IND AS 37 : PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
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IND AS 37 : PROVISIONS, CONTINGENT LIABILITIES
AND CONTINGENT ASSETS
(I) Key Terms:
1. Liability: A Liability is a present obligation arising from past events, the
settlement of which is expected to result in an outflow of resources.
2. Obligating Event: It is an event that created legal / constructive obligations
for which the entity has no realistic alternative but to settle.
OBLIGATION
LEGAL CONSTRUCTIVE
Law Past practises Give rise to
Contract
Or expectations
Published in minds
policies / of affected
statement parties
3. Contingent Liability: A possible obligation that may arise from past events
whose existence can be confirmed by some future events which are not within
the control of the entity. For e.g.: Law suits
4. Contingent Asset: A possible asset whose existence can be confirmed by the
occurrence of one or more uncertain future events which are not within the
control of the entity.
(Refer Q. no. 1, 2)
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IND AS 37 : PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
(II) Contingencies
ACCOUNTING FOR
CONTINGENCIES
Contingent
Contingent Assets
Liabilities
Virtually
Probable Uncertain Remote Probable Uncertain
Certain
(> 50%) (5% - 50%) (< 5%) [51% - 95%] [< 50%]
[> 95%]
Create Disclose in Disclose in
Ignored Record Asset Ignored
Provision Notes Notes
Note 1
Probable – More likely than Not i.e. > 50% chance of the obligation / asset arising.
Note 2
Virtual Certainty
This is factual confirmation from formal sources. Opinions given by advisors or
confirmation from informal sources do not lead to virtual certainty. Virtual certainty
goes beyond doubt and hence requires formal supporting evidence.
Note 3
In case additional information is obtained during the post Balance Sheet Period, it
would be treated as adjusting event in case the possible obligation already existed
on the Balance Sheet Date. In case of a Contingent Asset, it will help in appropriate
measurement of the Disclosure amount as on the Balance Sheet Date.
In case of a Contingent Asset, where Virtual Certainty arises in the Post Balance
Sheet period, we can record the Asset in the Next year only and we cannot assume
that virtual certainty existed on the Balance Sheet Date.
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IND AS 37 : PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
Note 4
Reimbursement Asset:
When an expenditure has been agreed to be reimbursed, only the net of reimbursement
expense in treated as an expense and a reimbursement asset (Receivable) is
recorded for the amount agreed to be reimbursed. Reimbursement asset can be
recorded if it is virtually certain that the reimbursement commitments would be
honoured. (For eg : Reimbursement agreement with clients for travelling expenses
in the course of audit)
Reimbursement contracts are different from insurance contracts as insurance
contracts are indemnification contracts. Therefore, in case of a loss followed by an
insurance claim, we should first recognize the loss and the separately recognize
the insurance claim receivable when it is virtually certain. We are not permitted to
record the net of insurance loss directly.
(Refer Q. no. 3, 4, 5)
(III) Provisions
MEASUREMENT OF PROVISIONS
Expected Gain on
Best Estimate Risk &
Present Value Sale of Assets /
Basis Uncertainty
Goods
In case a range All provisions Can be adjusted by
of probabilities should be adding a risk premium Should be ignored
are given, the discounted of / safety margin / buffer. at the time of
probability based the effect of time (only if specifically making provisions.
weighted Average is material i.e. given in the question)
can be taken. if payment is
Provision should be expected to be
measured on a pre- made on / after 12
tax basis months
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IND AS 37 : PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
KEY POINTS
a. Provision should be reviewed at the end of each year in order to reflect the
current best estimates.
b. Whenever discounting is used, the carrying amounts of provisions increase in
each year to reflect the passage of time. This cost is considered as Finance Cost
/ Borrowing Cost (Unwinding of Discount)
c. In extremely rare cases, it may not be possible to measure the amount of
provision due to lack of reliable information. In such a case, a disclosure should
be given for the liability along with the reasons for the inability to measure the
same.
(Refer Q. no. 6, 7, 8, 9, 10, 11, 12, 13, 14, 22)
(IV) Onerous Contracts
It is a contract in which the unavoidable cost of fulfilling / cancelling the contract exceeds
the expected profits to be received under the contract. As per IND AS 37, provision for
losses should be made as soon as the contract becomes onerous. The provision should
be made at the lower of:
a. Net cost of fulfilling / continuing the contract xx
OR
b. Penalties / Compensation arising from termination of contract. xx
KEY POINTS
1. The provision for losses as above is required only if losses can be attributed
to a particular contract. No provisions are required for general expected future
operation losses.
Example: Start up.
2. An onerous contract is a prima facie indicator of impairment on the assets
dedicated to the onerous contract (if any) Eg : A loss making contract under old
AS 7 (construction contracts) where an immediate provision was required is an
example of onerous contracts.
(Refer Q. no. 15, 16)
(V) Provisions for Restructuring
Restructuring refers to the closure / sale / termination of a line business or closure of a
geographical region / location of operation. A provision for restructuring should be created
for all directly attributable expenses as soon as the obligation to restructure arises.
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IND AS 37 : PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
PROVISION FOR RESTRUCTURING
Timing Measurement
Obligation to
restructure arises Includes: Direct Excludes: Indirect
Expenses Linked to Exp which are linked
Closure to continuance and
not closure
Legal E.g.:
Constructive
Court order
(i) Legal Fees (i) Relocation /
(ii) Banker’s Retraining
Fees (ii) Cost of
Detailed Formal AND
(iii) Termination making new
Plan Approved Give Rise To Benefits to
[Identifying Expectations IT / Marketing
Employees systems.
location, Asset, in Minds of
Employees etc Affected Parties (iii) Expected
Affected] Future
Operating
Losses
OR
Implementation
Communication
Starts.
to Affected
Eg: Dismantling
Parties
Starts
(Refer Q. no. 17, 18, 19, 20, 21)
APPENDIX ON LEVIES
Levies refer to charges levied by the government on an entity (Eg: Electricity Companies).
The levy should be accounted as and when they incurred i.e. if a levy is linked to the
revenue earned by the entity, it should be recorded as and when the entity earns the
revenue. In case there is a threshold after which levies are charged, then they should be
recorded only after the revenue crosses the threshold.
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