ACCOUNTING STANDARDS
4, 5 & 29
CA. Ashok Seth
B.Sc., FCA, DISA (ICA)
ashok.seth@gmail.com
AS 4- Contingencies & events
occurring after BS date
 Now contingencies covered in AS29Para 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
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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.
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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
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ACCOUNTING STANDARD 5
(Revised)
 Issued in November 1982- “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”
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Cover four distinctly independent
aspects




Net profit of loss for the period
Prior period items
Changes in Accounting Estimates, and
Changes in Accounting Policies
10
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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
12
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
13
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)
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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.
15
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.
16
Errors or Omissions
 Errors may occur as a result of




mathematical mistakes,
mistakes in applying accounting policies,
misinterpretation of facts, or
oversight.
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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.
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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.
19
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.
20
AS-29
 Provisions, Contingent Liabilities and
Contingent Assets
 Applicable:- 1.4.2004
 Level-I
 Level-II (except Para 67)
 Level-III (except Para 66 & 67)
 Should disclose the fact of exemption
21
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.
22
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
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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.
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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 nonoccurrence 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.
25
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.
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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.
27
Contingent Liability & Assets
 A contingent liability is not recognised
in financial statements but is
disclosed.
 A contingent asset is not recognised
in financial statements.
28
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.
29
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
30
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.
31
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.
32
 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.
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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)
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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.
35
Examples of Provision Required
 Warranties
 Refund Policy
 Wage Agreements
Provision Not Required
 Staff Retraining as result of Changes
in Tax system
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Decision Flow Chart
Flow
Chart
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THANK YOU
Please mail your comments to
ashok.seth@gmail.com
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THANKS FOR BEING NICE
HAVE A GOOD DAY
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