Treatment as per AS 4

Great question about Accounting Standard (AS) 4 — Contingencies and Events Occurring After the Balance Sheet Date!

Here’s how the scenario you described would be treated under AS 4:

Facts Recap:

• Company had an NPA loan of Rs. 5 crores.

• Bank gave OTS at Rs. 4 crores with a deadline in April 2024 (after FY 23-24 end).

• Company paid 50% in FY 23-24 and the rest in June 2024 (FY 24-25) after a 90-day extension.

AS 4 Treatment:

1. Balance Sheet Date:
   The balance sheet is as at 31st March 2024 (end of FY 23-24).

2. Nature of Event:
   The event (payment of full OTS amount) happened after the balance sheet date but before the financial statements are approved.

3. Type of Event (AS 4):
   AS 4 distinguishes between:

   • Adjusting events: Events that provide additional evidence about conditions existing at the balance sheet date.

   • Non-adjusting events: Events that indicate conditions that arose after the balance sheet date.

4. Analysis:

   • The original loan was classified as NPA as of 31st March 2024.

   • The OTS agreement and payments relate to existing liabilities (the loan).

   • The partial payment before balance sheet date indicates part settlement.

   • The final settlement agreement extension and payment completed after balance sheet date is a non-adjusting event because it happened after March 31, 2024.

   • However, if the terms of settlement were finalized before the balance sheet date (say the OTS was agreed before March 31, 2024), it may be an adjusting event.

5. Accounting Treatment:

   • If OTS terms were finalized before balance sheet date:
     Adjust the loan liability in FY 23-24 financials to Rs. 4 crores (settlement amount). Recognize any difference (1 crore) as expense or gain as applicable.

   • If OTS terms were finalized after balance sheet date:
     No adjustment in FY 23-24 financials. Disclose the settlement details as a non-adjusting event in the notes to accounts. Reflect the full amount (5 crores) as liability as on 31st March 2024.

Summary: