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  Date:22^nd February 2010

 Compiled by: M Sathya Kumar  

Post balance-sheet events

A significant alteration in the revised Accounting Standard 4 is that dividend proposed or declared after the reporting period cannot be recognized as a liability in the financial statements.

While the number of companies that declare their financial results within months of the financial year-end is on the rise, there still remain a few that publish their audited numbers when they are legally bound to.

A couple of bad quarters and events that occur after the financial year-end could materially affect the results of an entity and the shareholder feels entitled to know in these days of RTI and instant information.

Accounting Standard 4 (AS-4) issued by the Institute of Chartered Accountants of India (ICAI) has been revised and deals with ‘Events after the Reporting Period'.

Revised AS-4

In the revised Exposure Draft AS-4, the term ‘Events after the reporting period' has been defined as those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue; date of authorisation has been adequately explained through examples.

Whereas, the existing AS-4 does not use the term ‘authorised for issue' and defines the events occurring after the balance-sheet date as those significant events, both favourable and unfavourable, 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.

Also, material non-adjusting events are required to be disclosed in the financial statements, whereas the existing AS-4 requires the same to be disclosed in the report of the approving authority. A significant alteration in the revised AS-4 is that dividend proposed or declared after the reporting period cannot be recognised as a liability in the financial statements because it does not meet the criteria of a present obligation as per AS-29.

Such dividend is required to be disclosed in the notes in the financial statements as per AS-1, whereas as per the existing AS-4 the same is required to be adjusted in financial statements because of the requirements prescribed in the Schedule VI to the Companies Act, 1956.

Also, if after the reporting date, it is determined that the fundamental accounting assumption of going concern is no longer appropriate, the exposure draft of AS-4 requires a fundamental change in the basis of accounting.

Whereas existing AS-4 requires assets and liabilities to be adjusted for events occurring after the balance-sheet date that indicate that the fundamental accounting assumption of going concern is not appropriate.

The Exposure Draft also requires certain additional disclosures as compared to existing AS-4, such as the date when the financial statements were authorised for issue and who gave that authorisation. If the entity's owners or others have the power to amend the financial statements after issue, that fact is also required to be disclosed. The ED also gives guidance on accounting for non-cash distributions to owners. The revised AS-4 matches IFRS standards in terms of both content and disclosures.

US GAAP

It is significant that even US GAAP has issued updates on ‘Subsequent Events – Topic 855-10' to state that an entity that files or furnishes financial statements with the Securities and Exchange Commission (SEC) would be required to evaluate subsequent events through the date the financial statements were issued.

It is becoming apparent that regulators globally are attempting to ensure that they converge on accounting standards although the debate on whether the US should move to IFRS by removing the still-existing differences has not ended yet. The ICAI is committed to transition by next year — one could see a lot of activity once the roadmap is announced.

Article by Mr. Mohan R Lavi

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