016 While preparing its final accounts for the year ended 31st March, 2013 a company made a provision for bad debts @5% of its total debtors. In the last week of February, 2013 a debtor for 2 lakhs had suffered heavy loss due to an earthquake; the loss was not covered by any insurance policy. In April, 2013 the debtor became a bankrupt. Can the company provide for the full loss arising out of insolvency of the debtor in the final accounts for the year ended 31st March, 2013 Solution As per paras 8.2 and 13 of Accounting Standard 4 on Contingencies and Events Occurring after the Balance Sheet Date, Assets and Liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist estimation of amounts relating to conditions existing at the balance sheet date. So full provision for bad debt amounting to 2 lakhs should be made to cover the loss arising due to the insolvency in the Final Accounts for the year ended 31st March, 2013. It is because earthquake took place before the balance sheet date. Had the earthquake taken place after 31" March, 2013, then mere disclosure required as per para 15, would have been sufficient, Illustration 40 At the end of the financial year ending on 31st December, 2013, a company finds that there are twenty law suits outstanding which have not been settled till the date of approval of accounts by the Board of Directors. The possible outcome as estimated by the Board is as follows: Such events, however, are disclosed in the financial statements instead of report of directors as per Exposure Draft on Limited Revision to AS 4. However, it is pertinent to note that this Limited Revision has not yet been notified by the Govt Probability Loss (*) In respect of live cases (Win) 100% Next ten cases (Win) 60% Lose (Low damages) 30% 1,20,000 Lose (High damages) 10% 2,00,000 Remaining five cases Win 50% Lose (Low damages) 30% 1,00,000 Lose (High damages) 20% 2. 10,000 Outcome of each case is to be taken as a separate entity. Ascertain the amount of contingent loss and the accounting treatment in respect thereof