In: Accounting
DIFFERENTIATE THE FOLLOWING ITEMS WITH REFERENCE TO EXISTING AS & IND-AS:
1) EXTRAORDINARY ITEMS
2) CONTINGENCIES
(ANSWER IN 500 WORDS)
Answer-:
1.) As per AS-5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies.
Extraordinary items consisted of gains or losses from events that were unusual and infrequent in nature that were separately classified, presented, and disclosed on companies' financial statements. Extraordinary items were usually explained further in the notes to the financial statements. Companies showed an extraordinary item separately from their operating earnings because it was typically a one-time gain or loss and was not expected to recur in the future.
Before 2015, companies put a lot of effort into determining if a particular event should be deemed extraordinary. Gains and losses net of taxes from extraordinary items had to be shown separately on the income statement after income from continuing operations.
An event or transaction was deemed extraordinary if it was both unusual and infrequent. An unusual event must be highly abnormal and unrelated to the typical operating activities of a company, and it should be reasonably expected not to recur going forward. It was common for some businesses to not have this line item presented for years.
Profit or loss from extraordinary activities is such which do not arise under the normal course of business. These activities do not occur regularly. Example: – Profit on sale of fixed assets, Loss due to theft.
The transactions and results under this category are to be disclosed separately in financial statements. The disclosure should be in a manner which clearly shows the effect on overall profits/losses due to these activities.
2.) As per AS-4, Contingencies and Events Occurring After the Balance Sheet Date.
Contingencies are situations or conditions, the eventual outcome of which, profit or loss, would be determined or known only on happening, or non- happening, of an uncertain future event(s).
For a contingent loss, the accounting treatment is determined by likely outcome of such contingency. In case it’s likely that such contingency would result in the loss of the business, then it’s prudent to account for such loss in the enterprise’s financial statements.
In case there is insufficient or conflicting evidence for assessing the value of the contingent loss, then the disclosure in financial statements is provided for the nature and existence of the contingency. Obligations which might arise from the discounted bills of exchange and such similar obligations which are undertaken by the enterprise are usually disclosed in the financial statements by way of notes, even if the possibility of loss is remote.
A Contingent gain isn’t recognized in the financial statements as
their recognition could result in recognition of revenue that might
never be realized. When the realization of gain is certain and not
contingent anymore, the gain can be accounted in the books of
accounts.
Determination of the amount of contingencies-:
The value at which contingencies are stated in financial statements
depends on the information that is available on a date when the
financial statements are considered and approved.
Events which occurs after balance sheet date which suggest that the asset might have been impaired, or a liability might have existed, at balance sheet date are, hence, taken into consideration in recognizing the contingencies and determining the value at which the contingencies are included in the financial statements.
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