Accounting Standard

(AS) 29
Provisions, Contingent
Liabilities and Contingent
Assets

Scope
1. This Standard should be applied in accounting for provisions and
contingent liabilities and in dealing with contingent assets,
except:
Resulting from financial instruments that are carried at fair
value;
Resulting from executory contracts, except where the
contract is onerous
Arising in insurance enterprises from contracts with
policyholders; and
Covered by another Accounting Standard. 2. This Standard
applies to financial instruments (including guarantees) that
are not carried at fair value, Executory contracts
2. This Standard applies to provisions, contingent liabilities and
contingent assets of insurance enterprises other than those
arising from contracts with policy-holders.
3. Where another Accounting Standard deals with a specific type of
provision, contingent liability or contingent asset, an enterprise
applies that Standard instead of this Standard. For example, (a)
construction contracts; (b) taxes on income; (c) leases, and (d)
retirement benefits

Scope (cont.)
4. This Standard defines provisions as liabilities which can be measured
only by using a substantial degree of estimation. The term provision
is also used in the context of items such as depreciation, impairment
of assets and doubtful debts: these are adjustments to the carrying
amounts of assets and are not addressed in this Standard.
5. Other Accounting Standards specify whether expenditures are treated
as assets or as expenses. These issues are not addressed in this
Standard. Accordingly, this Standard neither prohibits nor requires
capitalisation of the costs recognised when a provision is made.
6. This Standard applies to provisions for restructuring (including
discontinuing operations). Where a restructuring meets the definition
of a discontinuing operation, additional disclosures are required by AS
24, Discontinuing Operations.

Definitions
A provision is a liability which can be measured only by using a
substantial degree of estimation.
A liability is a present obligation of the enterprise arising
from past events, the settlement of which is expected to result in
an outflow from the enterprise of resources embodying economic
benefits
An obligating event is an event that creates an obligation that
results in an enterprise having no realistic alternative to settling
that obligation.
A contingent liability is: (a) a possible obligation that arises from
past events and the existence of which will be confirmed only by
the occurrence or non-occurrence of one or more uncertain future
events not wholly within the control of the enterprise; or (b) a
present obligation that arises from past events but is not
recognised because: (i) it is not probable that an outflow of
resources embodying economic benefits will be required to settle
the obligation; or (ii) a reliable estimate of the amount of the
obligation cannot be made.
A contingent asset is a possible asset that arises from past events
the existence of which will be confirmed only by the occurrence or

Definitions (cont.)
Present obligation - an obligation is a present obligation if,
based on the evidence available, its existence at the balance sheet
date is considered probable.
Possible obligation - an obligation is a possible obligation if,
based on the evidence available, its existence at the balance sheet
date is considered not probable.
Restructuring is a programme that is planned and controlled by
management, and materially changes either
The scope of a business undertaken by an enterprise; or
The manner in which that business is conducted
An obligation is a duty or responsibility to act or perform in a
certain way. Obligations may be legally enforceable as a
consequence of a binding contract or statutory requirement

Definitions (cont.)
Provisions can be distinguished from other liabilities - in the
measurement of provisions substantial degree of estimation is
involved
Trade payables are liabilities to pay for goods or services that
have been received or supplied and have been invoiced or
formally agreed with the supplier; and accruals are liabilities to
pay for goods or services that have been received or supplied
but have not been paid, invoiced or formally agreed with the
supplier, including amounts due to employees.
Contingent is used for liabilities and assets that are not
recognised because their existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future
events not wholly within the control of the enterprise.
Contingent liability is used for liabilities that do not meet
the recognition criteria.

Recognition

Provisions
A Provision should be recognized when:
1.

an enterprise has a present obligation as a result of a past

event

2.

it is probable that an outflow of resources embodying

economic benefits will be required to settle the obligation

3.

a reliable estimate can be made of the amount of the

obligation

If these conditions are not met, no provision should be

recognized.

Contingent Liabilities
An enterprise should not recognize a contingent
liability.
A contingent liability is disclosed, unless the possibility of
an outflow of resources embodying economic benefits is
remote.
Where an enterprise is jointly and severally liable for an
obligation, the part of the obligation that is expected to be met
by other parties is treated as a contingent liability.
Contingent liabilities may develop in a way not initially
expected. Therefore, they are assessed continually to
determine whether an outflow of resources embodying
economic benefits has become probable.

Contingent Assets
An enterprise should not recognize a contingent asset.
Contingent assets usually arise from unplanned or other
unexpected events that give rise to the possibility of an inflow of
economic benefits to the enterprise. An example is a claim that
an enterprise is pursuing through legal processes, where the
outcome is uncertain.
A contingent asset is not disclosed in the financial statements. It
is usually disclosed in the report of the approving authority (Board
of Directors in the case of a company, and, the corresponding
approving authority in the case of any other enterprise), where an
inflow of economic benefits is probable.
Contingent assets are assessed continually and if it has become
virtually certain that an inflow of economic benefits will arise, the
asset and the related income are recognized in the financial
statements of the period in which the change occurs.

Measurement

Best Estimate
The amount recognized as a provision should be the best
estimate of the expenditure required to settle the present
obligation at the balance sheet date. The amount of a provision
should not be discounted to its present value.
The estimates of outcome and financial effect are determined by
the judgment of the management of the enterprise,
supplemented by experience
of similar transactions and, in some cases, reports from
independent experts.
The evidence considered includes any additional evidence
provided by events
after the balance sheet date.
The provision is measured before tax; the tax consequences of
the provision, and changes in it, are dealt with under AS 22,
Accounting for Taxes on Income.

Risk and
Uncertainties
The risks and uncertainties that inevitably surround many events
and circumstances should be taken into account in reaching the
best estimate of a provision.

Future Events
Future events that may affect the amount required to
settle an obligation should be reflected in the amount
of a provision where there is sufficient objective evidence that
they will occur.
Expected future events may be particularly important in
measuring provisions. For example, an enterprise may believe
that the cost of cleaning up a site at the end of its life will be
reduced by future changes in technology.
The effect of possible new legislation is taken into
consideration in measuring an existing obligation when
sufficient objective evidence exists that the legislation is
virtually certain to be enacted.

Expected Disposal of
Assets

Gains from the expected disposal of assets should not

be taken into account in measuring a provision.
Gains on the expected disposal of assets are not
taken into account in measuring a provision, even if
the expected disposal is closely linked to the event
giving rise to the provision.
Instead, an enterprise recognizes gains on expected
disposals of assets at the time specified by the
Accounting Standard dealing with the assets
concerned.

Reimbursemen
tWhere some or all of the expenditure

required to
settle a provision is expected to be reimbursed by
another party, the reimbursement should be
recognized when, and only when, it is virtually
certain that reimbursement will be received if
the
enterprise
settles
the
obligation.
The
reimbursement should be treated as a separate
asset. The amount recognized for the reimbursement
should not exceed the amount of the provision.
In the statement of profit and loss, the expense
relating to a provision may be presented net of the
amount recognized for a reimbursement.

Changes in
Provisions should be reviewed at each balance sheet date and
Provision

adjusted to reflect the current best estimate. If it is no longer

probable that an outflow of resources embodying economic
benefits will be required to settle the obligation, the provision
should be reversed.

Use of
A
provision should be used only for expenditures for which the provision
Provisions
was originally recognized.

Application of the
Recognition and
Measurement Rules

Future Operating
Losses
Provisions should not be recognized for future operating losses.

Restructuring
The following are examples of events that may fall under the definition
of restructuring:
(a) sale or termination of a line of business;
(b) the closure of business locations in a country or region or the
relocation of business activities from one country or region to another
(c) changes in management structure, for example, eliminating a layer
of management
(d) fundamental re-organizations that have a material effect on the
nature and focus of the enterprises operations

Restructuring (cont.)
No obligation arises for the sale of an operation until the
enterprise is committed to the sale, i.e., there is a binding sale
agreement.
A restructuring provision should include only the direct
expenditures arising from the restructuring, which are those
that are both:
(a) necessarily entailed by the restructuring
(b) not associated with the ongoing activities of the enterprise
A restructuring provision does not include such costs as:
(a) retraining or relocating continuing staff
(b) marketing
(c) investment in new systems and distribution networks

Decision Tree

Disclosure
For each class of provision, an enterprise should disclose:
(a) the carrying amount at the beginning and end of the period; (b)
additional provisions; (c) amounts used; and (d) unused amounts
reversed
An enterprise should disclose the following for each class of
provision:
Brief description of the nature of the obligation and the
expected timing of any resulting outflows of economic benefits;
Indication of the uncertainties about those outflows. Where
necessary an enterprise should disclose the major assumptions
made concerning future events,
Amount of any expected reimbursement, stating the amount of
any asset that has been recognised for that expected
reimbursement.

Disclosure
An enterprise should disclose for each class of contingent
(cont.)
liability at the balance sheet date a brief description of the
nature of the contingent liability and, where practicable:
An estimate of its financial effect
An indication of the uncertainties relating to any outflow
The possibility of any reimbursement.
In determining which provisions or contingent liabilities may
be aggregated to form a class, it is necessary to consider
whether the nature of the items is sufficiently similar for a
single statement.
warranties of different products,
Not normal warranties and amounts that are subject to
legal proceedings
In extremely rare cases, disclosure of the information required
can be expected to prejudice seriously the position of the
enterprise in a dispute with other parties on the subject
matter of the provision or contingent liability.

Illustration
Warranties: A manufacturer gives warranties at the time of
sale to purchasers of its three product lines. Under the terms
of the warranty, the manufacturer undertakes to repair or
replace items that fail to perform satisfactorily for two years
from the date of sale. At the balance sheet date, a provision
of Rs. 60,000 has been recognised.

Disclosure
A provision of Rs. 60,000 has been recognised for expected
warranty claims on products sold during the last three
financial years. It is expected that the majority of this
expenditure will be incurred in the next financial year, and
all will be incurred within two years of the balance sheet
date.

Illustration
Disclosure Exemption: An enterprise is involved in a dispute
with a competitor, who is alleging that the enterprise has
infringed patents and is seeking damages of Rs. 1000 lakhs.
The enterprise recognises a provision for its best estimate of
the obligation, but discloses none of the information.

Disclosure
Litigation is in process against the company relating to a
dispute a competitor who alleges that the company has
infringed patents and is seeking damages of Rs. 1000 lakhs.
The information usually required by AS 29, Provisions,
Contingent Liabilities and Contingent Assets is not disclosed
on the grounds that it can be expected to prejudice the
interests of the company. The directors are of the opinion
that the claim can be successfully resisted by the company

Thank You

Present Obligation
In rare cases, if it is disputed whether certain events have occurred or
whether those events results in a present obligation, an enterprise
determines whether a present obligation exists at the balance sheet
date by taking account of all available evidence, including, for
example, the opinion of experts. The evidence considered includes
any additional evidence provided by events after the balance sheet
date. On the basis of such evidence:
1. where it is more likely than not that a present obligation exists at
the balance sheet date, the enterprise recognizes a provision (if
the recognition criteria are met)
2. where it is more likely that no present obligation exists at the
balance sheet date, the enterprise discloses a contingent liability,
unless the possibility of an outflow of resources embodying
economic benefits is remote

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Illustration Court
Case
After
a wedding in 2004-05, ten people died, possibly as a result of
food poisoning from products sold by the enterprise. Legal
proceedings are started seeking damages from the enterprise but it
disputes liability. Up to the date of approval of the financial
statements for the year 31 March 2005, the enterprises lawyers
advise that it is probable that the enterprise will not be found liable.
However, when the enterprise prepares the financial statements for
the year 31 March 2006, its lawyers advise that, owing to
developments in the case, it is probable that the enterprise will be
found liable.
(a) At 31 March 2005
Present obligation as a result of a past obligating event - On
the basis of
the evidence available when the financial statements were approved,
there is
no present obligation as a result of past events.
Conclusion - No provision is recognized (see definition of
present obligation
and paragraph 15). The matter is disclosed as a contingent liability

Illustration Court Case

(cont.)
(b)
At 31 March 2006
Present obligation as a result of a past obligating event - On
the basis of
the evidence available, there is a present obligation.
An outflow of resources embodying economic benefits in
settlement Probable.
Conclusion - A provision is recognized for the best estimate of
the amount
to settle the obligation.

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Past Event
A past event that leads to a present obligation is called an obligating
event. For an event to be an obligating event, it is necessary that the
enterprise has no realistic alternative to settling the obligation
created by the event.
Financial statements deal with the financial position of an enterprise
at the end of its reporting period and not its possible position in the
future. Therefore, no provision is recognized for costs that need to be
incurred to operate in the future.
It is only those obligations arising from past events existing
independently of an enterprises future actions (i.e. the future
conduct of its business) that are recognized as provisions. Examples
of such obligations are penalties or clean-up costs for unlawful
environmental damage.
An event that does not give rise to an obligation immediately may do
so at a later date, because of changes in the law. For example, when
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environmental damage is caused there may be no obligation
to
remedy the consequences. However, the causing of the damage will
become an obligating event when a new law requires the existing

Economic Benefits
For the purpose of this Standard, an outflow of resources or other
event is regarded as probable if the event is more likely than not to
occur. Where it is not probable that a
present obligation exists, an enterprise discloses a contingent
liability, unless the possibility of an outflow of resources embodying
economic benefits is remote.
Where there are a number of similar obligations (e.g. product
warranties or similar contracts) the probability that an outflow will be
required in settlement is determined by considering the class of
obligations as a whole. Although the likelihood of outflow for any one
item may be small, it may well be probable that some outflow of
resources will be needed to settle the class of obligations as a whole.

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Illustration
AWarranties
manufacturer gives warranties at the time of sale to purchasers of
its product. Under the terms of the contract for sale the manufacturer
undertakes to make good, by repair or replacement, manufacturing
defects that become apparent within three years from the date of
sale. On past experience, it is probable (i.e. more likely than not) that
there will be some claims under the warranties.
Present obligation as a result of a past obligating event - The
obligating event is the sale of the product with a warranty, which
gives rise to an obligation.
An outflow of resources embodying economic benefits in
settlement Probable for the warranties as a whole.
Conclusion - A provision is recognized for the best estimate of
the costs of

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making good under the warranty products sold before the balance

Reliable Estimate of the

Obligation
The
use of estimates is an essential part of

the preparation of

financial statements and does not undermine their reliability. This is

especially true in the case of provisions, which by their nature involve
a greater degree of estimation than most other items.
In the extremely rare case where no reliable estimate can be made, a
liability exists that cannot be recognized. That liability is disclosed as
a contingent liability.

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Illustration Single
Guarantee
During
2004-05, Enterprise A gives a guarantee of certain borrowings
of Enterprise B, whose financial condition at that time is sound.
During 2005-06, the financial condition of Enterprise B deteriorates
and at 30 September 2005 Enterprise B goes into liquidation.
(a) At 31 March 2005
Present obligation as a result of a past obligating event - The
obligating event is the giving of the guarantee, which gives rise to an
obligation.
An outflow of resources embodying economic benefits in
settlement No outflow of benefits is probable at 31 March 2005.
Conclusion - No provision is recognized. The guarantee is disclosed
as a contingent liability unless the probability of any outflow is
regarded as remote.
(b) At 31 March 2006
Present obligation as a result of a past obligating event - The
obligating event is the giving of the guarantee, which gives rise to a
legal obligation.
An outflow of resources embodying economic benefits in Back
settlement At 31 March 2006, it is probable that an outflow of
resources embodying economic benefits will be required to settle the