Download Quick Reference on Accounting Standard (AS) 29 Provisions Contingent Liabilities and Contingent Assets
The objective of AS 29 is to ensure that appropriate recognition criteria and measurement bases are applied to provisions and contingent liabilities and that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and amount. The objective of this Standard is also to lay down appropriate accounting for contingent assets.
AS 29 prescribes accounting for provisions and contingent liabilities and in dealing with contingent assets, except:
- those resulting from financial instruments that are carried at fair value
- those resulting from executory contracts, except where the contract is onerous
- those covered by another AS
- those arising in insurance enterprises from contracts with policy holders
Provision is a liability which can be measured only by using substantial degree of estimation.
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.
Contingent Liability is
- a possible obligation arising 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
- a present obligation that arises from past events but is not recognised because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or a reliable estimate of the amount of obligation cannot be made.
Contingent Asset is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the enterprise.
Present obligation– An obligation is a present obligation if, based on the evidence available, its existence at the balance sheet date is considered probable, i.e., more likely than not.
An obligation is a possible obligation if, based on the evidence available, its existence at the balance sheet date is considered not probable.
Provisions -Recognition, Measurement and Review
A provision should be recognised when:
a) Enterprise has a present obligation as a result of a past event
b) It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation
c) Reliable estimate can be made of the amount of the obligation.
Best estimate of the expenditure required to settle the present obligation at the Balance Sheet date
Other factors for consideration
a) Risks and uncertainties should be considered.
b) Future events should be considered when there is sufficient objective evidence that they will occur
c) No discounting except in the case of decommissioning, restoration and similar liabilities that are recognised as cost of PPE
d) Gains from expected disposal of assets should not be considered.
e) Reimbursements by another party should be considered if it is virtually certain that reimbursement will be received if the enterprise settles the obligation
f) The reimbursement should be treated as a separate asset.
g) Amount recognised for the reimbursement should not exceed the amount of provision
h) In the Statement of Profit and Loss, the expense relating to a provision may be presented as net of the amount recognised for reimbursement.
Reviewed at each balance sheet date and adjusted to reflect the current best estimate.
Reversed, if appropriate.
Contingent Liabilities – Recognition and Review
Not to be recognised.
Only disclosure is required, unless the possibility o an outflow of resources embodying economic benefits is remote.
Assessed continually to determine whether an outflow of resources embodying economic benefits has become probable. If it becomes probable, contingent liability is recognised as provision.
Contingent Assets – Recognition and Review
Not to be recognised.
Disclosure is usually made in the report of the approving authority when an inflow of economic benefits is probable and not in the financial statements.
Assessed continually and if it has become virtually certain that an inflow of economic benefits will arise, the asset and the related income are recognised.