Accounting Standard – 4 on “Contingencies and Events occurring after the Balance Sheet Date” deals with the treatment of contingencies and events occurring after the balance sheet date in financial statements. According to it, 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 in the case of any other entity by the corresponding approving authority. Some of such events may require adjustments to assets and liabilities as the balance sheet date or may require disclosure. These are classified as under:
- Adjusting events are those significant 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, e.g., an adjustment may be made for a loss on a trade receivable account which is confirmed by the insolvency of the customer which occurs after the balance sheet date or that indicate that the fundamental accounting assumptions of going concern (i.e., the continuance of existence or substratum of enterprise) is not appropriate.
- Non-adjusting events are those events which do not relate to conditions existing at the balance sheet date. An example is the decline in the market value of investments between the balance sheet date and the date on which the financial statements are approved. Ordinary fluctuations in the market value do not normally relate to the condition of the investments at the balance sheet date but reflects circumstances which have occurred in the following periods. However, disclosure is generally made of such events in case these represent unusual changes affecting the existence or sub-stratum of the enterprise at the balance sheet date. For example the destruction of a major production plant by a fire after the balance sheet will not require any adjustment in the balance sheet as no conditions existed on the date of the balance sheet. They may be of such significance that they may be required disclosure in the report of the approving authority. Representing material changes and commitments affecting the financial position of the enterprise. In case disclosure of events occuring after the balance sheet is required, the auditor should see that the following information has been provided:
- the nature of the events; and
- an estimate of the financial effect or a statement that such an estimate cannot be made.
3. There is another category of events which although take place after the balance sheet date are required to be reflected in the financial statements because of statutory requirements or because of their special nature. Such items include the amount of dividend proposed or declared after the balance sheet in respect of the period covered by the financial statements.