ACCOUNTING STANDARDS 4, 5 & 29 CA. Ashok Seth B.Sc., FCA, DISA (ICA)

AS 4- Contingencies & events occurring after BS date  Now contingencies covered in AS29- Para relating to contingencies dropped from AS 4  This Standard now deals only with events occurring after Balance sheet date  Impairment of Assets not covered by AS 28 are covered by AS 4 2

Events Occurring after 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 by the Board of Directors in the case of a company, and, by the corresponding approving authority in the case of any other entity 3

Events  those which provide further evidence of conditions that existed at the balance sheet date  Need to make adjustments to final accounts as on BS date (Adjusting event 4

Events  Those which are indicative of conditions that arose subsequent to the balance sheet date.  Would require disclosure only 5

Adjusting Events:- examples  Subsequent determination of Purchase or sale price of purchase or sale executed before YE  Debtors- re-negotiation with debtors indicating realizable amount at YE  Taxation:-New case law affecting the tax provisions  Insurance Claims settlement which were under negotiation earlier 6

Adjusting Events:- examples  Events occurring after the BS date may indicate enterprise ceases to be a going concern. may indicate a need to consider whether it is proper to use the fundamental accounting assumption of going concern in the preparation of the financial statements. 7

Non- Adjusting Events:- examples  Losses on account of natural calamities after BS date.  Closing significant part of activities if was not anticipated at YE  The decline in market value of investments after BS date  Provision for Obsolete of Stocks 8

9 ACCOUNTING STANDARD 5 (Revised)  Issued in November “Prior Period & extra ordinary items, and changes in accounting policies”  Revised in 1997 w.e.f accounting period starting from 1st April 1996 as- “NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN ACCOUNTING POLICIES”

10 Cover four distinctly independent aspects  Net profit of loss for the period  Prior period items  Changes in Accounting Estimates, and  Changes in Accounting Policies

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12 Net profit of loss “for the period”  Comprises the following components, each of which should be disclosed on the face of the statement of profit and loss: Profit or loss from ordinary activities Extraordinary items  There may be exceptional items from ordinary activities

13 Ordinary Activities  are any activities which are undertaken by an enterprise as part of its business and such related activities in which the enterprise engages in furtherance of, incidental to, or arising from, these activities

14 Profit & Loss from Ordinary Activities  When items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately. (Exceptional items)

15 Extraordinary Items  Extraordinary items should be disclosed in the statement of profit and loss as a part of net profit or loss for the period. The nature and the amount of each extraordinary item should be separately disclosed in the statement of profit and loss in a manner that its impact on current profit or loss can be perceived.

16 Prior Period Items  Prior Period Items are incomes or expenses, which arise, in the current period as the result of errors of omissions in the preparations of financial statements of one or more prior periods.  The nature and amount of prior period items should be separately disclosed in the statement of profit and loss  Should be distinguished from changes in accounting estimates.

Errors or Omissions  Errors may occur as a result of mathematical mistakes, mistakes in applying accounting policies, misinterpretation of facts, or oversight. 17

18 Changes in Accounting Estimates  The effect of a change in an accounting estimate should be included in the determination of net profit or loss in: the period of the change, if the change affects the period only; the period of the change and future periods, if the change affects both.

19 Change in Accounting Policies to be made only if  if the adoption of a different accounting policy is required by statute or  for compliance with an accounting standard or  if it is considered that the change would result in a more appropriate presentation of the financial statements of the enterprise.

20 Change in Accounting Policies  which has a material effect should be disclosed.  The impact of, and the adjustments resulting from, such change, if material, should be shown in the financial statements of the period in which such change is made,  If a change which has no material effect on the financial statements for the current period but which is reasonably expected to have a material effect in later periods, the fact of such change should be appropriately disclosed in the period in which the change is adopted.

21 AS-29  Provisions, Contingent Liabilities and Contingent Assets  Applicable: Level-I Level-II (except Para 67) Level-III (except Para 66 & 67)  Should disclose the fact of exemption

22 From the date of coming into operation of AS 29, the following stand withdrawn AS 4 – Contingencies and Events Occurring after the Balance Sheet Date – paras 1(a), 2.3.1, 4(4.1 to 4.4), 5(5.1 to 5.6), 6, 7 (7.1 to 7.3), 9.1 (relevant portion), 9.2, 10, 11, 12 and 16) stand withdrawn. However, till the issuance of the proposed Accounting Standard on financial instruments, paragraphs which deal with contingencies would remain operational to the extent they cover impairment of assets not covered by other Accounting Standards. For example, provision for bad and doubtful debts.

23 Not applicable on  Those resulting from financial instruments that are carried at fair value  those resulting from executory contracts except Onerous Contracts  those arising in insurance enterprises from contracts with policy – holders and  those covered by another AS

24 Definitions  Provision is a liability, which can be measured only by using a substantial degree of estimation.  Liability is a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits.

25 Definition- Contingent Liability is  a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non- occurrence of one or more uncertain future events not wholly within the control of the enterprise; or  a present obligation, but is not recognised because it is not probable that outflow of resources embodying economic benefits will be required (or is remote) for its settlement or a reliable estimate of the amount of the obligation cannot be made.

26 Definition- Contingent Assets is  a possible asset that arises from past events, the existence of which will be confirmed only by the occurrences or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise.

27 A provision should be recognised when –  an enterprises has a present obligation as a result of a past event;  it is probable (more likely than not) that an outflow of resources will be required to settle the obligation; and  a reliable estimate can be made of the amount of the obligation.

28 Contingent Liability & Assets  A contingent liability is not recognised in financial statements but is disclosed.  A contingent asset is not recognised in financial statements.

29 Measurement  The amount of provision should be measure before tax at the best estimate of the expenditure required to settle the present obligation and  Should not be discounted to its present value.  The risks and uncertainties that surround events and circumstances should be taken into account in arriving at the best estimate of provision to avoid its under or over statement.

30 Measurement  Expected future events, which are likely to affect the amount required to settle an obligation, may be important in measuring provisions.  Gains on the expected disposal of assets should not be taken into account in measuring a provision, even if the expected disposal is closely linked with the item requiring provision

31 Reimbursement by other party  Whenever all or part of the expenditure relevant to a provision is expected to be reimbursed by another party, the reimbursement should be recognised only on virtual certainty of its receipt.  The reimbursement should be treated as a separate asset and should not exceed the amount of the provision.  In the statement of profit and loss, the expense relating to a provision may be presented net of the amount recognised for a reimbursement.

32 Review of Provisions  Provisions should be reviewed at each balance sheet date and adjusted to reflect the current best estimate. The provision should be reversed, if it is no longer probable to result in a liability.  A provision should be used only for expenditures for which the provision was originally recognised and not against a provision recognised for another purpose, so as not to conceal the impact of two different events.

33  Provision should not be recognised for future operating losses, since it is not a liability nor meet the crieteria for provisions.  A restructuring provision should include only the direct expenditures, necessarily entailed by the restructuring and not associated with the ongoing activities of the enterprise.

34 Disclosure- for each class of Provisions  The carrying amount at the beginning and end of the period; additional provisions made, amounts used and unused amounts reversed during the period.  Description of the nature of the obligation, the expected timing of any resulting outflows of economic benefits, the uncertainties about those outflows and the amount of any expected reimbursement (also stating the amount of any asset recognised therefor)

35 Disclosure- for each class of contingent liability  a brief description of its nature and where practicable, an estimate of its financial effect, the uncertainties relating to any outflow and the possibility of any reimbursement. If the information is not disclosed, being not practicable, the fact thereof is to be disclosed.  In extremely rare cases, disclosure of any information can be expected to prejudice seriously the position of the enterprise in a dispute with other parties; in such cases the information need not be disclosed but, the fact and reason for such non–disclosure along with the general nature of dispute should be disclosed.

Examples of Provision Required  Warranties  Refund Policy  Wage Agreements Provision Not Required  Staff Retraining as result of Changes in Tax system 36

Decision Flow Chart 37 Flow Chart Chart

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