TREATMENT OF PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS WHILE PREPARING FINANCIAL STATEMENTS AS PER AS, IND AS AND IFRS (LATEST)

Assistant Professor of Commerce.

The relevant Accounting Standards relating to PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS are the following:-

a. INDAS 37

b. IAS 37

c. AS 29

There is no major difference between INDAS 37and IAS 37.Therefore, the following descriptions relate to both INDAS 37and IAS 37.

Statements of Profit and loss and other Comprehensive income, Statement of changes in Equity and Statement of Financial position are the new names of Financial Statements as per IND AS and IAS.

1. Objective

To prescribe accounting for:

i. Provission

ii. Contingent liabilities

iii. Contingent Assets

2. 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

a. IND AS -12 Income Taxes

b. IND AS 116-Leases

c. INDAS -19 Employee Benefits

d. INDAS -104 Insurance Contracts

e. INDAS-103 Business Combinations

f. Revenue from contracts with customers –INDAS 115

3. Recognition of Provisions.

If Yes is the answer to the following questions, then you may make provisions

a. Whether a confirmed present legal or constructive obligation as a result of past obligating event?

b. Whether Settlement of liability should result in an outflow from entity of resources?

c. Whether reliable estimate can be made of the obligation?

4. Factors affecting Measurement of Provisions

A. Measured at Best Estimate of the expenditure required to settle the present legal or constructive obligation as a result of past obligating event.

B. Time value of Money.

5. Change and use of Provisions.

    Provisions to be reviewed at the end of every reporting period.

6. Provisions in the following cases

A. Future Operating losses—-No Provision is needed.

B. Onerous Contracts.

It’s a contract entered into with another party under which the unavoidable costs of fulfilling the terms of contract exceed any revenues to be received from goods or services supplied or purchased directly or indirectly under the contract and the entity would have to compensate the other party if it did not fulfil the terms of contract. Provision is needed.

C. Provision for Restructuring cost.

Restructuring affects the scope of a business and the manner in which that business is conducted. Therefore, Restructuring provisions are permitted.

Costs to be included in restructuring provision

    Only direct expenditure arising from restructuring to be included

     They must be

– Necessarily entailed by the restructuring and.

– Should not be associated with ongoing activities.

   Following costs should not be included.

– Retraining or relocating continuing staff.

– Marketing.

– Investment in new systems & distribution network.

7. Contingent liability

No need to recognize it.

Whereas, the entity should disclose in the financial statements

If No is the answer to the following questions, then you may call it a Contingent Liability

a. Whether any confirmed present legal or constructive obligation as a result of past obligating event?

b. Whether there is any probability that Settlement of liability should result in an outflow from entity of resources?

c. Whether reliable estimate can be made of the obligation?.

8. Contingent Asset

No need to recognize it.

Whereas, the entity should disclose in the financial statements

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.

9. Accounting treatment of provision.

Provision –as an expense in Statement of Profit or loss.

Amount of provision outstanding-As a liability in the Statement of Financial position.

10. Difference Between AS29  and INDAS 37

AS 29 INDAS 37
1.Only legal Obligation 1.Both legal and constructive obligation
2.Discounting is not required 2.Discounting is required
3.No Contingent Assets 3.Contingent Assets should be disclosed.

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