Comapany A sold Rs.5,00,000 worth of goods to company B on 15 march 2010. Fire occured in the premises of company B on Apr 20th and subsequently Co. B adjudged insolvent on june 30th.
A/c year is Apr 2009 to Mar 2010
Director approved the B/s on Aug 30th 2010
Questions:
A provision for bad debts for the entire amount is to be made and also disclosure should be made...
For applicability of as-4 an event should have taken place which affects an event which has already occured prior to balance sheet date.
Event Refers to B becoming insolvent and it is an adjusting event for A
As per the data in your query, the company has been declared insolvent. Hence, your company will not receive any amount outstanding from B co.
This is an adjusting event and the adjustments have to be made in the debtors in the balance sheet as on the balance sheet date.
All the dates are important but you determine the answer based on the date on which the BOD have approved the balance sheet.
In the above case if it was approved much before the date of fire it would not have to be adjusted in the balance sheet of the current financial year
As per AS 4, its an adjusting event if
1. The events accuring after Balance Sheet date provide additional evidence of the conditions existed on the Balance Sheet date. (or)
2. It effects going concern assumption eg: destruction of major production plant by fire after balance sheet date. (or)
3. If its required by the statute to make adjustments. eg: Proposed dividend
here no conditions existed on the balance sheet date to decide insolvency of Company B... so its a non adjusting event.
However, if the amount is material then disclosure is required in BOD report w.r.t
Insolvency of Company B n amount of loss
.
Mr Netra
But Accounts are approved By BOD ON 30TH AUG 2010 and Fire Gutted down the premises of B on 20th apr2010.since the event is known before approval of accountsby Board of Directors it becomes an adjusting event only.
Kindly note Adjusting events are those which provides additional evidence and amounts which can be estimated
agree with sir sivaram...
please refer to similar situation in Rawat's book on AS n also in Nov 2003 Final exam Accounts paper.... According to it no provision required but only disclosure is required. As the conditions i.e.fire dint occur before Balance Sheet date.
Mr Dinesh I am making the answer straight
Elements that constitute the principle Example
Condition already existing on B/s date Non payment by a debtor
Additional evidence surfacing after B/s Date Debtr rendered insolvent asper court dec
Post Balance sheet event Insolvency
Quantification of amount debts due less share of dividends likely to be paid by receiver
Adjustment to be made Provison for losses
Hi Dinesh,
As per AS 4 adjustment needs to be made for those events occurred after Balance Sheet date which is related to conditions existing on balance sheet date. Here the thought of the debtor becoming bad debt came into mind when the fire accident occurred which further evidenced by the debtor becoming bad. The fire occurred after balance sheet date so conditions relating to recognition of bad debt are not in existence on balance sheet date. So only disclosure will suffice the compliance of AS4, adjustment can be made in next year.[For reference check 8.2 and 8.3 paras of AS4]
Hello Dinesh all over above i found people bit confused on this matter but answer to this matter is straght forward as discussed below:
the event as u mentioned occured after the balance sheet date (occurance of fire in factory of B) and further bad debt was confirmed by subsequent declaration of B as insovent . Thus no condition existed on balance sheet date regarding such bad debt ,as such it will be considered as non adjusting event and as such no adjustment of such bad debt should be made in b/s of fy concerned and only diclosure in to be made in directors report.
Agreed with baijnath..! The event did not occur on the balance sheet date. had the fire occured on 30 th mar (for eg) ., then adequate provision need to be made. here oly disclosure by way of notes to accounts. no adjustment per se.
Baijnath Agarwal made the point straight.He strengthened what i and Netra said.
CAclubindia
