Treatment of Provisions, Contingent Liabilities and Contingent Assets while preparing financial statements as per as, Ind AS and IFRS by incorporating Changes as per Companies (Indian Accounting Standards) Amendments Rules 2021.
The relevant Accounting Standards relating to PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS are the following:-
a. Ind AS 37
b. IAS 37
c. AS 29
I. Following are the important differences between Ind AS 37 and IAS 37
|
Ind AS 37 |
IAS 37 |
| 1.Relevant terms are Statement of profit and loss and balance sheet | 1.Relevant terms are Statement of Comprehensive Income and Statement of Financial Position |
II. 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
a. Ind AS -12 Income Taxes
b. Ind AS 116-Leases
c. Ind AS -19 Employee Benefits
d. Ind AS -104 Insurance Contracts
e. Ind AS-103 Business Combinations
f. Revenue from contracts with customers –Ind AS 115
g. Ind AS-19 Financial Instruments
IV. Recognition of Provisions.
If Yes is the answer to all the following questions, then you have to make provisions
a. Whether a confirmed present legal or constructive obligation as a result of past obligating event?
b. Whether it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation?
c. Whether reliable estimate can be made of the obligation?
V. 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. Management should really incorporate all available information in their estimates and they must not forget about
I. Risks and uncertainties
II. Time value of money
III. Some probable future events
VI Change and use of Provisions.
Provisions to be reviewed at the end of every reporting period.
VII. 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.
VIII. Contingent liability
No need to recognize it.
Whereas, the entity should disclose in the financial statements
A contingent Liability is
a 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; or
b. a present obligation that arises from past events but is not recognized because :
i. it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
ii. the amount of the obligation cannot be measured with sufficient reliability .
IX. 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.
X. 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.
XI. MCA Notification on 24/7/2020
Consequential of the above amendments have been notified, and a paragraph below on accounting of restructuring plans have been substituted.
A management or board decision to restructure taken before the end of the reporting period does not give rise to a constructive obligation at the end of the reporting period unless the entity has, before the end of the reporting period-
- a) started to implement the restructuring plan; or
- b) announced the main features of the restructuring plan to those affected by it in a sufficiently specific manner to raise a valid expectation in them that the entity will carry out the restructuring
XII MCA Notification as on 18/06/2021
Following changes have been made in the Ind AS 37 as per the above notification.
In “Indian Accounting Standard (Ind AS) 37”, in paragraph 10, in the definition of the term “liability”, after the word “liability”, the symbol “*”with corresponding following footnote shall be inserted, namely:-
- “*The definition of a liability in this Standard is not revised following the revision of the definition of a liability in the Conceptual Framework for Financial Reporting under Indian Accounting Standards issued in 2021 by the Institute of Chartered Accountants of India.”;
XIII. Companies (Indian Accounting Standards) Amendment Rules 2022
Indian Accounting Standard (Ind AS) 37, –
(i) after paragraph 68, the following shall be inserted, namely:- ―68A The cost of fulfilling a contract comprises the costs that relate directly to the contract. Costs that relate directly to a contract consist of both- (a) the incremental costs of fulfilling that contract—for example, direct labour and materials; and (b) an allocation of other costs that relate directly to fulfilling contracts— for example, an allocation of the depreciation charge for an item of property, plant and equipment used in fulfilling that contract among others.;
(ii) for paragraph 69, the following shall be substituted, namely:- ―69 Before a separate provision for an onerous contract is established, an entity recognises any impairment loss that has occurred on assets used in fulfilling the contract (see Ind AS 36).;
(iii) after paragraph 94, the following shall be inserted, namely:- ―94A Onerous Contracts—Cost of Fulfilling a Contract, added paragraph 68A and amended paragraph 69. An entity shall apply those amendments to contracts for which it has not yet fulfilled all its obligations at the beginning of the annual reporting period in which it first applies the amendments (the date of initial application). The entity shall not restate comparative information. Instead, the entity shall recognise the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings or other component of equity, as appropriate, at the date of initial application.;
(iv) after paragraph 104, the following shall be inserted, namely:- ―105 Onerous Contracts—Cost of Fulfilling a Contract, added paragraphs 68A and 94A and amended paragraph 69. An entity shall apply those amendments for annual reporting periods beginning on or after 1st April, 2022.
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