Contingencies and Events in Accounting

Harsh Wardhan Soni

Understanding Contingencies and Events in Accounting

Contingencies: A Closer Look

Contingencies are uncertain future events that are beyond an entity’s control. They may result from past events but their occurrence or non-occurrence depends on future events.

Accounting Standard (AS) 29: Provisions, Contingent Liabilities, and Contingent Assets:

According to AS 29 issued by the Institute of Chartered Accountants of India (ICAI), a contingency is recognized when there is a possible obligation arising from past events, the existence of which will be confirmed only by the occurrence or non-occurrence of uncertain future events not wholly within the control of the enterprise.

Events Occurring After the Balance Sheet Date: An Overview

Events occurring after the balance sheet date are those significant events, both favorable and unfavorable, that occur between the balance sheet date and the date on which the financial statements are approved for issue.

Accounting Standard (AS) 4: Contingencies and Events Occurring After the Balance Sheet Date:

AS 4 issued by the ICAI provides guidance on accounting for events occurring after the balance sheet date. Such events may require adjustments to or disclosure in the financial statements.

Practical Implications:

1. Adjusting Events: If an adjusting event occurs after the balance sheet date, it provides evidence of conditions that existed at the balance sheet date. In such cases, financial statements are adjusted to reflect these events.
2. Non-Adjusting Events: Non-adjusting events are those events that are indicative of conditions arising after the balance sheet date. These events are disclosed in the financial statements if they are material and could influence the decisions of the users.

Contingency Example: Legal Proceedings

Consider a company facing a lawsuit for patent infringement. The outcome is uncertain, and the amount of potential loss cannot be measured reliably. As per AS 29, the company does not create a provision but discloses the nature of the dispute, along with a best estimate of the financial effect if it is probable that an outflow of resources embodying economic benefits will be required.

Events Occurring After the Balance Sheet Date Example: Natural Disasters

Imagine a company's factory being destroyed by a flood after the balance sheet date. If this event occurred before the financial statements are approved, it would be considered a non-adjusting event. The company should disclose the nature of the event and an estimate of its financial effect in the notes to the financial statements.

© 2023 Accounting Insights. All rights reserved.