Arrears of dividend on cumulative preference share. Bills of exchange discounted Guarantees given by the co. to companys under the same management. Suit for damages against the company which it is defending.

The nature and amount of each extraordinary activity should be disclosed separately, so that its impact on profit 7 loss can be perceived. However these items although separately stated are part of the net profit or loss. An item can be called an extraordinary item must satisfy both the features listed below. It should arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise. The events are not expected to occur frequently or regularly. Examples of Extraordinary items are : 1. Restructuring of business 2. Earthquake 3. Sale of segments of business 4. Write off goodwill arising out of purchase of business. 5. Compensation payments in accordance with non- competeing agreements.

AS-5 issued by the Institute of Charted Accountants Of India, defines prior period items as material charges or credits which arise in the current period as a result of errors or commissions in the preparation of the financial statements of one or more prior periods.
Prior Period items should be separately disclosed in the current statement of profit & loss together with their nature & amount in a manner that their impact on current profit or loss can be perceived. The balance Sheet does not separately disclose prior period adjustments.

It is a contract that gives the employees of the enterprise the right, but not the obligation to purchase or subscribe to the enterprises shares at a fixed or determinable price(called the exercise price)for a specified period of time. Generally, if the exercise price is less than the market price of the shares, the option is exercised. Grant Date : The date at which the enterprise and its employees agree to the terms of a compensation plan, provided the specified vesting conditions are met. Vesting Conditions : Conditions that must be satisfied for the employee to become eligible to receive shares of the enterprise. Vesting period : The period between the grant date and the date by which all the vesting conditions are to be satisfied. Exercise period : Time period after vesting within which the employee should exercise his right. Expected life of an option: the period of time from grant date to the date on which an option is expected to be exercised. Re-pricing of the option : Changing the existing exercise price of the option to a different price.

There are two alternative methods of accounting for the above compensation plans Fair Value Method Intrinsic Value Method Fair Value of the option means the price that shall be calculated for that option in arms length transaction between a willing buyer and a willing seller. Intrinsic Value Method : Intrinsic value refers to the amount by which the quoted market price of the underlying shares exceeds the exercise price of an option.

When the value of asset decreases, it may be called impairment of an asset. As per AS-28 asset is said to be impaired when carrying amount of asset is more than its recoverable amount.
Carrying amount is the amount at which asset is shown in balance sheet at its cost less accumulated depreciation or amortization and accumulated impairment losses. Recoverable amount of an asset is higher of

Net selling price ( amount obtainable from sale less cost of disposal) Value in use

Value in use is present value of estimated future cash flow arising from use of asset + residual price at the end of useful life.

Impairment loss is calculated as under.

Recoverable amount less carrying amount. In other words if recoverable amount is equal to or more than carrying amount, no impairment loss is accounted for and asset is not impaired.

Example 1 : A ltd has a plant which is carried in balance sheet on

31-3-09 at Rs 500 lacs. Value in use is Rs 400 lakhs. Net selling price is Rs 375 lacs on 31-3-09. Calculate impairment loss.