1.23 Query: Events occurring after the balance sheet date. 1. A public sector company manufacturing and supplying process control equipments is closing its accounts on 31st March, 1990.
2.Wage revision proposals are to be approved by the Government of India only after which settlements can be finalised. After the close of the year, the company, after obtaining the approval of the Government of India, which was given on 9.4.90, arrived at a wage settlement with its workers on 11th April, 1990 effective from 1st April, 1989. The settlement covered a period from 1.4.88 to 30.9.92. The liability upto 31.3.90 was disclosed on account of the above settlement in the notes forming part of the accounts.
3. The company based its view on para 15 of the Accounting Standard (AS) 4, which reads as under:
“15. Assets and liabilities should not be adjusted for but disclosure should be made in the report of the approving authority of events occurring after the balance sheet date that represent material changes and commitments affecting the financial position of the enterprise.”
4. The auditors did not agree with the views of the company and commented that the profits of the company were over-stated by the amount of liability pertaining to the year 1989-90.
5.The querist has sought the opinion of the Expert Advisory Committee, on whether adjustment of the liability in the accounts of 1989-90 was necessary or a disclosure in the accounts is adequate.
Opinion May 29, 1991
1. The Committee notes paras 8.1, 8.2, 8.3 and 13 of Accounting Standard (AS) 4 on ‘Contingencies and Events Occurring After the Balance Sheet Date’, which are reproduced below:
“8.1 Events which occur between the balance sheet date and the date on which the financial statements are approved, may indicate the need for adjustments to assets and liabilities as at the balance sheet date or may require disclosure.
8.2 Adjustments to assets and liabilities are required for significant events occurring after the balance sheet date that provide additional information materially affecting the determination of the amounts relating to conditions existing at the balance sheet date. For example, an adjustment may be made for a loss on a trade receivable account which is confirmed by the insolvency of a customer which occurs after the balance sheet date.
8.3 Adjustment to assets and liabilities are not appropriate for events occurring after the balance sheet date, if such events do not relate to conditions existing at the balance sheet date. An example is the decline in market value of investments between the balance sheet date and the date on which the financial statements are approved. Ordinary fluctuations in market values do not normally relate to the condition of the investments at the balance sheet date, but reflect circumstances which have occurred in the following period. However, disclosure is generally made of events in subsequent periods that represent unusual changes affecting the existence or substratum of the enterprise at the balance sheet date; for example, the destruction of a major production plant by a fire after the balance sheet date.
13. Assets and liabilities should be adjusted for events occurring after the balance sheet that provide additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date.”
2. The Committee notes from the above that adjustments to assets and liabilities should be made, if such events relate to conditions existing on the balance sheet date. From the facts of the query, the Committee feels that the company was aware, on the balance sheet date, that the revision of wages was probable as it had sent proposals in respect thereof although the final amount was subject to approval of the Government and settlement with its workers. Thus, conditions about the wage revision existed on the balance sheet date.
3. The Committee notes that para 15 of AS 4, quoted by the querist in para 3 of the query, deals with a situation where the events occurring after the balance sheet date do not relate to conditions existing at the balance sheet date.
4.The Committee is, accordingly, of the opinion that the liability arising from wage revision should be adjusted in the accounts of 1989-90.
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