As 29

AS-29
Provisions, Contingent
Liabilities and Contingent
Assets
29 Provisions, Contingent Liabilities and Contingent Assets
Content of the Presentation
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☛ Objective of the Standard
Click here to
☛ Applicability
☛ Scope of the Standard
☛ Definitions explained
☛ Recognition criteria - Provisions
☛ Observations/Other points - Provisions
☛ Recognition criteria - Contingencies
☛ Observations/Other points - Contingencies
☛ Measurement of Provisions
☛ Other Points
☛ Disclosure requirement
☛ Comparison with AS 4
☛ Decision table - Summarized position
☛ Comparison with IAS
☛ Comparison with US GAAP
Objective of the Standard
☛ Ensuring that appropriate recognition
criteria and measurement bases are
applied to provisions and contingent
liabilities
☛ Incorporation of sufficient information in
financial statements to enable users to
understand the nature, timing and
amount of provisions and contingent
liabilities Return
Applicability of the Standard
☛ It comes into effect in respect of
accounting periods commencing on or
after 1st April 2004
☛ Entire AS is applicable to (category a):
➧ Enterprises whose equity or debt securities
are listed in India or outside India
➧ Enterprises which are in the process of listing
➧ Banks including co-operative banks
➧ Financial institutions
➧ Enterprises carrying on insurance business
➧ Enterprises whose turnover in immediately
preceding financial year is more than Rs. 50
Crs contd...
Applicability of the Standard (contd...)
☛ Entire AS, except disclosure requirement
of para 67, is applicable to (category b):
➧ Enterprises whose turnover in immediately
preceding financial year is more than Rs. 40
Lacs but is not more than Rs. 50 Crs
➧ Enterprises having borrowings in excess of
Rs. 1 Cr. But not in excess of Rs. 10 Crs at any
time during the accounting period
➧ Holding and subsidiary enterprises of any one
of the above at any time during the
accounting period
☛ Entire AS, except disclosure requirement
of para 66 & 67, is applicable to all other
contd...
Other Points Regarding
Applicability
☛ Enterprise once covered in category a
and subsequently ceases to be so
covered will not get exemption from para
67 until the enterprise ceases to be
covered in category a for two consecutive
years
☛ Enterprise once covered in category a or
b and subsequently ceases to be so
covered will not get exemption from
paras 66 & 67 until the enterprise ceases
contd...
Other Points Regarding Applicability
(contd…)
☛ Enterprise once covered in category c
and subsequently ceases to be so
covered in the current accounting period,
this standard applies in its entirety (if it
subsequently falls in category a) or in its
entirety except para 67 (if it
subsequently falls in category b), as the
case may be, from the current accounting
period. However, the relevant
contd...
Other Points Regarding Applicability
(contd…)
☛ If pursuant to the above provisions an
enterprise does not disclose information
required by para 67 or paras 66 and 67,
it should disclose such fact
☛ From the date of applicability of this
Standard all paras of AS 4 Contingencies
and Events Occurring After the Balance
Sheet Date that deal with contingencies
(paras 1(a), 2, 3.1, 4 (4.1 to 4.4), 5 (5.1
to 5.6), 6, 7, 9.1(relevant portion), 9.2,
Return
Scope of the Standard

☛ Standard should be applied in accounting
for provisions and contingent liabilities
and in dealing with contingent assets
☛ Statement does not apply to provisions,
contingent liabilities and contingent
assets:
➧ Resulting from financial instruments that are
carried at fair value
➧ Resulting from executory contracts
➧ Arising in insurance enterprises from
contracts with policy holders and contd...
Scope of the Standard (contd…)
☛ Executory contracts are contracts under
which neither party has performed any of
its obligations or both parties have
partially performed their obligations to
an equal extent
☛ Examples of provisions dealt with by
another standard are:
➧ AS 7 construction contracts
➧ AS 22 accounting for taxes on income
➧ AS 19 leases
➧ AS 15 accounting for retirement benefits in
contd...
Scope of the Standard (contd…)
☛ This statement does not address
recognition of revenue i.e. it does not
change the requirements of AS 9
revenue recognition
☛ The term provision (as used in this
standard) does not include depreciation,
impairment loss and doubtful debts

Return
Definitions explained
☛ A Provision is:
➧ A liability
➧ Which can be measured only by using a
substantial degree of estimation
☛ A Liability is:
➧ Present obligation arising from past events
➧ Settlement of which is expected to result
in outflow of resources embodying

contd...
economic benefits
Definitions explained (contd…)
☛ An Obligating Event is:
➧ An event that creates an obligation
➧ That results in an enterprise having no
realistic alternative to settling that
obligation
☛ A Possible Obligation is an obligation
the existence of which (based on the
evidence available) at the balance

contd...
☛ A Present Obligation is an obligation the
existence of which (based on the
evidence available) at the balance sheet
date is considered probable i.e. more
likely than not
☛ A Contingent Asset is:
➧ A possible asset that arises from past events
➧ The existence of which will be confirmed only

by the occurrence or non-occurrence of one or
more uncertain future events not contd...
wholly
☛ A Contingent Liability is:
➧ A possible obligation
✖ that arises from past events
✖ 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
➧ A present obligation that arises from past
events but is not recognised because:
✖ It is nor probable that an outflow of economic
resources will be required to settle the
obligation or
✖ A reliable estimate of the amount of the contd...
☛A Restructuring Programme is a
programme:
➧ that is planned and controlled by
management and
➧ that materially changes either:
✖ the scope of a business undertaken by an
enterprise
Return
Recognition criteria - Provisions
☛ Para 14 of AS states that a Provision
should be recognised when:

➧ an enterprise has a present obligation as a
result of a past event
➧ it is probable that an outflow of economic
resources embodying economic benefits

will be required to settle the obligation
and
Return
➧ a reliable estimate can be made of the
Observations/other points -
Provisions
☛ On the basis of evidence available on the
balance sheet date and after considering
additional evidence provided by events
occurring after the balance sheet date:
➧ where it is more likely than not that a
present obligation exists at the balance
sheet date, the enterprise recognises a
provision if:
✖ the settlement of obligation will result in
outflow of economic resources and
contd...
Observations/other points - Provisions
(contd…)
➧ where it is more likely that no present
obligation exists at the balance sheet
date, the enterprise discloses a
contingent liability, unless the possibility
of an outflow of economic resources is
remote
☛ Only present obligations arising out of
past events should be considered
☛ No provision should be recognised for
costs that need to be incurred contd...
to
(contd…)
☛ An obligations always involves another
party to whom obligation is owed. It is

not necessary, however, to know the
identity of the party to whom the
obligation is owed
☛ An outflow of economic resources or
other event is regarded as probable if

the probability that the event will occur
contd...
(contd…)
☛ Except in extremely rare cases, an
enterprise will be able to determine a
range of possible outcomes and can
therefore make can reliable estimate of
the amount of provision
☛ In extremely rare cases where it is not
possible to make a reliable estimate, no
provision is recognised and the liability

Return
Recognition criteria -
Contingencies
☛ As per para 26 of AS an enterprise
should not recognise a contingent
liability
☛ As per para 30 of AS an enterprise
should not recognise a contingent asset

Return
Observations / other points -
Contingencies
☛ Where an enterprise is jointly and
severally liable for an obligation:
➧ provision (if the recognition criteria is
met) should be made of the part of the

obligation which has to be met by the
enterprise
➧ the part of the obligation that is expected
to be met by other parties is treated as

contd...
Observations/other points - Contingencies
(contd…)
☛ Contingent Liabilities should be assessed
continually to determine whether outflow
of economic resources has become
probable or not
☛ The moment the outflow of economic
resource becomes probable provision
should be recognised if other recognition

contd...
Observations/other points - Contingencies
(contd…)
☛ When the realisation of income is
virtually certain, then the related asset is
not a contingent asset and its
recognition is appropriate
☛ A contingent asset is not disclosed in the
financial statements
☛ Contingent assets are assessed
continually and the moment the inflow of
economic resource becomes virtually
certain, the asset and related income
Return
Measurement of Provisions
☛ Best Estimate:
➧ The amount recognised as a provision
should be the best estimate of the
expenditure
➧ It should not be discounted to its present
value
➧ It should be based on evidence available
not only on the balance sheet date but
also from the events occurring after the
balance sheet date
contd...
Measurement of Provisions
(contd…)
☛ Risks and Uncertainties:
➧ Risks and uncertainties that surround
events and circumstances should be
taken into account in reaching the best
estimate
➧ Uncertainty does not justify the
creation of excessive provisions or a
deliberate overstatement of liabilitiescontd...

Measurement of Provisions (contd…)

☛ Future Events:
➧ Future events affecting the amount

required to settle an obligation should
be reflected in the amount of a provision
if and only if there is sufficient objective
evidence that they will occur
☛ Expected Disposal of Assets:
➧ Gains from the expected disposal of

assets should not be taken into account
contd...

☛ Reimbursements:
➧ When the expenditure required to settle
a provision is expected to reimbursed by
another party, the reimbursement should
be recognised
➧ It should be recognised only if it is
virtually certain that reimbursement will
be received
➧ Reimbursement should be treated as a
separate asset
contd...
☛ Changes in and Use of Provisions:
➧ Provisions should be reviewed at each
balance sheet date and adjusted to

reflect the current best estimate
➧ If after review it is identified that it does
not meet the recognition criteria it

should be reversed
➧ Provision should be used only for

Return
expenditure for which the provision was
Other points
☛ Future Operating Losses:
➧ Provisions should not be recognised for
future operating losses
➧ Future operating losses do not meet the
definition of liability
➧ Expectation of future operating losses is
an indication that certain assets may be

impaired and thus, these assets should
be tested under AS 28 Impairment of
contd...
Other points (contd…)
☛ Restructuring:
➧ Provision for restructuring costs is
recognised only when the recognition
criteria for provisions are met
➧ A restructuring provision should include
only the direct expenditure arising from
the restructuring and which are:
✖ necessarily entailed by the restructuring
and
✖ not associated with the ongoing activities
contd...
☛ Restructuring (contd…) :
➧ Examples of restructuring are:
✖ sale or termination of a line of business
✖ the closure of business locations in a
country or region
✖ relocation of business activities
✖ changes in management structure
✖ fundamental re-organisations that have a
material effect on the operations

contd...
☛ Restructuring (contd…) :
➧ Restructuring provision does not include
such costs as:
✖ retraining or relocating continuing staff
✖ marketing or
✖ investment in new systems and
distribution networks
Return
Disclosure
☛ For each class of provision, the
following should be disclosed (para 66
of the AS) :
➧ carrying amount at beginning and end of
the period
➧ additional provisions made in the period
➧ amount used during the period
➧ unused amounts reversed during contd...

the
Disclosure (contd…)
☛ For each class of provision, the following
should be disclosed (para 67 of the AS) :
➧ brief description of the nature of the
obligation and expected timing of any
resulting outflow of economic resources
➧ an indication of the uncertainties about
those outflows and major assumptions
concerning future events
➧ the amount of expected reimbursement,
stating the amount recognised as an asset
for expected reimbursement contd...
☛ Unless the possibility of outflow of
economic resources is remote, for each
class of contingent liability, the
following should be disclosed (para 68 of
the AS) :
➧ brief description of the nature of
contingent liability
➧ an estimate of financial effect
➧ an indication of the uncertainties relating

to any outflow contd...
☛ Where any of the information required

by para 68 is not disclosed because it is
not practicable to do so, that fact should
be stated
☛ If the disclosure of information are
required in the Standard, is expected to
prejudice seriously the position of the
enterprise in a dispute with other parties
on the subject matter of the provision or
contd...
☛ If as per above, the enterprise does not
disclose the information, it is required
to disclose
➧ the general nature of the dispute
➧ reason why the information has not
been disclosed
Return
Comparison with AS 4
Contingencies and Events
Occurring After the Balance Sheet
Date AS 29 AS 4
Definition of Contingent Contingent Liability and
Liability and Contingent Contingent Asset included in
Asset separated the definition of
‘Contingency’
The term ‘Provision’ clearly No express segregation of

distinguished from the term ‘Provision’ from the
‘Contingent Liability’ and term of ‘Contingent Liability’
thus both the terms have
been elaborated
contd...
Comparison with AS 4 Contingencies and
Events Occurring After the Balance Sheet
Date (contd…)
AS 29 AS 4
Only if there is a present If it is probable that
obligation and there will contingency will result in a
be outflow of economic loss (an asset impaired or
resources (to settle it) liability incurred), provision
which can be reliably should be made
estimated, provision
should be made
Provision once made No such express

should be reviewed at requirement mentioned
each Balance Sheet date
to see whether it sill meets
the recognition criteria
contd...
Date (contd…)
AS 29 AS 4
Measurement of amount No such detailed
of provision should be: measurement principles laid
•Based on best estimate down
•After considering risks
and uncertainties
•After considering future
events
•Made without
considering expected
disposal of assets
•After taking into account
reimbursements
contd...
Date (contd…)
AS 29 AS 4
Provision can be made for No such specific activity
Restructuring activities if it included in the Standard
meets the recognition
criteria
Provision should be used No such express

only for expenditure for requirement mentioned in
which the provision was the Standard
originally recognised
Detailed disclosure No disclosure requirement
requirement for the for contingent liability for
Provisions made which provision is made
contd...
Date (contd…)
AS 29 AS 4
If the disclosure of No such concession given
information will by the Standard
prejudicially affect the
interest of the enterprise
(in a dispute with third
party) the same may not
be disclosed. However,
general nature of dispute
and the reason for non-
disclosure should be
mentioned
Return
Decision Table - Position
Summarized
Situation 1 Situation 2 Situation 3
There is a present There is a possible There is a possible
obligation that obligation or a obligation or a
probably requires an present obligation present obligation
outflow of resources that may, but where the
and a reliable probably will not, likelihood of an
estimate can be require an outflow outflow of
made of the amount of resources. resources is
of obligation. remote.
Action 1 Action 2 Action 3
A provision is No provision is No provision is
recognised (para 14). recognised (para recognised (para
26). 26).
Disclosures are
required for the Disclosures are No disclosure is
required for the required (para 68).
provision (paras 66
contingent liability
and 67) Return
(para 68).
Comparison with International
Accounting Standard
IAS 37 AS 29
Discounting of Provisions
Where the effect of The amount of provision
time value of money is should not be discounted
material the amount of to its present value
provision should be
discounted
Contingent Assets
Where the inflow of Contingent Assets are
economic benefits is usually disclosed in the
probable, contingent report of approving
assets should be authority. No requirement
disclosed in the of disclosing it in financial
financial statements statements contd...
Comparison with International Accounting
Standard (contd…)
IAS 37 AS 29
Onerous Contracts
Present obligation under No such requirement
an Onerous Contract incorporated in AS 29
should be recognised as
provision. Onerous
Contract is a contract in
which the unavoidable
costs of meeting the
obligations exceed the
economic benefits
expected to be received
under it
contd...
Comparison with International Accounting
Standard (contd…)
IAS 37 AS 29
Constructive Obligation
IAS deals with Requirement of
‘constructive obligation’ in recognising constructive
the context of creation of obligation has been
provision. For example, in omitted by AS 29.
case of a restructuring, a
constructive obligation
arises when an enterprise
has a detailed formal plan
for restructuring. Thus, in
this case provision is
recognised at an early
Return
stage
Comparison with US GAAP - FASB
Statement No. 5 - Accounting for
Contingencies
US GAAP AS 29
If the estimated No such express
amount of loss is requirement. However, all
within a range, risks and uncertainties
provision should be should be considered in
based on best reaching best estimate.
estimate. If best Uncertainty does not justify
estimate cannot be creation of higher amount of
made, minimum provision. Thus, in case of
amount should be uncertainty lower amount
provided with a should be provided with no
disclosure of disclosure of higher amount
maximum amount. contd...
Comparison with US GAAP - FASB Statement
No. 5 - Accounting for Contingencies (contd…)
US GAAP AS 29
No provision should be No provision can be made for
made for general general / unspecified
/unspecified contingencies. Disclosure of
contingencies such as such contingencies is also not
seIf-insurance etc. encouraged.
However, footnote
disclosure and/or
appropriation of retained
earnings can be made
for such contingencies.
contd...
Comparison with US GAAP - FASB Statement

No. 5 - Accounting for Contingencies (contd…)
US GAAP AS 29
Unasserted claims exist No such requirement
when the claimant has incorporated in the Standard
elected not to assert the
claim or because the
claimant lacks knowledge
of existence of claim. If it
is probable that outcome
of such claims (if made)
will be unfavourable, the
unasserted claim should
be disclosed in the
financial statements
Return
THANK YOU

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AS-29

Scope of the Standard

Scope of the Standard (contd…)

☛ This statement does not address

recognition of revenue i.e. it does not

change the requirements of AS 9

☛ The term provision (as used in this

standard) does not include depreciation,

impairment loss and doubtful debts

➧ Which can be measured only by using a

substantial degree of estimation

➧ Present obligation arising from past events

➧ Settlement of which is expected to result

in outflow of resources embodying

☛ An Obligating Event is:

➧ An event that creates an obligation

➧ That results in an enterprise having no

realistic alternative to settling that

☛ A Possible Obligation is an obligation

the existence of which (based on the

evidence available) at the balance

➧ The existence of which will be confirmed only

Definitions explained (contd…)

➧ that is planned and controlled by

➧ that materially changes either:

✖ the scope of a business undertaken by an

should be recognised when:

result of a past event

➧ it is probable that an outflow of economic

resources embodying economic benefits

☛ An obligations always involves another

party to whom obligation is owed. It is

☛ An outflow of economic resources or

other event is regarded as probable if

enterprise will be able to determine a

range of possible outcomes and can

therefore make can reliable estimate of

the amount of provision

☛ In extremely rare cases where it is not

possible to make a reliable estimate, no

provision is recognised and the liability

should not recognise a contingent

☛ As per para 30 of AS an enterprise

should not recognise a contingent asset

met) should be made of the part of the

➧ the part of the obligation that is expected

to be met by other parties is treated as

☛ Contingent Liabilities should be assessed

continually to determine whether outflow

of economic resources has become

☛ The moment the outflow of economic

resource becomes probable provision

should be recognised if other recognition

☛ Risks and Uncertainties:

➧ Risks and uncertainties that surround

events and circumstances should be

taken into account in reaching the best

➧ Uncertainty does not justify the

creation of excessive provisions or a

deliberate overstatement of liabilitiescontd...

Measurement of Provisions (contd…)

➧ Future events affecting the amount