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AS 4 - Contingencies

nidhi (CA) (65 Points)

26 November 2009

Are Contingencies completely covered by AS-29 after its introduction in 2004? or is any part of it still governed by AS-4. There is an announcement by ICAI (do not have the link, though) which states that to the extent Contingencies relate to Assets & Liabilities, they are to be governed by AS -4 as yet.

Also, what is the differnce between Contingencies and Events occuring After the Balance Sheet date in practical terms??

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3 Replies

Hitesh (CA) (459 Points)
Replied 26 November 2009

Aspect 1 - explaining coverage for contingencies.

With the introduction of AS-29 all the Contigencies (viz Contingent Liabilities and Contingent Assets) are coverd under AS-26.

AS-26 cleary defines what are Contingent Liabilities or contingent Assets.

The practical issue involved herein was whether all the provisions are covered by the AS-26.

AS-26 defines Provision as - " A provision is a liability which can be measured only by using a substantial degree of estimation. "

Therefore it is quite clear that it does not cover provisions made towards the items representing Asset to te Company, and for this reason AS-4 continues to apply to only for the purpose of provision towards Assets.

Aspect 2 - explaining difference between contringency and events occuring after the balance sheet date.

Contigency situation wherein the outcome is yet to be known, which will be ascertained on happening or not happening of certain event in the future.

eg. A warranty claim case filed against the company for goods sold by it. The amount that needs to be provided depends upon the facts of the case and would require professional judgement on an case to case basis. At each Balance sheet date the same needs to be verified n if required then account for the claim to payable.

As regards events occuring after the balance sheet date, it is occurrence of certain activity or event for an item or transaction which already existed on the balance sheet date but provides further evidence to substantiate the amount reflected.

Hareesh H Sharma (Cleared IPCC..now article) (894 Points)
Replied 27 November 2009

Definitions

3. The following terms are used in this Standard with the meanings specified:

3.1 A contingency is 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.

3.2 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.

Two types of events can be identified:

(a) those which provide further evidence of conditions that existed at the balance sheet date; and

(b) those which are indicative of conditions that arose subsequent to the balance sheet date.

Hareesh H Sharma (Cleared IPCC..now article) (894 Points)
Replied 27 November 2009

And about AS4 covering contingencies my IPCC study material says the reason for keeping the contingency part in AS4 alive is for the limited purpose of provisioning for doubtful debts. All paragraphs of AS 4 covering other contingencies have been withdrawn aftr AS29 came into existence from 1-4-2004.

This is from what i have read in my study material. I hope my limited knowledge about this is correct