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TMI BlogProvisions, Contingent Liabilities and Contingent AssetsX X X X Extracts X X X X X X X X Extracts X X X X ..... ial Instruments. 3 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. This Standard does not apply to executory contracts unless they are onerous. 4. [Refer Appendix 1] 5[5. When another Standard deals with a specific type of provision, contingent liability or contingent asset, an entity applies that Standard instead of this Standard. For example, some types of provisions are addressed in Standards on: (a) Omitted*; (b) income taxes (see Ind AS 12, Income Taxes); 11[(c) leases (see Ind AS 116, Leases). However, this Standard applies to any lease that becomes onerous before the commencement date of the lease as defined in Ind AS 116. This Standard also applies to short-term leases and leases for which the underlying asset is of low value accounted for in accordance with paragraph 6 of Ind AS 116 and that have become onerous;] (d) employee benefits (see Ind AS 19, Employee Benefits); 22[(e) insurance contracts and other contracts within the scope of Ind AS 117, Insurance Contracts;] (f) contingent consideration of an acquirer in a business combin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stence 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. 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. 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. Provisions and other liabilities 11 Provisions can be distinguished from other liabilities such as trade pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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. Present obligation 15 In rare cases, it is not clear whether there is a present obligation. In these cases, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists at the end of the reporting period. 16 In almost all cases it will be clear whether a past event has given rise to a present obligation. In rare cases, for example in a lawsuit, it may be disputed either whether certain events have occurred or whether those events result in a present obligation. In such a case, an entity determines whether a present obligation exists at the end of the reporting period by taking account of all available evidence, including, for example, the opinion of experts. The evidence considered includes any additional evidence provided by events after the reporting period. On the basis of such evidence: (a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cognised. 20 An obligation always involves another party to whom the obligation is owed. It is not necessary, however, to know the identity of the party to whom the obligation is owed-indeed the obligation may be to the public at large. Because an obligation always involves a commitment to another party, it follows that a management or board decision does not give rise to a constructive obligation at the end of the reporting period unless the decision has been communicated before the end of the reporting period to those affected by it in a sufficiently specific manner to raise a valid expectation in them that the entity will discharge its responsibilities. 21 An event that does not give rise to an obligation immediately may do so at a later date, because of changes in the law or because an act (for example, a sufficiently specific public statement) by the entity gives rise to a constructive obligation. For example, when environmental damage is caused there may be no obligation to remedy the consequences. However, the causing of the damage will become an obligating event when a new law requires the existing damage to be rectified or when the entity publicly accepts responsibility ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be recognised. That liability is disclosed as a contingent liability (see paragraph 86). Contingent liabilities 27 An entity shall not recognise a contingent liability. 28 A contingent liability is disclosed, as required by paragraph 86, unless the possibility of an outflow of resources embodying economic benefits is remote. 29 Where 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. 30 Contingent liabilities may develop in a way not initially expected. Therefore, they are assessed continually to determine whether an outflow of resources embodying economic benefits has become probable. 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 occ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riod. 39 Uncertainties surrounding the amount to be recognised as a provision are dealt with by various means according to the circumstances. Where the provision being measured involves a large population of items, the obligation is estimated by weighting all possible outcomes by their associated probabilities. The name for this statistical method of estimation is 'expected value'. The provision will therefore be different depending on whether the probability of a loss of a given amount is, for example, 60 per cent or 90 per cent. Where there is a continuous range of possible outcomes, and each point in that range is as likely as any other, the mid-point of the range is used. Example An entity sells goods with a warranty under which customers are covered for the cost of repairs of any manufacturing defects that become apparent within the first six months after purchase. If minor defects were detected in all products sold, repair costs of ₹ 1 million would result. If major defects were detected in all products sold, repair costs of ₹ 4 million would result. The entity's past experience and future expectations indicate that, for the coming year, 75 per cent of the good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired to settle the obligation. 46 Because of the time value of money, provisions relating to cash outflows that arise soon after the reporting period are more onerous than those where cash outflows of the same amount arise later. Provisions are therefore discounted, where the effect is material. 47 The discount rate (or rates) shall be a pre-tax rate (or rates) that reflect(s) current market assessments of the time value of money and the risks specific to the liability. The discount rate(s) shall not reflect risks for which future cash flow estimates have been adjusted. Future events 48 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. 49 Expected future events may be particularly important in measuring provisions. For example, an entity may believe that the cost of cleaning up a site at the end of its life will be reduced by future changes in technology. The amount recognised reflects a reasonable expectation of technically qualified, objective observers, taking account of all available evidence as to the technology that will be availa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e entity or pay the amounts directly. 56 In most cases the entity will remain liable for the whole of the amount in question so that the entity would have to settle the full amount if the third party failed to pay for any reason. In this situation, a provision is recognised for the full amount of the liability, and a separate asset for the expected reimbursement is recognised when it is virtually certain that reimbursement will be received if the entity settles the liability. 57 In some cases, the entity will not be liable for the costs in question if the third party fails to pay. In such a case the entity has no liability for those costs and they are not included in the provision. 58 As noted in paragraph 29, an obligation for which an entity is jointly and severally liable is a contingent liability to the extent that it is expected that the obligation will be settled by the other parties. Changes in provisions 59 Provisions shall be reviewed at the end of each reporting period and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision shall b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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.] 19[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).] Restructuring 70 The following are examples of events that may fall under the definition of restructuring: (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; (c) changes in management structure, for example, eliminating a layer of management; and (d) fundamental reorganisations that have a material effect on the nature and focus of the entity's operations. 71 A provision for restructuring costs is recognised only when the general recognition criteria for provisions set out in paragraph 14 are met. Paragraphs 72- 83 set out how the general recognition criteria apply to restructurings. 72 A constructive obligation to restructure arises only when an entity: (a) has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tures to those affected, only after the reporting period, disclosure is required under Ind AS 10 Events after the Reporting Period, if the restructuring is material and non-disclosure could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.] 76 Although a constructive obligation is not created solely by a management decision, an obligation may result from other earlier events together with such a decision. For example, negotiations with employee representatives for termination payments, or with purchasers for the sale of an operation, may have been concluded subject only to board approval. Once that approval has been obtained and communicated to the other parties, the entity has a constructive obligation to restructure, if the conditions of paragraph 72 are met. 77 In some countries, the ultimate authority is vested in a board whose membership includes representatives of interests other than those of management (eg employees) or notification to such representatives may be necessary before the board decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od ; (d) unused amounts reversed during the period ; and (e) 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. Comparative information is not required. 85 An entity shall disclose the following for each class of provision: (a) a brief description of the nature of the obligation and the expected timing of any resulting outflows of economic benefits; (b) an indication of the uncertainties about the amount or timing of those outflows. Where necessary to provide adequate information, an entity shall disclose the major assumptions made concerning future events, as addressed in paragraph 48;and (c) the amount of any expected reimbursement, stating the amount of any asset that has been recognised for that expected reimbursement. 86 Unless the possibility of any outflow in settlement is remote, an entity shall disclose for each class of contingent liability at the end of the reporting period a brief description of the nature of the contingent liability and, where practicable: (a) an estimate of its financial effect, measured under paragraphs 36-52; (b) an indication of the u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormation. 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.] Effective date 95 * 96 * 97 * 98 * 99 * 100 As a consequence of issuance of Ind AS 115, Revenue from Contracts with Customers, paragraph 5 is amended and paragraph 6 is deleted. An entity shall apply those amendments when it applies Ind AS 115.] 12[101 Omitted* (*Refer Appendix 1) 102 Ind AS 116, amended paragraph 5. An entity shall apply that amendment when it applies Ind AS 116.] 16[23[103 Ind AS 117 amended paragraph 5. An entity shall apply that amendment when it applies Ind AS 117.] 104 Definition of Material (Amendments to Ind AS 1 and Ind AS 8), amended paragraph 75. An entity shall apply those amendments when it applies the amendments to the definition of material in paragraph 7 of Ind AS 1 and paragraphs 5 and 6 of Ind AS 8.] 21[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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmissioning costs. The trustees determine how contributions are invested, within the constraints set by the fund's governing documents and any applicable legislation or other regulations. (c) the contributors retain the obligation to pay decommissioning costs. However, contributors are able to obtain reimbursement of decommissioning costs from the fund up to the lower of the decommissioning costs incurred and the contributor's share of assets of the fund. (d) the contributors may have restricted access or no access to any surplus of assets of the fund over those used to meet eligible decommissioning costs. Scope 4 This Appendix applies to accounting in the financial statements of a contributor for interests arising from decommissioning funds that have both of the following features: (a) the assets are administered separately (either by being held in a separate legal entity or as segregated assets within another entity); and (b) a contributor's right to access the assets is restricted. 5 A residual interest in a fund that extends beyond a right to reimbursement, such as a contractual right to distributions once all the decommissioning has been completed or on winding up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of its interest in a fund and any restrictions on access to the assets in the fund. 12 When a contributor has an obligation to make potential additional contributions that is not recognised as a liability (see paragraph 10), it shall make the disclosures required by paragraph 86 of Ind AS 37. 13 When a contributor accounts for its interest in the fund in accordance with paragraph 9, it shall make the disclosures required by paragraph 85(c) of Ind AS 37. Appendix B Liabilities arising from Participating in a Specific Market- Waste Electrical and Electronic Equipment2 This Appendix is an integral part of the Ind AS. Background 1 Paragraph 17 of Ind AS 37 specifies that an obligating event is a past event that leads to a present obligation that an entity has no realistic alternative to settling. 2 Paragraph 19 of Ind AS 37 states that provisions are recognised only for 'obligations arising from past events existing independently of an entity's future actions'. 3 The European Union's Directive on Waste Electrical and Electronic Equipment (WE&EE), which regulates the collection, treatment, recovery and environmentally sound disposal of waste equipment, has given rise to qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in accordance with paragraph 14(a) of Ind AS 37 for the recognition of a provision for waste management costs: * the manufacture or sale of the historical household equipment? * participation in the market during the measurement period? * the incurrence of costs in the performance of waste management activities? Accounting Principles 9 Participation in the market during the measurement period is the obligating event in accordance with paragraph 14(a) of Ind AS 37. As a consequence, a liability for waste management costs for historical household equipment does not arise as the products are manufactured or sold. Because the obligation for historical household equipment is linked to participation in the market during the measurement period, rather than to production or sale of the items to be disposed of, there is no obligation unless and until a market share exists during the measurement period. The timing of the obligating event may also be independent of the particular period in which the activities to perform the waste management are undertaken and the related costs incurred. 2This Appendix is in the context of European Union. However, if similar regulations exist in ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in some circumstances, arise progressively over time? (e) what is the obligating event that gives rise to the recognition of a liability to pay a levy that is triggered if a minimum threshold is reached? (f) are the principles for recognising in the annual financial statements and in the interim financial report a liability to pay a levy the same? Accounting Principles 8. The obligating event that gives rise to a liability to pay a levy is the activity that triggers the payment of the levy, as identified by the legislation. For example, if the activity that triggers the payment of the levy is the generation of revenue in the current period and the calculation of that levy is based on the revenue that was generated in a previous period, the obligating event for that levy is the generation of revenue in the current period. The generation of revenue in the previous period is necessary, but not sufficient, to create a present obligation. 9. An entity does not have a constructive obligation to pay a levy that will be triggered by operating in a future period as a result of the entity being economically compelled to continue to operate in that future period. 10. The preparation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endix is not a part of the Indian Accounting Standard. The purpose of this Appendix is only to bring out the major differences, if any, between Indian Accounting Standard (Ind AS) 37 and the corresponding International Accounting Standard (IAS) 37, Provisions, Contingent Liabilities and Contingent Assets, IFRIC 5, Rights to Interests arising from Decommissioning Restoration and Environmental Rehabilitation Funds, IFRIC 6, Liabilities arising from Participating in Specific Market-Waste electrical and Electronic Equipment and IFRIC 21, Levies, issued by the International Accounting Standards Board. Comparison with IAS 37, Provisions, Contingent Liabilities and Contingent Assets, IFRIC 5, IFRIC 6 and IFRIC 21 1 The transitional provisions given in IAS 37 and IFRIC 5 and IFRIC 6 have not been given in Ind AS 37, since all transitional provisions related to Ind ASs, wherever considered appropriate have been included in Ind AS 101, First-time Adoption of Indian Accounting Standards, corresponding to IFRS 1, First-time Adoption of International Financial Reporting Standards 2 Different terminology is used in this standard, eg, term 'balance sheet' is used instead of 'Statement of fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustomers). However, as Ind AS 115 contains no specific requirements to address contracts with customers that are, or have become, onerous, this Standard applies to such cases." 2. Substituted vide F. No. 01/01/2009-CL-V(Part) - Dated 30-3-2016 before it was read as, " 6 [ Refer Appendix 1] " 3. Substituted vide F. No. 01/01/2009-CL-V(Part) - Dated 30-3-2016 before it was read as, " (i) Appendix C, Service Concession Arrangements and Appendix D, Service Concession Arrangements: Disclosures, contained in Ind AS 115, Revenue from Contracts with Customers. " 4. Substituted vide F. No. 01/01/2009-CL-V(Part) - Dated 30-3-2016 before it was read as, "3 The following paragraph numbers appear as 'Deleted' in IAS 37. In order to maintain consistency with paragraph numbers of IAS 37, the paragraph numbers are retained in Ind AS 37 : (i) paragraph 1(b) (ii) paragraph 4 (iii) paragraph 5(a) (iv) paragraph 6" 5. Substituted vide F. No. 01/01/2009-CL-V(Part VI) - Dated 28-03-2018, w.e.f. 1st day of April, 2018, before it was read as, "1[5. When another Standard deals with a specific type of provision, contingent liability or contingent asset, an e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 w.e.f. 01-04-2019 before it was read as "(c) leases (see Ind AS 17, Leases). However, as Ind AS 17 contains no specific requirements to deal with operating leases that have become onerous, this Standard applies to such cases;" 12. Inserted vide NOTIFICATION No. [F. No. 01/01/2009-CL-V-(Part VII)] dated 30-03-2019 w.e.f. 01-04-2019 13. Omitted vide NOTIFICATION No. [F. No. 01/01/2009-CL-V-(Part VII)] dated 30-03-2019 w.e.f. 01-04-2019 before it was read as "Appendix B, Evaluating the Substance of Transactions involving the Legal Form of a Lease contained in Ind AS 17, Leases. ." 14. Substituted vide NOTIFICATION No. [F. No. 01/01/2009-CL-V-(Part VII)] dated 30-03-2019 w.e.f. 01-04-2019 before it was read as "10[4. Paragraphs 93 to 99 related to Transitional Provisions and Effective date given in IAS 37 have not been given in Ind AS 37, since all transitional provisions related to Ind ASs, wherever considered appropriate have been included in Ind AS 101, First-time Adoption of Indian Accounting Standards corresponding to IFRS 1, First-time Adoption of International Financial Reporting Standards and paragraph related to Effective date are not re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erted vide Notification No. G.S.R 255(E) dated 23-03-2022 w.e.f. 01-04-2022 * "* 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."; Inserted vide NOTIFICATION G.S.R. 419(E) [F. No. 01/01/2009-CL-V (Part. IX)], dated 18-06-2021. 22. Substituted vide Notification No. G.S.R. 492 (E) dated 12-08-2024 before it was read as, "(e) insurance contracts (see Ind AS 104, Insurance Contracts). However, this Standard applies to provisions, contingent liabilities and contingent assets of an insurer, other than those arising from its contractual obligations and rights under insurance contracts within the scope of Ind AS 104;" 23. Substituted vide Notification No. G.S.R. 492 (E) dated 12-08-2024 before it was read as, "103 [Refer Appendix 1]" 24. Substituted vide Notification No. G.S.R. 492 (E) dated 12-08-2024 before it was read as, "17[4. Paragraphs 93-99 and 101 related to Transitional Provisions and Effective date given in IAS 37 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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