The document discusses provisions, contingent liabilities, and contingent assets under Ind AS 37. It defines key terms and outlines the recognition criteria, measurement, and disclosure requirements for provisions, contingent liabilities, and contingent assets as per the accounting standard. Specifically, it states that a provision should be recognized if there is a present obligation from a past event, an outflow is probable, and a reliable estimate can be made; contingent liabilities are not recognized but disclosed; and contingent assets are not recognized.

1. Provisions, Contingent Liabilities
and Contingent Assets
Ind AS – 37
Mr. Sathish V
Assistant Professor
PES Institute of Advanced Management Studies
NH-206, Sagar Road Shivamogga

2. Objective
The objective of this Standard is to ensure
that,
(1) Appropriate recognition criteria and
measurement bases are applied to
Provisions, Contingent Liabilities and
Contingent Assets and that,
(2) Sufficient information is disclosed in
the Notes to enable users to understand
their nature, timing and amount.

3. Scope
This Standard shall be applied by all entities in accounting for
Provisions, Contingent Liabilities and Contingent Assets, except,
(1) Those resulting from executory contracts (a contract under which
both sides still have important performance remaining), except where
the contract is onerous (an onerous contract is a contract in which
the unavoidable costs of meeting the obligations under the contract
exceed the economic benefits expected to be received under it); and
(2) Those covered by another Standard.
(3) The term provision is also used in the context of items such as
depreciation, impairment of assets and doubtful debts - these are
adjustments to the carrying amounts of assets and are not addressed
in this Standard.

4. Definitions
(1) A liability is a present obligation of the entity arising from past events,
the settlement of which is expected to result in an outflow from the
entity of resources embodying economic benefits.
(2) A provision is a liability of uncertain timing or amount.
(3) An obligating event is an event that creates a legal or constructive
obligation that results in an entity having no realistic alternative to
settling that obligation.
(a) A legal obligation is an obligation that derives from (a) a
contract (through its explicit or implicit terms); (b) legislation; or (c)
other operation of law.
(b) A constructive obligation is an obligation that derives from an
entity’s actions where (a) by an established pattern of past practice,
published policies or a sufficiently specific current statement, the
entity has indicated to other parties that it will accept certain
responsibilities; and (b) as a result, the entity has created a valid
expectation on the part of those other parties that it will discharge
those responsibilities.

5. Definitions (contd)
A contingent liability is,
(a) 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 recognised
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.
A 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 the entity.

6. Provisions and Other Liabilities
Provisions can be distinguished from other liabilities
such as trade payables and accruals because there is
uncertainty about the timing or amount of the future
expenditure required in settlement of Provisions. By
contrast:
(a) Trade payables are liabilities to pay for goods or
services that have been received or supplied and have
been invoiced or formally agreed with the supplier;
and
(b)Accruals are liabilities to pay for goods or services
that have been received or supplied but have not been
paid, invoiced or formally agreed with the supplier,
including amounts due to employees.

7. Provisions Vs Contingent
Liabilities
(1)In a general sense, all provisions are contingent
because they are uncertain in timing or amount.
Provisions are recognised as liabilities (assuming
that a reliable estimate can be made) because they
are present obligations and it is probable that an
outflow of resources embodying economic benefits
will be required to settle the obligations.
(2)However, within this Standard, the term ‘contingent’
is used for liabilities and assets that are not
recognised because their 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.

8. RecognitionRecognitionorNo
Recognition
Provisions
Present Obligation
Past Event
Probable of
Outflow
Reliable Estimate
Contingent
Liabilities
Contingent Assets

9. Recognition (contd)
Provisions: A provision shall be recognised when,
(a)an entity has a present obligation (legal or
constructive) 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; and
(c)a reliable estimate can be made of the amount of
the obligation.
If these conditions are not met, no provision
shall be recognised.

10. Recognition (contd)
Contingent Liabilities: An entity shall not
recognise a contingent liability. A contingent
liability is disclosed.
Contingent Assets: An entity shall not
recognise a contingent asset. Contingent assets
usually arise from unplanned or other
unexpected events that give rise to the
possibility of an inflow of economic benefits to
the entity. An example is a claim that an entity is
pursuing through legal processes, where the
outcome is uncertain.

11. Measurement
Measure-
ment
Best
Estimate
Risk and
Uncer-
tainties
Present
Value
Future
Events
Expected
Disposal
of Assets

12. Measurement(contd)
(1) Best Estimate: The amount recognised as a provision shall be the
best estimate of the expenditure required to settle the present
obligation at the end of the reporting period.
(2) Risks and Uncertainties: The risks and uncertainties that
inevitably surround many events and circumstances shall be taken
into account in reaching the best estimate of a provision. Risk
describes variability of outcome. However, uncertainty does not
justify the creation of excessive provisions or a deliberate
overstatement of liabilities.
(3) Present Value: Where the effect of the time value of money is
material, the amount of a provision shall be the present value of
the expenditures expected to be required to settle the obligation.
(4) Future Events: Future events that may affect the amount
required to settle an obligation shall be reflected in the amount of
a provision where there is sufficient objective evidence that they
will occur.
(5) Expected Gain on disposal of Assets: Gains from the expected
disposal of assets shall not be taken into account in measuring a
provision.

13. Reimbursements
(1)Where some or all of the expenditure required to
settle a provision is expected to be reimbursed by
another party, the reimbursement shall be
recognised when, and only when, it is virtually
certain that reimbursement will be received if the
entity settles the obligation.
(2)The reimbursement shall be treated as a separate
asset.
(3)The amount recognised for the reimbursement shall
not exceed the amount of the provision.
(4)In the statement of profit and loss, the expense
relating to a provision may be presented net of the
amount recognised for a reimbursement.

14. Changes in Provisions
(1) Provisions shall be reviewed at the
end of each reporting period and
adjusted to reflect the current best
estimate.
(2) If it is no longer probable that an
outflow of resources embodying
economic benefits will be required
to settle the obligation, the provision
shall be reversed.

15. Application of Recognition and Measurement Rules
The Standard discusses three important areas wherein the
Recognition and Measurement Rules are applied. They are,
Future
Opera-
ting
Losses
Onerous
Contracts
Restruc-
turing

16. Application (contd)
(1) Future Operating Losses: Provisions shall not be recognised for
future operating losses. Because, future operating losses do not meet
the definition of a liability.
(2) Onerous Contracts: If an entity has a contract that is onerous, the
present obligation under the contract shall be recognised and
measured as a provision.
(3) Restructuring: A restructuring is a programme that is planned and
controlled by management, and materially changes either (a) the
scope of a business undertaken by an entity; or (b) the manner in
which that business is conducted – for example,
a. Sale or termination of a line of business;
b. The closure of business locations in a country or region or the
relocation of business activities from one country or region to
another; etc.
A provision for restructuring costs is recognized only when the general
recognition criteria for Provisions are met.

17. Disclosure
For each class of Provision, an entity shall disclose the
following details:
(1)The carrying amount at the beginning and end of
the period;
(2)Additional Provisions made in the period, including
increases to existing provisions;
(3)Amounts used (i.e., incurred and charged against
the Provision) during the period;
(4)Unused amounts reversed during the period; and
(5)The increase during the period in the discounted
amount arising from the passage of time and the
effect of any change in the discount rate.

18. MCQ - 1: Easy Go Ltd., is to prepare its annual accounts for the
year ended 31 March 2017. A claim has damages for ` 1 crore for
breach of patents and copyrights has been served on the company
in January 2017. A competent firm of solicitors advises that the
claim is highly frivolous without any basis and would not survive
even in the first trial court. The company, however, anticipates a
long drawn battle and huge legal costs. As a proper course of action
about this issue, the company’s financial statements for the year
ended 31 March 2017,
(a) Need not have any adjustment
(b) Make no disclosure as per legal advice
(c) Disclose both the compensation and the estimated legal
expenses
(d) Make the disclosure only for estimated legal expenses
Ans: (d)

19. MCQ - 2: Contingency Assets, as per Ind
AS – 37, are,
(a)Recognized in Balance Sheet if
happening is almost certain
(b)Not recognized in Balance Sheet
(c)Disclosed in Notes to Accounts
(d)None of (a), (b) and (c)
Ans: (b)

20. MCQ - 3: When can a ‘Provision’ be recognized in accordance with
IAS/Ind AS – 37?
(a) When there is a legal obligation arising from a past (obligating)
event, the probability of the outflow of resources is more than
remote (but less than probable), and a reliable estimate can be
made of the amount of the obligation.
(b) When there is a constructive obligation as a result of a past
(obligating) event, the outflow of resources is probable, and a
reliable estimate can be made of the amount of the obligation.
(c) When there is a possible obligation arising from a past event,
the outflow of resources is probable, and an appropriate amount
can be set aside toward the obligation.
(d) When management decides that it is essential that a Provision
be made for unforeseen circumstances and keeping in mind this
year the profits were enough but next year there may be losses.
Ans: (b)

21. MCQ - 4: A competitor has sued an entity for unauthorized use of its
patented technology. The amount that the entity may be required to
pay to competitor if the competitor succeeds in the lawsuit is
determinable with reliability, and according to the legal counsel, it is
less than probable (but more than remote) that an outflow of the
resources would be needed to meet the obligation. The entity that was
sued should at year-end:
(a) Recognize a Provision for this possible obligation
(b) Make a disclosure of the possible obligation in the footnotes to the
financial statements
(c) Make no Provision or disclosure and wait until the lawsuit is
finally decided and then expense the amount on settlement, if any
(d) Set aside, as an appropriation, a contingency reserve, an amount
based on the best estimate of the possible liability.
Ans: (b)

22. MCQ - 5: A factory owned by XYZ Inc., was destroyed by fire. XYZ Inc., lodged an
insurance claim for the value of the factory building, plant, and amount equal to one
year’s net profit. During the year, there were a number of meetings with the
representatives of the insurance company. Finally, before year-end, it was decided that
XYZ Inc., would receive compensation for 90% of its claim. XYZ Inc., received a letter
that the settlement cheque for that amount had been mailed, but it was not received
before year-end. How should XYZ Inc., treat this in its financial instruments?
(a) Disclose the contingent asset in the Foot Notes
(b) Wait until next year when the settlement cheque is actually received and not
recognize or disclose this receivable at all since at year-end it is a contingent asset
(c) Because the settlement of the claim was conveyed by a letter from the insurance
company that also stated that the settlement cheque was in the mail for 90% of the
claim, record 90% of the claim as a receivable as it is virtually certain that the
Contingent Asset will be received
(d) Because the settlement of the claim was conveyed by a letter from the insurance
company that also stated that the settlement cheque was in the mail for 90% of the
claim, record 100% of the claim as a receivable at year-end as it is virtually certain
that the Contingent Asset will be received, and adjust the 10% next year when the
settlement cheque is actually received
Ans: (c)

23. MCQ - 6: The Board of Directors of ABC Inc., decided on 15 March 2017 to wind
up international operations in the Far East and move them to Australia. The decision
was based on a detailed formal plan of restructuring as required by IAS/Ind AS – 37.
This decision was conveyed to all workers and management personnel at the
headquarters in Bengaluru. The cost of restructuring the operations in the Far East as
per this detailed plan was ` 20 crore. How should ABC Inc., treat this restructuring in
its financial statements for the year ended 31 March 2017?
(a) Because ABC Inc., has not announced the restructuring to those affected by the
decision and thus has not raised an expectation that ABC Inc., will actually carry
out the restructuring (and as no constructive obligation has arisen), only disclose
the restructuring decision and the cost of restructuring of ` 20 crore in footnotes
to the financial statements.
(b) Recognize a Provision for restructuring since the board of directors has approved
it and it has been announced in the headquarters of ABC Inc., in Bengaluru.
(c) Mention the decision to restructure and the cost involved in the chairman’s
statement in the annual report since it is a decision of the board of directors.
(d) Because the restructuring has not commenced before year-end, based on
prudence, wait until next year and do nothing in this year’s financial statements.
Ans: (a)

24. Illustration – 3: Vishnu Company has at its financial year ended 31st
March, 2016, fifteen law suits outstanding and none of which has been
settled by the time the accounts are approved by the directors. The
directors have estimated that the possible outcomes as below.
Outcome of each case is to be taken as a separate entity. Ascertain the
amount of contingent loss and the accounting treatment in respect
thereof.
Probability (%) Loss (`)
For first ten cases -
Win 0.6
Lose - low damages 0.3 90,000
Lose - high damages 0.1 1,60,000
For remaining five cases:
Win 0.5
Lose - low damages 0.3 60,000
Lose - high damages 0.2 95,000

25. Illustration – 2: At the end of the financial year ending on 31st March,
2017, Counsle & Client Ltd., finds that there are 20 law suits outstanding
which have not been settled till the date of approval of accounts by the
Board of Directors. The possible outcome as estimated by the Board is as
follows.
Outcome of each case is to be taken as a separate entity. Ascertain the
amount of contingent loss and the accounting treatment in respect
thereof.
Probability (%) Loss (`)
In respect of five cases (win) 100 -
Next ten cases: Win 60 -
Lose (low damages) 30 1,20,000
Lose (high damages) 10 2,00,000
Remaining five cases:
Win 50
Lose (low damages) 30 1,00,000
Lose (high damages) 20 2,10,000

26. Illustration – 1: Sun Ltd., entered into a sale contract of
` 5 crore with X Ltd., during 2016-17 financial year. The
profit on this transaction is ` 1 crore. The delivery of
goods to take place during the first month of 2017-18
financial year. In case of failure of Sun Ltd., to deliver
within the schedule, a compensation of ` 1.5 crore is to be
paid to X Ltd. Sun Ltd., planned to manufacture the goods
during the last month of 2016-17 financial year. As on
Balance Sheet date (31 March 2017), the goods were not
manufactured and it was unlikely that Sun Ltd., will be in
a position to meet the contractual obligation.
1. Should Sun Ltd., provide for contingency as per Ind
AS – 37 (AS – 29)?
2. Should provision is measured as the excess of
compensation to be paid over the profit?