Accounting Standard as 29 Provisions Contingent Liabilities Contingent Assets

8/11/2019 Accounting Standard as 29 Provisions Contingent Liabilities Contingent Assets

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Accounting standard no

Provisions, contingent,

assets

Vinod Kothari. .1012 Krishna224 AJC Bose RoadKolkata - 700 017. IndiaE-mail: [email protected] 91-33-22817715/ 228113742/22811276

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This Presentation is theproperty ofVinod Kothari and nopart of it can be copied,

distributed in anymanner.


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Comparative international standards

and hi hli hts IAS 37 Deals with

Distinction between liabilities, provisions and contingent liabilities When to make provision for a liability, when to book a con tingent liability, when to take no

action at all Gives several illustrations of si tuations about provisioning, contingent liability recognition

Significant differences between IAS 37 and the present form of the AS or u ure a es, no presen va ua on s requ re un er Required under IAS 37

5/27/2010 Free template from www.brainybetty.com 3


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Scope Those resulting from financial instruments carried at fair value

Original text of the AS said, the AS applies to liabili ties arising out of financialinstruments too

,

Hence, this s tandard does NOT now apply to financial instruments Some guarantees are covered by AS 30

The statement does not apply to such guarantees too e s an ar oes no app y o a es un er execu ory con rac s

Meaning of executory cont ract performance pending on the part of a party to acontract for example, obligation of a landlord to maintain a building

That is , pending performance under a contract does not come as a liability or

However, in case of onerous executory con tracts, provis ion may be required Onerous executory contract is one which exposes one party to a clear liability

Does not apply to Liabil it of insurers under insurance contracts Liabilities dealt with by other standards

For example construction con tracts Tax provisions Retirement benefits, etc



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Important definitions Provision a liability that can be measured using a substantial

degree of estimation Liabil it - resent obli at ion for ast events, ex ected to result

into an outflow Contingent liability

Possible obligation from past events, existence of which will be

within the control of the enterprise Present obl igation f rom past events, not recognised as liability

because Reliable estimate of the amount of obligation cannot be made

Contingent asset Possible asset that arises from past events, existence of which will be

within the control of the enterprise Present versus probable

More likely than not it is present



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Distinction between liabilities,

rovisions and contin ent liabilit Liability is l iabili ty to make future payments

For goods/services already received or obligations already

Or accruals whole or part of the expense pertains to thecurrent period

the liability is not an existing l iability Substantial Degree of estimation is required

ere egree o es ma on requ re s ess, we crea e a a y Contingent

Things are to happen in future whereby a liability may arise It is condit ional, contingent upon such things happening or not

happening Hence the liability is notrecognised as such



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Recognition

rovision should be made with these THREE condit ions aresatisfied Entity has a present obligation as a result of past event

Obligation is present - that is, more likely than not per a ns o or ar ses ou o a pas even , no ou o an even o appen n

future It is probable that an outflow will take place to settle the obligation A reliable estimate can be made of the obligation

Note the difference between liability and provision discussedearlier

The degree of estimation required If the amount of li abili ty i s almost ascertainable and does not require

significant estimation, we create a liabili ty If estimation required is significant, we make a provision If reliable estimate cannot be made, or other condit ions for provisioning are

not satisfied, we create a contingent liability



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Evidence required for provisioning

Provisions are based on an estimated liabilityfor events that have already happened, that is,

obligating event The probability of incurrence of such

Evidence may include evidence available after thebalance sheet date

That is to say, provision may be created on thebalance sheet date

, ,balance sheet date

Though the evidence of such obligation arises after balancesheet date



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Obligating event Obligating events that exist on the balance

sheet date only lead to provisions

We cannot be looking at what expenditure will haveto be incurred in future: only to the extent of

Second condition is the obligating eventpertains to things that have happened

For example, penalty for infraction of a law that hashappened

,to identify the counterparty, that is therecipient



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Contingent liabilities and contingent

assets Contingent liabilit ies are not recognised

They are only disclosed When the liability satisfies the features to create

a provision, or becomes a certain liability, it is

recognised as such Contingent assets are neither recognised nor

disclosed



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Estimation of liability to make

rovision Estimation is done applying best estimate

Gains from future disposal of assets are notcaptured in estimating the amount of thea ty

Reimbursements from third parties are notncorpora e un ess s reasona y cer a n oreceipt

A provision should be used only for the



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Restructuring provision Meaning of restructuring

Sale or termination of a line of business

Closure of business locations Management restructuring, e.g., Eliminating a layer

Fundamental reorganisations having material impacton nature or focus of the enterprise

If the entity announces restructuring,restructuring provision should be made if

Not associated with the ongoing activities of the

enterprise



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START

Present obligation Possibleas a result of an

obligating event? obligation?

o

Y e

Y e

Possible Outflow? Remote?

s

No

s

Yes

es

R N

Y e

are

o


Do NothingProvideDisclose contingent

Liabilities

Accounting Standard as 29 Provisions Contingent Liabilities Contingent Assets

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