Indian Accounting Standard (Ind AS) 37 “Provisions, Contingent Liabilities and Contingent Assets”

1. Indian Accounting Standard (Ind AS) 37
“Provisions, Contingent Liabilities
and Contingent Assets”
CMA Raman Khanna
khanna1975@yahoo.co.in

2. Objective
Ind AS 37
is to ensure
appropriate
RECOGNITION criteria
and MEASUREMENT
bases are applied to
Provisions,
Contingent
Liabilities
Contingent
Assets
sufficient information is
DISCLOSED in notes
enabling users to
understand nature, timing
and amount.

3. Objective
PROVISIONS&
CONTINGENICES
RECOGNITION
Provision
Contingency
Contingent Asset
Contingent Liabilities
MEASUREMENT
Best estimate
Risks and uncertainties
Present value
Expected disposals of assets
Future Events
Expected disposal of assets
DISCLOSURE
Provision
Contingency

4. Scope:
Standard applies to all entities for Provisions, Contingent Liabilities & Contingent Assets except:
Exceptions
Executory Contracts Except
Onerous Contracts
Covered by another Standard

5. Scope: Exceptions - Executory Contracts Except Onerous Contracts
Executory
Contracts are
contracts under
which
Parties to contract have
NOT PERFORMED
any of its obligations or
Parties to contract have
PARTIALLY PERFORMED
their obligations to an equal extent

6. Scope: Exceptions - Executory Contracts Except Onerous Contracts - Examples
Operating leases - Tenant is required to make periodic rental payments; landlord required to provide accommodation.
Equipment leases - lessee has to pay lease rent for equipment use; lessor has to provide equipment for use by the lessee.
Real Estate Contracts – Developers develop the real estate; homebuyers to make the payment when milestones achieved
Services Contracts - Future delivery of services such as gas and electricity against payment
Supply Contracts - On 01-Jan-2019 ABC Ltd. enter into a contract with XYZ Ltd. (manufacturer) for delivery of 100 units of an Item at 4
different dates in future; Payment is due on delivery of units. (Executory Contract)
• On 01-Jan-2018, contract between ABC Ltd. and XYZ Ltd. is executory contract because neither party has performed any of its
obligations. XYZ Ltd. has not manufactured/delivered any of the units, nor ABC Ltd. paid for any of them. (Executory Contract)
• On 01-Mar-2018, XYZ Ltd. manufactured and delivered 200 units and ABC Ltd. has made full payment for those 200 units. As on 01-
Mar-2018, the contract between ABC Ltd. and XYZ Ltd. continues to be executory since both the parties have partially performed their
obligations to an equal extent. (Executory Contract)
• On 01-Apr-2018, XYZ Ltd. manufactured and delivered balance 200 units, but ABC Ltd. has made payment for 300 units only. Contract
between ABC Ltd. and XYZ Ltd. is no longer meeting the definition of an executory contract because both the parties have not
performed under contract to an equal extent. ABC Ltd. is required to recognize a liability for 100 units for which it has to make
payment. (Not Executory Contract)

7. Scope: 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
ONEROUS CONTRACT – A contract is an Onerous Contract in which
• UNAVOIDABLE COST of meeting the obligations under the contract
• EXCEED the ECONOMIC BENEFITS expected to be received under it.
Onerous
Contract
Unavoidable
costs
Economic
benefits
>
……….Contd

8. Scope: Onerous Contracts – Unavoidable Costs
UNAVOIDABLE COSTS – Unavoidable costs under a contract reflect the LEAST NET COST OF EXITING from the contract,
which is the lower of:
the cost of fulfilling the contract or
any compensation or penalties arising from failure to fulfil the contract (Exit or breach of Contract)
Unavoidable
costs under a
contract is
lower of:-
Cost of fulfilling the contract
Any compensation or penalties arising from
failure to fulfil the contract

9. Example Contract Type and Recognition
(1) A Co. running a profitable business from a factory which is on lease .
Monthly lease rents are Rs. 100,000 p.m. effective from 01-04-2018 for a
period of 5 years. On 31-03-2019 the market rent for the factory is Rs.
40,000 p.m.
Lease Contract is not onerous
(2) A Co. running a profitable business from a factory which is on lease .
Monthly lease rents are Rs. 100,000 p.m. effective from 01-04-2018 for a
period of 5 years.
On 31-03-2019, Co. relocates its factory to a new location. The lease on old
factory premises continues for the next 4 years, it cannot be cancelled and
cannot be sub-let to another tenant.
Lease Contract is onerous
On 31-03-2019 the lease becomes onerous because
unavoidable costs (Rs. 48,00,000) exceed the economic
benefits expected to be received (Rs. NIL).
Therefore, a provision to be recognised for the present
value of unavoidable lease payments.
(3) A Co. running a profitable business from a factory which is on lease.
Monthly lease rents are Rs. 100,000 p.m. effective from 01-04-2018 for a
period of 5 years.
On 31-03-2019, Co. relocates its factory to a new location. The lease on old
factory continues for the next 4 years. The contract stipulates a cancellation
fee of Rs. 20,00,000 and factory cannot be sub-let to another tenant.
Lease Contract is onerous
On 31-03-2019, the lease becomes onerous because
unavoidable costs (lower of Rs. 48,00,000 and Rs.
20,00,000) exceed the economic benefits expected to be
received (Rs. NIL).
Therefore, a provision is recognised for the present value
of unavoidable lease payments.
Scope: Onerous Contracts – Unavoidable Costs - Examples

10. Example Contract Type and Recognition
(4) A Co. running a profitable business from a factory which is on lease.
Monthly lease rents are Rs. 100,000 p.m. effective from 01-04-2018 for a
period of 5 years.
On 31-03-2019, Co. relocates its factory to a new location. The lease on old
factory continues for the next 4 years. The contract stipulates a cancellation
fee of Rs. 20,00,000 and factory can be sub-let to another tenant.
The expected market rental income from the factory is Rs. 75,000 p.m.
Lease Contract is onerous
2 alternatives are available to exist the onerous contract.
Lessee should determine cheapest exit route out of two.
Alternate-1 On 31-03-2019, the lease becomes onerous
because unavoidable costs (lower of Rs. 48,00,000 and Rs.
20,00,000) exceed the economic benefits expected to be
received (Rs. NIL).
Alternative-2 Continue with lease at Rs. 1,00,000 p.m., plus
sub-let the factory at an expected rental of Rs. 75,000 p.m.
It would result in a loss of Rs. 12,00,000 over the
remaining 4 years of lease contract.
The present value of net cost of continuing with the lease
is less than the penalty of exiting the lease. Therefore, on
31-03-2019, a provision shall be recognised for the present
value of Rs. 25,000 p.m. (Rs. 1,00,000 lease-rent minus Rs.
75,000 lease sub-let rental income) for remaining 3 years
of the operating lease.
Scope: Onerous Contracts - Examples

11. Scope: Exceptions - Covered by another Standard
Financial
Instruments
(Ind AS 109)
Income Taxes
(Ind AS 12)
Leases
(Ind AS 17)
Employees
Benefits
(Ind AS 19)
Insurance
Contracts
(Ind AS 104)
Contingent
liabilities in
business
combinations
Construction
Contracts
(Ind AS 11)
Contingent
Consideration in
business
combinations
(Ind AS 103)
Revenue from
Contracts with
Customer
(Ind AS 115)

12. Term Definition
Provision Is a liability of uncertain timing or amount
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
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
Legal
Obligation
Is an obligation that derives from:
(a) a contract
(b) legislation; or
(c) other operation of law.
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; &
(b) as a result, the entity has created a valid expectation on the part of those other parties that it will
discharge those responsibilities.
Definitions:

13. Term Definition
Contingent
Liability
(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 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.
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.
Definitions:

14. Differences
Existence of
“Present
Obligation”
Probability
of “Outflow”
Certainty of
“Amount”
Certainty of
“Time”
Liabilities (Trade Payables / Accruals) Certain Certain Certain Certain
Provisions (Uncertainty of Amount) Certain Certain Uncertain Certain
Provisions (Uncertainty of Time) Certain Certain Certain Uncertain
Contingent Liability (Possible Obligation) Uncertain Certain Certain Certain
Contingent Liability (Present Obligation) Certain Uncertain Certain Certain
Contingent Liability (Present Obligation) Certain Certain Uncertain Certain
Relationship between Provisions, Liabilities and Contingent Liabilities

15. Recognition Test: Provisions
An entity shall recognize a provision when below three conditions are met. It these conditions are not met, no provision
shall be recognised.
an entity has a present
obligation (legal or
constructive) as a result
of a past event
it is probable that an
outflow of resources
embodying economic
benefits will be required to
settle the obligation
a reliable estimate
can be made of the
amount of obligation

16. Recognition Test: Provisions - Present Obligation:
RECOGNISE - If it is more likely than not that a present obligation exists at the end of the reporting period, (if
recognition criteria are met) - PROVISION
DISCLOSE -If it is more likely that no present obligation exists at the end of the reporting period-CONTINGENT LIABILITY
Past Event:
A past event that leads to a present obligation is called an obligating event
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
RECOGNISE - Only those liabilities that exist at the end of reporting period.
NO PROVISON RECOGNISED – For costs and events to be incurred in future.
Present obligation
It is as a result of PAST EVENT only
It can be either a LEGAL or CONSTRUCTIVE obligation

17. Recognition Test: Provisions - Present Obligation:
Virtually Certain:
Probability of more
than 95%
More likely than not:
Probability of more
than 50%
Possible not Probable:
Probability of 5% to
50%
Remote:
Probability of less than
5%
Probable - More likely than not

18. Recognition Test: Provisions - Probable outflow of resources embodying
economic benefits
DISCLOSE as CONTINGET LIABILITY – If it is not probable that a present obligation exists, an entity discloses a
contingent liability and possibility of an outflow of resources embodying economic benefits is remote.
Probable
Outflow
A Probability
of an outflow of resources embodying economic
benefits to settle that obligation

19. Recognition Test: Provisions – Reliable Estimate of the Obligation

20. Recognition Test: Contingent Liabilities
DISCLOSE - A contingent liability.
NOT DISCLOSE - If the possibility of an outflow of resources embodying economic benefits is remote
PARTIAL DISCLOSE PARTIAL RECOGNISE – If an entity is jointly and severally liable for an obligation, the part of the
obligation that is expected to be met by other parties is treated as a contingent liability. The entity recognises a
provision for the part of the obligation for which an outflow of resources embodying economic benefits is probable,
except in the extremely rare circumstances where no reliable estimate can be made.
INITIAL CONTINGENT LATOR PROVISION - If it becomes probable that an outflow of future economic benefits will be
required for an item previously dealt with as a contingent liability, a provision is recognised in the financial statements
of the period in which the change in probability occurs (except in the extremely rare circumstances where no reliable
estimate can be made).
An entity shall not recognise a contingent liability

21. Recognition Test: Contingent Assets
Contingent assets usually arise from unplanned or other unexpected events that give rise to possibility of an inflow of
economic benefits to the entity.
NOT REGCOGNISE – Contingent assets are not recognised in financial statements since this may result in recognition of
income that may never be realised.
REGCOGNISE – If realisation of income is virtually certain, the asset and related income are not contingent and it is
recognized in financial statements of the period in which change occurs
DISCLOSE - A contingent asset is disclosed, where an inflow of economic benefits is probable.
CONTINUOUS ASSESSMENT - Contingent assets are assessed continually to ensure that developments are
appropriately reflected in financial statements.
An entity shall not recognise a contingent asset

22. Measurement : Best estimate
Principles for determining best estimates
1) Best estimate of the expenditure required to settle present obligation is the amount that an entity would rationally
pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time.
2) The estimates of outcome and financial effect are determined:
• by the judgement of the management of the entity,
• supplemented by experience of similar transactions and,
• in some cases, reports from independent experts.
3) Provision for large population of items – Obligation is estimated by weighting all possible outcomes by their
associated probabilities. Such statistical method of estimation is named as “expected value”
4) Provision for Single obligation – Obligation is estimated at the most likely outcome.
5) Provision is measured before tax.
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

23. Measurement : Risk and uncertainties
These need to be factored in making judgements under conditions of uncertainty, so that income or assets are not
overstated and expenses or liabilities are not understated
DISCLOSE - Uncertainties surrounding the amount of the expenditure.
Measurement : Present Value
Discount the provisions, where the effect is material. Due to time value of money, provisions relating to cash outflows
that arise soon after the reporting period are more onerous than those where cash outflows arise later.
Discount rate / rates shall be a pre-tax rate / rate that reflect(s) current market assessments of the time value of
money and the risks specific to the liability.
The risks and uncertainties that inevitably surround many events and circumstances
shall be taken into account in reaching the best estimate of a provision
Where 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.

24. Measurement : Future Events
Measurement : Expected disposal of assets
Gains on expected disposal of assets are not taken into account in measuring a provision, even if the expected disposal
is closely linked to the event giving rise to the provision.
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.
Gains from the expected disposal of assets shall not be taken into account in
measuring a provision

25. Reimbursement :
If any expenditure required to settle a provision is to be reimbursed by another party, the reimbursement shall be
recognised when it is virtually certain that it will be received if the entity settles the obligation. Reimbursement shall be
treated as a separate asset. Amount recognised for reimbursement shall not exceed the amount of provision.
In Profit and Loss A/c - Expense relating to a provision may be presented net of amount recognised for a reimbursement.
In Balance Sheet – The Asset and Provision are not net of and presented separately under different heads.
Example:
• Supplier shall reimburse
warranty claim to ABC Ltd.
Supplier
• ABC Ltd. Shall accept the
customer claim and recognize
provision and reimbursement
ABC Ltd. • Customer raise the claim
for defective item and get it
from ABC Ltd.
Customer

26. Changes in provisions :
REVIEW - Review Provisions at the end of each reporting period and adjust it to reflect the current best estimate.
REVERSE - 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.
INCREASE IN PROVISIONS AS BORROWING COST –Where discounting is used, the carrying amount of a provision
increases in each period to reflect the passage of time. This increase is recognised as borrowing cost.

27. Application of the recognition and measurement rules:
Future operating losses
NOT RECOGNISED - Provisions shall not be recognised for future operating losses as there is no past event.
Future operating losses do not meet the definition of a liability and general recognition criteria set out for provisions
in the Standard.
An expectation of future operating losses is an indication that certain assets of the operation may be impaired. An
entity tests these assets for impairment under Ind AS 36, Impairment of Assets.
Future operating losses
Refer initial slides.
Future operating losses Onerous contracts Restructuring

28. Application of the recognition and measurement rules: Restructuring
Examples of restructuring:
(a) sale or termination of a line of business – (Demerger or slump sale)
(b) closure of business locations in a country / region / relocation of business from one country / region to another
(c) changes in management structure, for example, eliminating a layer of management
(d) fundamental reorganisations that have a material effect on the nature and focus of the entity’s operations.
Provision for restructuring costs is recognised only when general recognition criteria for provisions are met.
A constructive obligation to restructure arises only when an entity:
(a) has a detailed formal plan for the restructuring identifying at least:
(i) business or part of a business concerned;
(ii) principal locations affected;
(iii) location, function, & approximate no. of employees who will be compensated for terminating their services
(iv) expenditures that will be undertaken;
(v) when the plan will be implemented;
(b) has raised a valid expectation in those affected that it will carry out restructuring by starting to implement that plan
or announcing its main features to those affected by it.

29. Application of the recognition and measurement rules: Restructuring
No obligation arises for the sale of an operation until there is a binding sale agreement.
A restructuring provision shall include only direct expenditures arising from restructuring, and shall be
a) necessarily entailed by the restructuring; and
b) not associated with the ongoing activities of the entity.

30. Disclosure:
DISCLOSURE
PROVISION
Reconciliation
Brief Description
Indication of uncertainties
Expected reimbursement
CONTINGENT
LIABIILITY
Brief Description
Estimate of Financial Effect
Indication of uncertainties
Possibility of reimbursement
CONTINGENT
ASSET
Inflow is probable

31. Disclosure: Provision
For each class of provision, an entity shall make reconciliation and disclose as under:
(a) Opening Balance
(b) additional provisions made in the period, including increases to existing provisions;
(c) amounts used/Charged against the provision during the period
(d) unused amounts reversed during the period;
(e) Impact due to Increase in discounted amount arising from passage of time
(f) Effect of any change in discount rate.
(g) Closing Balance
For each class of provision, a brief description of:
a) nature;
b) timing of expected outflow;
c) indication of uncertainties about amount and timing;
d) assumptions relating to future events;
e) expected reimbursement, if any.

32. Disclosure: Contingent Liability
For each class of contingent liability:
a) description of the nature of contingent liability;
b) an estimate of financial effect;
c) indication of uncertainties relating to the amount or timing of any outflow;
d) possibility of any reimbursement
Disclosure: Contingent Asset
With respect to contingent asset:
a) description of the nature of contingent asset; and
b) if possible, an estimate of financial effect.
Where any of the information required to be disclosed in the context of contingent liabilities and contingent assets is
not disclosed because it is not practicable to do so, that fact shall be stated.
In extremely rare cases, disclosure of any information in the context of provision / contingent liability / contingent asset
may seriously affect the position of entity in a dispute with other parties on the subject matter of the provision /
contingent liability / contingent asset. In such cases, an entity need not disclose the information, but shall disclose
general nature of dispute, together with the fact that, and reason why the information has not been disclosed

33. This ppt is prepared with an effort to simplify the contents and strengthen the understanding and is meant
to share the knowledge with professional colleagues, students, academicians and interested public.
For any feedbacks, suggestions please drop an e-mail @ khanna1975@yahoo.co.in