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Provisions, Contingent Liabilities and Contingent Assets

Ind AS - 037 - Rule - B. Indian Accounting Standards (Ind AS) - Companies Law - Ind AS - 037 - Indian Accounting Standard (Ind AS) 37 (This Indian Accounting Standard includes paragraphs set in bold type and plain type, which have equal authority. Paragraphs in bold type indicate the main principles). Objective The objective of this Standard is to ensure that appropriate recognition criteria and measurement bases are applied to and that sufficient information is disclosed in the notes to enable .....

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rmed 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] 1[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) construction contracts (see Ind AS 11, Construction C .....

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ontracts within the scope of Ind AS 104; and (f) contingent consideration of an acquirer in a business combination (see Ind AS 103, Business Combinations).] 2[ 6. Some amounts treated as provisions may relate to the recognition of revenue, for example where an entity gives guarantees in exchange for a fee. This Standard does not address the recognition of revenue. Ind AS 18, Revenue, identifies the circumstances in which revenue is recognised and provides practical guidance on the application of .....

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d in this Standard. Accordingly, this Standard neither prohibits nor requires capitalisation of the costs recognised when a provision is made. 9 This Standard applies to provisions for restructurings (including discontinued operations). When a restructuring meets the definition of a discontinued operation, additional disclosures may be required by Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations. Definitions 10 The following terms are used in this Standard with the meanin .....

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ct (through its explicit or implicit terms); (b) legislation; or (c) other operation of law. 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 discha .....

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nt 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 progr .....

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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 (for example, amounts relating to accrued vacation pay). Although it is sometimes necessary to estimate the amount or timing of accruals, the uncertainty is generally much less than for provisions. A .....

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ot wholly within the control of the entity. In addition, the term contingent liability is used for liabilities that do not meet the recognition criteria. 13 This Standard distinguishes between: (a) provisions - which 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; and (b) contingent liabilities - which are not r .....

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obligation cannot be made). Recognition Provisions 14 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. Present obligation 15 In rare cases, it is not clear whe .....

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nt 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) where it is more likely than not that a present obligation exists at the end of the reporting period, the entity recognises a provision (if the r .....

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ation created by the event. This is the case only: (a) where the settlement of the obligation can be enforced by law; or (b) in the case of a constructive obligation, where the event (which may be an action of the entity) creates valid expectations in other parties that the entity will discharge the obligation. 18 Financial statements deal with the financial position of an entity at the end of its reporting period and not its possible position in the future. Therefore, no provision is recognised .....

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of resources embodying economic benefits in settlement regardless of the future actions of the entity. Similarly, an entity recognises a provision for the decommissioning costs of an oil installation or a nuclear power station to the extent that the entity is obliged to rectify damage already caused. In contrast, because of commercial pressures or legal requirements, an entity may intend or need to carry out expenditure to operate in a particular way in the future (for example, by fitting smoke .....

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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, b .....

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ation. 22 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 as drafted. For the purpose of this Standard, such an obligation is treated as a legal obligation. Differences in circumstances surrounding enactment 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 i .....

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ill not. Where it is not probable that a present obligation exists, an entity discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote (see paragraph 86). 24 Where there are a number of similar obligations (eg product warranties or similar contracts) the probability that an outflow will be required in settlement is determined by considering the class of obligations as a whole. Although the likelihood of outflow for any one item may .....

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in the balance sheet. Except in extremely rare cases, an entity will be able to determine a range of possible outcomes and can therefore make an estimate of the obligation that is sufficiently reliable to use in recognising a provision. 26 In the extremely rare case where no reliable estimate can be made, a liability exists that cannot be recognised. That liability is disclosed as a contingent liability (see paragraph 86). Contingent liabilities 27 An entity shall not recognise a contingent liab .....

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tremely 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 c .....

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al 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. 34 A contingent asset is disclosed, as required by paragraph 89, where an inflow of economic benefits is probable. 35 Contingent assets are assessed continually to ensure that developments are appropriately reflected in the financial statements. If it has beco .....

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best estimate of the expenditure required to settle the 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. It will often be impossible or prohibitively expensive to settle or transfer an obligation at the end of the reporting period. However, the estimate of the amount that an entity would rationally pay to settle or transfer the obligation gives the best estimate of the .....

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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, .....

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ty s past experience and future expectations indicate that, for the coming year, 75 per cent of the goods sold will have no defects, 20 per cent of the goods sold will have minor defects and 5 per cent of the goods sold will have major defects. In accordance with paragraph 24, an entity assesses the probability of an outflow for the warranty obligations as a whole. The expected value of the cost of repairs is: (75% of nil) + (20% of 1m) + (5% of 4m) = ₹ 400,000 40 Where a single obligation .....

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succeed at the first attempt at a cost of ₹ 1,000, but a provision for a larger amount is made if there is a significant chance that further attempts will be necessary. 41 The provision is measured before tax, as the tax consequences of the provision, and changes in it, are dealt with under Ind AS 12. Risks and uncertainties 42 The risks and uncertainties that inevitably surround many events and circumstances shall be taken into account in reaching the best estimate of a provision. 43 Ris .....

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, that outcome is not then deliberately treated as more probable than is realistically the case. Care is needed to avoid duplicating adjustments for risk and uncertainty with consequent overstatement of a provision. 44 Disclosure of the uncertainties surrounding the amount of the expenditure is made under paragraph 85(b). Present value 45 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 se .....

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ect 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 .....

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r, an entity does not anticipate the development of a completely new technology for cleaning up unless it is supported by sufficient objective evidence. 50 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 arise in practice makes it impossible to specify a single event that will provide sufficient, objective evid .....

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expected disposal is closely linked to the event giving rise to the provision. Instead, an entity recognises gains on expected disposals of assets at the time specified by the Standard dealing with the assets concerned. Reimbursements 53 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 ob .....

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arranties). The other party may either reimburse amounts paid by the 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 b .....

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isions 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 be reversed. 60 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. Use of provisions 61 A provision shall be used only for ex .....

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aragraph 10 and the general recognition criteria set out for provisions in paragraph 14. 65 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. Onerous contracts 66 If an entity has a contract that is onerous, the present obligation under the contract shall be recognised and measured as a provision. 67 Many contracts (for example, some routine purchase o .....

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idable costs of meeting the obligations under the contract 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 fulfil it. 69 Before a separate provision for an onerous contract is established, an entity recognises any impairment loss that has occurred on assets dedicated to that contrac .....

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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 a detailed formal plan for the restructuring identifying at least: (i) the business or part of a business concerned; (ii) the principal locations affected; (iii) the locatio .....

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ling plant or selling assets or by the public announcement of the main features of the plan. A public announcement of a detailed plan to restructure constitutes a constructive obligation to restructure only if it is made in such a way and in sufficient detail (ie setting out the main features of the plan) that it gives rise to valid expectations in other parties such as customers, suppliers and employees (or their representatives) that the entity will carry out the restructuring. 74 For a plan t .....

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is at present committed to restructuring, because the timeframe allows opportunities for the entity to change its plans. 75 A management or board decision to restructure taken before the end of the reporting period does not give rise to a constructive obligation at the end of the reporting period unless the entity has, before the end of the reporting period: (a) started to implement the restructuring plan; or (b) announced the main features of the restructuring plan to those affected by it in a .....

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tive 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 .....

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e sale, ie there is a binding sale agreement. 79 Even when an entity has taken a decision to sell an operation and announced that decision publicly, it cannot be committed to the sale until a purchaser has been identified and there is a binding sale agreement. Until there is a binding sale agreement, the entity will be able to change its mind and indeed will have to take another course of action if a purchaser cannot be found on acceptable terms. When the sale of an operation is envisaged as par .....

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tity. 81 A restructuring provision does not include such costs as: (a) retraining or relocating continuing staff; (b) marketing; or (c) investment in new systems and distribution networks. These expenditures relate to the future conduct of the business and are not liabilities for restructuring at the end of the reporting period. Such expenditures are recognised on the same basis as if they arose independently of a restructuring. 82 Identifiable future operating losses up to the date of a restruc .....

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ncluding increases to existing provisions; (c) amounts used (ie incurred and charged against the provision) during the period ; (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 .....

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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 uncertainties relating to the amount or timing of any outflow; and (c) the possibility of any reimbursement. 87 In determining which provisions or contingent liabilities may be aggregated to form a class, .....

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liability arise from the same set of circumstances, an entity makes the disclosures required by paragraphs 84-86 in a way that shows the link between the provision and the contingent liability. 89 Where an inflow of economic benefits is probable, an entity shall disclose a brief description of the nature of the contingent assets at the end of the reporting period, and, where practicable, an estimate of their financial effect, measured using the principles set out for provisions in paragraphs 36- .....

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atter of the provision, contingent liability or contingent asset. In such cases, an entity need not disclose the information, but shall disclose the general nature of the dispute, together with the fact that, and reason why, the information has not been disclosed. 1 The interpretation of probable in this Standard as more likely than not does not necessarily apply in other Indian Accounting Standards. 2 This Appendix is in the context of European Union. However, if similar regulations exist in ot .....

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lear plant) or certain equipment (such as cars), or in undertaking environmental rehabilitation (such as rectifying pollution of water or restoring mined land), together referred to as decommissioning . 2 Contributions to these funds may be voluntary or required by regulation or law. The funds may have one of the following structures: (a) funds that are established by a single contributor to fund its own decommissioning obligations, whether for a particular site, or for a number of geographicall .....

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funds that are established with multiple contributors to fund their individual or joint decommissioning obligations when the required level of contributions is based on the current activity of a contributor and the benefit obtained by that contributor is based on its past activity. In such cases there is a potential mismatch in the amount of contributions made by a contributor (based on current activity) and the value realisable from the fund (based on past activity). 3 Such funds generally hav .....

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s 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 .....

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equity instrument within the scope of Ind AS 109 and is not within the scope of this Appendix. Issues 6 The issues addressed in this Appendix are: (a) how should a contributor account for its interest in a fund? (b) when a contributor has an obligation to make additional contributions, for example, in the event of the bankruptcy of another contributor, how should that obligation be accounted for? Accounting Principles Accounting for an interest in a fund 7 The contributor shall recognise its ob .....

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r shall account for its interest in the fund in accordance with those Standards. 9 If a contributor does not have control or joint control of, or significant influence over, the fund, the contributor shall recognise the right to receive reimbursement from the fund as a reimbursement in accordance with Ind AS 37. This reimbursement shall be measured at the lower of: (a) the amount of the decommissioning obligation recognised; and (b) the contributor s share of the fair value of the net assets of .....

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by the fund decreases to an extent that they are insufficient to fulfil the fund s reimbursement obligations, this obligation is a contingent liability that is within the scope of Ind AS 37. The contributor shall recognise a liability only if it is probable that additional contributions will be made. Disclosure 11 A contributor shall disclose the nature 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 a .....

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h 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 dis .....

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hat the cost of waste management for historical household equipment should be borne by producers of that type of equipment that are in the market during a period to be specified in the applicable legislation of each Member State (the measurement period). The Directive states that each Member State shall establish a mechanism to have producers contribute to costs proportionately e.g. in proportion to their respective share of the market by type of equipment. 5 Several terms used in this Appendix .....

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ndix provides guidance on the recognition, in the financial statements of producers, of liabilities for waste management under the EU Directive on WE&EE in respect of sales of historical household equipment. 7 This Appendix addresses neither new waste nor historical waste from sources other than private households. The liability for such waste management is adequately covered in Ind AS 37. However, if, in national legislation, new waste from private households is treated in a similar manner .....

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gnition 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 .....

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the related costs incurred. Appendix C Levies This Appendix is an integral part of the Ind AS. Background 1. A government may impose a levy on an entity. An issue arises when to recognise a liability to pay a levy that is accounted for in accordance with Ind AS 37, . Scope 2. This Appendix addresses the accounting for a liability to pay a levy if that liability is within the scope of Ind AS 37. It also addresses the accounting for a liability to pay a levy whose timing and amount is certain. 3. .....

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s that are within the scope of other Standards (such as income taxes that are within the scope of Ind AS 12, Income Taxes); and (b) fines or other penalties that are imposed for breaches of the legislation. Government refers to government, government agencies and similar bodies whether local, national or international. 5. A payment made by an entity for the acquisition of an asset, or for the rendering of services under a contractual agreement with a government, does not meet the definition of a .....

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iod? (c) does the going concern assumption imply that an entity has a present obligation to pay a levy that will be triggered by operating in a future period? (d) does the recognition of a liability to pay a levy arise at a point in time or does it, 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 .....

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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 of financial statements under the going concern assumption .....

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entity generates that revenue. 12. If an obligation to pay a levy is triggered when a minimum threshold is reached, the accounting for the liability that arises from that obligation shall be consistent with the principles established in paragraphs 8-14 of this Appendix (in particular, paragraphs 8 and 11). For example, if the obligating event is the reaching of a minimum activity threshold (such as a minimum amount of revenue or sales generated or outputs produced), the corresponding liability i .....

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reporting period. 14. An entity shall recognise an asset if it has prepaid a levy but does not yet have a present obligation to pay that levy. Appendix D References to matters contained in other Indian Accounting Standards This Appendix is an integral part of the Ind AS. This appendix lists the appendices which are part of other Indian Accounting Standards and makes references to Ind AS 37, . 3[(i) Appendix A, Service Concession Arrangements and Appendix B, Service Concession Arrangements: Discl .....

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Indian Accounting Standard (Ind AS) 37 and the corresponding International Accounting Standard (IAS) 37, , 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, , IFRIC 5, IFRIC 6 and IFRIC 21 1 The transitional provisions given in .....

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d of Statement of comprehensive income . Words approval of the financial statements for issue have been used instead of authorisation of the financial statements for issue in the context of financial statements considered for the purpose of events after the reporting period. 4[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] - No .....

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