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AS - 29 - Provisions, Contingent Liabilities and Contingent Assets - Companies (Accounting Standards) Rules, 2021

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..... of this Standard is also to lay down appropriate accounting for contingent assets. Scope 1. This Standard should be applied in accounting for provisions and contingent liabilities and in dealing with contingent assets, except: (a) those resulting from financial instruments41 that are carried at fair value; (b) those resulting from executory contracts, except where the contract is onerous; Explanation: (i) 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. Thus, for a contract to qualify as an onerous contract, the unavoidable costs of meeting the obligation under the contract should exceed the economic benefits expected to be received under it. The unavoidable costs under a contract reflect the least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfill it. (ii) If an enterprise has a contract that is onerous, the present obligation under the contract is recognised and measured as a provision as per this Standard. The application of the above explana .....

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AS - 29 - Provisions, Contingent Liabilities and Contingent Assets - Companies (Accounting Standards) Rules, 2021

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..... ons). Where a restructuring meets the definition of a discontinuing operation, additional disclosures are required by AS 24, Discontinuing Operations. Definitions 10. The following terms are used in this Standard with the meanings specified: 10.1 A provision is a liability which can be measured only by using a substantial degree of estimation. 10.2 A 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. 10.3 An obligating event is an event that creates an obligation that results in an enterprise having no realistic alternative to settling that obligation. 10.4 A contingent liability is: (a) a possible obligation that arises 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 (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) a reliable e .....

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AS - 29 - Provisions, Contingent Liabilities and Contingent Assets - Companies (Accounting Standards) Rules, 2021

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..... ligation 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 should be recognised. Present Obligation 15. 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 enterprise determines whether a present obligation exists at the balance sheet date 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 balance sheet date. On the basis of such evidence: (a) where it is more likely than not that a present obligation exists at the balance sheet date, the enterprise recognises a provision (if the recognition criteria are met); and (b) where it is more likely that no present obligation exists at the balance sheet date, the enterprise disclo .....

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AS - 29 - Provisions, Contingent Liabilities and Contingent Assets - Companies (Accounting Standards) Rules, 2021

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..... 21. Where details of a proposed new law have yet to be finalised, an obligation arises only when the legislation is virtually certain to be enacted. Differences in circumstances surrounding enactment usually make it impossible to specify a single event that would make the enactment of a law virtually certain. In many cases it will be impossible to be virtually certain of the enactment of a law until it is enacted. Probable Outflow of Resources Embodying Economic Benefits 22. For a liability to qualify for recognition there must be not only a present obligation but also the probability of an outflow of resources embodying economic benefits to settle that obligation. For the purpose of this Standard42 , an outflow of resources or other event is regarded as probable if the event is more likely than not to occur, i.e., the probability that the event will occur is greater than the probability that it will not. Where it is not probable that a present obligation exists, an enterprise discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote (see paragraph 68). 23. Where there are a number of similar obligations (e.g. product .....

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AS - 29 - Provisions, Contingent Liabilities and Contingent Assets - Companies (Accounting Standards) Rules, 2021

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..... Assets 30. An enterprise should not recognise a contingent asset. 31. Contingent assets usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefits to the enterprise. An example is a claim that an enterprise is pursuing through legal processes, where the outcome is uncertain. 32. Contingent assets are not recognised in financial statements since this may result in the recognition of income that may never be realised. However, when the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate. 33. A contingent asset is not disclosed in the financial statements. It is usually disclosed in the report of the approving authority (Board of Directors in the case of a company, and, the corresponding approving authority in the case of any other enterprise), where an inflow of economic benefits is probable. 34. Contingent assets are 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 in the financial statements of the period in which the change occurs. Meas .....

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AS - 29 - Provisions, Contingent Liabilities and Contingent Assets - Companies (Accounting Standards) Rules, 2021

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..... here there is sufficient objective evidence that they will occur. 42. Expected future events may be particularly important in measuring provisions. For example, an enterprise 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 available at the time of the clean-up. Thus, it is appropriate to include, for example, expected cost reductions associated with increased experience in applying existing technology or the expected cost of applying existing technology to a larger or more complex clean-up operation than has previously been carried out. However, an enterprise does not anticipate the development of a completely new technology for cleaning up unless it is supported by sufficient objective evidence. 43. The effect of possible new legislation is taken into consideration in measuring an existing obligation when sufficient objective evidence exists that the legislation is virtually certain to be enacted. The variety of circumstances that aris .....

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AS - 29 - Provisions, Contingent Liabilities and Contingent Assets - Companies (Accounting Standards) Rules, 2021

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..... rally 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 52. Provisions should be reviewed at each balance sheet date 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 should be reversed. Use of Provisions 53. A provision should be used only for expenditures for which the provision was originally recognised. 54. Only expenditures that relate to the original provision are adjusted against it. Adjusting expenditures against a provision that was originally recognised for another purpose would conceal the impact of two different events. Application of the Recognition and Measurement Rules Future Operating Losses 55. Provisions should not be recognised for future operating losses. 56. Future operating losses do not meet the definition of a liability in paragraph 10 and the general recognition criteria set out for provisions in paragraph 14. 57. An expectation of future operating losses is an indication that certain assets of the operation may be impair .....

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AS - 29 - Provisions, Contingent Liabilities and Contingent Assets - Companies (Accounting Standards) Rules, 2021

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..... the beginning and end of the period; (b) additional provisions made in the period, including increases to existing provisions; (c) amounts used (i.e. incurred and charged against the provision) during the period; and (d) unused amounts reversed during the period. Provided that a Small and Medium-sized Company, as defined in the Notification, may not comply with paragraph 66 above. 67. An enterprise should 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 those outflows. Where necessary to provide adequate information, an enterprise should disclose the major assumptions made concerning future events, as addressed in paragraph 41; and (c) the amount of any expected reimbursement, stating the amount of any asset that has been recognised for that expected reimbursement. Provided that a Small and Medium-sized Company, as defined in in the Notification, may not comply with paragraph 67 above. 68. Unless the possibility of any outflow in settlement is remote, an enterprise should disclose for each class of contingen .....

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AS - 29 - Provisions, Contingent Liabilities and Contingent Assets - Companies (Accounting Standards) Rules, 2021

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..... g future economic benefits in settlement of: (a) a present obligation the one whose existence at the balance sheet date is considered probable; or (b) a possible obligation the existence of which at the balance sheet date is considered not probable. There is a present obligation that probably requires an outflow of resources and a reliable estimate can be made of the amount of obligation. There is a possible obligation or a present obligation that may, but probably will not, require an outflow of resources. There is a possible obligation or a present obligation where the likelihood of an outflow of resources is remote. A provision is recognised (paragraph 14). Disclosures are required for the provision (paragraphs 66 and 67). No provision is recognised (paragraph 26). Disclosures are required for the contingent liability (paragraph 68). No provision is recognised (paragraph 26). No disclosure is required (paragraph 68). Reimbursements Some or all of the expenditure required to settle a provision is expected to be reimbursed by another party. The enterprise has no obligation for the part of the expenditure to be reimbursed by the other party. The obligation for the amount expected t .....

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AS - 29 - Provisions, Contingent Liabilities and Contingent Assets - Companies (Accounting Standards) Rules, 2021

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..... . Under the terms of the contract for sale the manufacturer undertakes to make good, by repair or replacement, manufacturing defects that become apparent within three years from the date of sale. On past experience, it is probable (i.e. more likely than not) that there will be some claims under the warranties. Present obligation as a result of a past obligating event - The obligating event is the sale of the product with a warranty, which gives rise to an obligation. An outflow of resources embodying economic benefits in settlement - Probable for the warranties as a whole (see paragraph 23). Conclusion - A provision is recognised for the best estimate of the costs of making good under the warranty products sold before the balance sheet date (see paragraphs 14 and 23). Illustration 2: Contaminated Land - Legislation Virtually Certain to be Enacted An enterprise in the oil industry causes contamination but does not clean up because there is no legislation requiring cleaning up, and the enterprise has been contaminating land for several years. At 31 March 2005 it is virtually certain that a law requiring a clean-up of land already contaminated will be enacted shortly after the year en .....

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AS - 29 - Provisions, Contingent Liabilities and Contingent Assets - Companies (Accounting Standards) Rules, 2021

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..... aragraphs 11, 14 and 23). Illustration 5: Legal Requirement to Fit Smoke Filters Under new legislation, an enterprise is required to fit smoke filters to its factories by 30 September 2005. The enterprise has not fitted the smoke filters. (a) At the balance sheet date of 31 March 2005 Present obligation as a result of a past obligating event - There is no obligation because there is no obligating event either for the costs of fitting smoke filters or for fines under the legislation. Conclusion - No provision is recognised for the cost of fitting the smoke filters (see paragraphs 14 and 16-18). (b) At the balance sheet date of 31 March 2006 Present obligation as a result of a past obligating event - There is still no obligation for the costs of fitting smoke filters because no obligating event has occurred (the fitting of the filters). However, an obligation might arise to pay fines or penalties under the legislation because the obligating event has occurred (the non-compliant operation of the factory). An outflow of resources embodying economic benefits in settlement - Assessment of probability of incurring fines and penalties by non-compliant operation depends on the details of th .....

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AS - 29 - Provisions, Contingent Liabilities and Contingent Assets - Companies (Accounting Standards) Rules, 2021

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..... g whether an outflow of resources embodying economic benefit is probable (see paragraph 23). Where an enterprise gives guarantees in exchange for a fee, revenue is recognised under AS 9, Revenue Recognition. Illustration 8 : A Court Case After a wedding in 2004-05, ten people died, possibly as a result of food poisoning from products sold by the enterprise. Legal proceedings are started seeking damages from the enterprise but it disputes liability. Up to the date of approval of the financial statements for the year 31 March 2005, the e the enterprise will not be found liable. However, when the enterprise prepares the financial statements for the year 31 March 2006, its lawyers advise that, owing to developments in the case, it is probable that the enterprise will be found liable. (a) At 31 March 2005 Present obligation as a result of a past obligating event - On the basis of the evidence available when the financial statements were approved, there is no present obligation as a result of past events. Conclusion - disclosed as a contingent liability unless the probability of any outflow is regarded as remote (paragraph 68). (b) At 31 March 2006 Present obligation as a result of a pas .....

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..... se accounts for the lease under AS 19, Leases). Conclusion-A provision is recognised for the best estimate of the unavoidable lease payments. Illustration D Illustrations: Disclosure This illustration does not form part of the Accounting Standard. Its purpose is to illustrate the application of the Accounting Standard to assist in clarifying its meaning. An illustration of the disclosures required by paragraph 67 is provided below. Illustration 1 Warranties A manufacturer gives warranties at the time of sale to purchasers of its three product lines. Under the terms of the warranty, the manufacturer undertakes to repair or replace items that fail to perform satisfactorily for two years from the date of sale. At the balance sheet date, a provision of Rs. 60,000 has been recognised. The following information is disclosed: A provision of Rs. 60,000 has been recognised for expected warranty claims on products sold during the last three financial years. It is expected that the majority of this expenditure will be incurred in the next financial year, and all will be incurred within two years of the balance sheet date. An illustration is given below of the disclosures required by paragraph .....

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AS - 29 - Provisions, Contingent Liabilities and Contingent Assets - Companies (Accounting Standards) Rules, 2021

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