Provisions, Contingent liabilities and contingent assets (Ind AS 37) Scope, provision, Liability, Obligating event, Legal obligation, Constructive obligation, Contingent liability, Contingent asset

Objective To prescribe accounting for: i. Provision ii. Contingent liabilities iii. Contingent Assets iv. Provision for restructuring cost III. Scope This standard shall may be used all entities in accounting for: i. Provisions ii. Contingent liabilities iii. Contingent Assets. Except for those covered by specific other standards like

1. Ind AS -12 Income Taxes
2. Ind AS 116-Leases
3. IndAS -19 Employee Benefits
4. IndAS -104 Insurance Contracts
5. IndAS-103 Business Combinations
6. Revenue from contracts with customers –Ind AS 115
7. Ind AS-19 Financial Instruments

Factors affecting Measurement of Provisions

1. Measured at Best Estimate of the expenditure required to settle the present legal or constructive obligation as a result of past obligating event.
2. Management should really incorporate all available information in their estimates and they must not forget about
3. Risks and uncertainties
4. Time value of money

Some probable future events

Obligating event

• A present obligation (legal or constructive) has arisen as a result of a past event (the obligating event),
• Payment is probable (‘more likely than not’), and
• The amount can be estimated reliably.

An obligating event is an event that creates a legal or constructive obligation and, therefore, results in an entity having no realistic alternative but to settle the obligation.

A constructive obligation arises if past practice creates a valid expectation on the part of a third party, for example, a retail store that has a long-standing policy of allowing customers to return merchandise within, say, a 30-day period.

A possible obligation (a contingent liability) is disclosed but not accrued. However, disclosure is not required if payment is remote.

In rare cases, for example in a lawsuit, it may not be clear whether an entity has a present obligation. In those cases, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists at the balance sheet date. A provision should be recognised for that present obligation if the other recognition criteria described above are met. If it is more likely than not that no present obligation exists, the entity should disclose a contingent liability, unless the possibility of an outflow of resources is remote.

Legal obligation

Legal Obligation is also referred to as the legal duty. Legal Obligation is generated through the contract or law. Also, it requires an individual to conform their actions to a specific standard.

A provision is recognised as contamination occurs for any legal obligations of clean up, or for constructive obligations if the company’s published policy is to clean up even if there is no legal requirement to do so (past event is the contamination and public expectation created by the company’s policy).

Constructive obligation

A provision is a liability of uncertain timing or amount. The liability may be a legal obligation or a constructive obligation. A constructive obligation arises from the entity’s actions, through which it has indicated to others that it will accept certain responsibilities, and as a result has created an expectation that it will discharge those responsibilities. Examples of provisions may include: warranty obligations; legal or constructive obligations to clean up contaminated land or restore facilities; and obligations caused by a retailer’s policy to make refunds to customers.

An entity recognises a provision if it is probable that an outflow of cash or other economic resources will be required to settle the provision. If an outflow is not probable, the item is treated as a contingent liability.

A provision is measured at the amount that the entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time. Risks and uncertainties are taken into account in measuring a provision. A provision is discounted to its present value.

Contingent Liability

No need to recognize it. Whereas, the entity should disclose in the financial statements.

A contingent Liability is

1. Possible obligation that arises from past events and whose 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 entity.
2. A present obligation that arises from past events but is not recognized because:
3. it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation.
4. the amount of the obligation cannot be measured with sufficient reliability.

Contingent Asset

No need to recognize it. Whereas, the entity should disclose in the financial statements.

Contingent Asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of entity.