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Provisions Contingent Liabilities and Contingent Assets w.e.f 30-3-2016

AS - 29 - B. Accounting Standard (AS) - Companies Law - AS - 29 - [W.e.f. 30-3-2016 - See Notification no. 364E dated 30-3-2016] Accounting Standard (AS) 29 Provisions, Contingent Liabilities and Contingent Assets (This Accounting Standard includes paragraphs set in bold italic type and plain type, which have equal authority. Paragraphs set in bold italic type indicate the main principles. This Accounting Standard should be read in the context of its objective and the General Instructions contai .....

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rds. Objective The objective of this Standard is to ensure that appropriate recognition criteria and measurement bases are applied to provisions and contingent liabilities and that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and amount. The objective 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 continge .....

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eeting 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 Statement. The applicatio .....

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tions to an equal extent. This Standard does not apply to executory contracts unless they are onerous. 4. This Standard applies to provisions, contingent liabilities and contingent assets of insurance enterprises other than those arising from contracts with policy-holders. 5. Where another Accounting Standard deals with a specific type of provision, contingent liability or contingent asset, an enterprise applies that Standard instead of this Standard. For example, certain types of provisions are .....

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isions may relate to the recognition of revenue, for example where an enterprise gives guarantees in exchange for a fee. This Standard does not address the recognition of revenue. AS 9, Revenue Recognition, identifies the circumstances in which revenue is recognised and provides practical guidance on the application of the recognition criteria. This Standard does not change the requirements of AS 9. 7. This Standard defines provisions as liabilities which can be measured only by using a substant .....

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is made. 9. This Standard applies to provisions for restructuring (including discontinuing operations). 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 enterpr .....

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tain 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 estimate of the amount of the obligation cannot be made. 10.5 A contingent asset is a possible asset that arises from past events the existence of which will be confirmed only by the occurrence or nonoc .....

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t is planned and controlled by management, and materially changes either: (a) the scope of a business undertaken by an enterprise; or (b) the manner in which that business is conducted. 11. An obligation is a duty or responsibility to act or perform in a certain way. Obligations may be legally enforceable as a consequence of a binding contract or statutory requirement. Obligations also arise from normal business practice, custom and a desire to maintain good business relations or act in an equit .....

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e been received or supplied but have not been paid, invoiced or formally agreed with the supplier, including amounts due to employees. Although it is sometimes necessary to estimate the amount of accruals, the degree of estimation is generally much less than that for provisions. 13. In this Standard, the term contingent is used for liabilities and assets that are not recognised because their existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future even .....

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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, .....

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possibility of an outflow of resources embodying economic benefits is remote (see paragraph 68). Past Event 16. A past event that leads to a present obligation is called an obligating event. For an event to be an obligating event, it is necessary that the enterprise has no realistic alternative to settling the obligation created by the event. 17. Financial statements deal with the financial position of an enterprise at the end of its reporting period and not its possible position in the future. .....

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both of which would lead to an outflow of resources embodying economic benefits in settlement regardless of the future actions of the enterprise. Similarly, an enterprise recognises a provision for the decommissioning costs of an oil installation to the extent that the enterprise is obliged to rectify damage already caused. In contrast, because of commercial pressures or legal requirements, an enterprise may intend or need to carry out expenditure to operate in a particular way in the future (f .....

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blic at large. 20. An event that does not give rise to an obligation immediately may do so at a later date, because of changes in the law. 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. 21. Where details of a proposed new law have yet to be finalised, an obligation arises only when the legislation is virtually cer .....

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economic benefits to settle that obligation. For the purpose of this Standard10 , 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 .....

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e met). Reliable Estimate of the Obligation 24. The use of estimates is an essential part of the preparation of financial statements and does not undermine their reliability. This is especially true in the case of provisions, which by their nature involve a greater degree of estimation than most other items. Except in extremely rare cases, an enterprise will be able to determine a range of possible outcomes and can therefore make an estimate of the obligation that is reliable to use in recognisi .....

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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 enterprise 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 (see paragraph 14). 29. Contingent liabilities may develop in a way not initially expected. Therefore, they are assessed continually to de .....

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uld 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 .....

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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. Measurement Best Estimate 35. The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet date. The amount of a provision should not be discounted to its present value except in case of decommissioning, restoration and similar liabilities that ar .....

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ent of the management of the enterprise, supplemented by experience of similar transactions and, in some cases, reports from independent experts. The evidence considered includes any additional evidence provided by events after the balance sheet date. 37. The provision is measured before tax; the tax consequences of the provision, and changes in it, are dealt with under AS 22, Accounting for Taxes on Income. Risks and Uncertainties 38. The risks and uncertainties that inevitably surround many ev .....

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. For example, if the projected costs of a particularly adverse outcome are estimated on a prudent basis, 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. 40. Disclosure of the uncertainties surrounding the amount of the expenditure is made under paragraph 67(b). Future Events 41. Future events that may affect the amount required to .....

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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 suff .....

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to be enacted and implemented in due course. In many cases sufficient objective evidence will not exist until the new legislation is enacted. Expected Disposal of Assets 44. Gains from the expected disposal of assets should not be taken into account in measuring a provision. 45. Gains on the expected disposal of assets are not taken into account in measuring a provision, even if the expected disposal is closely linked to the event giving rise to the provision. Instead, an enterprise recognises g .....

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the reimbursement should not exceed the amount of the provision. 47. In the statement of profit and loss, the expense relating to a provision may be presented net of the amount recognised for a reimbursement. 48. Sometimes, an enterprise is able to look to another party to pay part or all of the expenditure required to settle a provision (for example, through insurance contracts, indemnity clauses or suppliers warranties). The other party may either reimburse amounts paid by the enterprise or pa .....

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the enterprise will not be liable for the costs in question if the third party fails to pay. In such a case, the enterprise has no liability for those costs and they are not included in the provision. 51. As noted in paragraph 28, an obligation for which an enterprise 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 52. Provisions should be reviewed at each balance sheet dat .....

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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 impaired. An enter .....

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-organisations that have a material effect on the nature and focus of the enterprise s operations. 59. A provision for restructuring costs is recognised only when the recognition criteria for provisions set out in paragraph 14 are met. 60. No obligation arises for the sale of an operation until the enterprise is committed to the sale, i.e., there is a binding sale agreement. 61. An enterprise cannot be committed to the sale until a purchaser has been identified and there is a binding sale agreem .....

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hose that are both: (a) necessarily entailed by the restructuring; and (b) not associated with the ongoing activities of the enterprise. 63. 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 balance sheet date. Such expenditures are recognised on the same b .....

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f 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 th .....

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ication, 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 contingent liability at the balance sheet date a brief description of the nature of the contingent liability and, where practicable: (a) an estimate of its financial effect, measured under paragraphs 35-45; (b) an indication of the uncertainties relating to any outflow; and (c) the possibility of any reimbursement. 69. In determining .....

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nts that are subject to legal proceedings. 70. Where a provision and a contingent liability arise from the same set of circumstances, an enterprise makes the disclosures required by paragraphs 66-68 in a way that shows the link between the provision and the contingent liability. 71. Where any of the information required by paragraph 68 is not disclosed because it is not practicable to do so, that fact should be stated. 72. In extremely rare cases, disclosure of some or all of the information req .....

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bilities (see paragraph 35) should be discounted prospectively, with the corresponding effect to the related item of property, plant and equipment. Illustration A Tables - Provisions, Contingent Liabilities and Reimbursements The purpose of this illustration is to summarise the main requirements of the Accounting Standard. It does not form part of the Accounting Standard and should be read in the context of the full text of the Accounting Standard. Provisions and Contingent Liabilities Where, as .....

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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 .....

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ise and the reimbursement is not virtually certain if the enterprise settles the provision. The enterprise has no liability for the amount to be reimbursed (paragraph 50). The reimbursement is recognised as a separate asset in the balance sheet and may be offset against the expense in the statement of profit and loss. The amount recognised for the expected reimbursement does not exceed the liability (paragraphs 46 and 47). The expected reimbursement is not recognised as an asset (paragraph 46). .....

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counting Standard. Note: 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 balance sheet date (paragraph 15 of the Standard). Illustration C Illustration: Recognition This illustration illustrates the application of the Accounting Standard to assist in clarifying its meaning. It does not fo .....

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in the context of the full text of the Accounting Standard. Illustration 1: Warranties A manufacturer gives warranties at the time of sale to purchasers of its product. 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 .....

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y 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 end. Present obligation as a result of a past obligating event -The obligating event is the contamination of the land because of the virt .....

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of the oil rig and restoration of damage caused by building it, and ten per cent arise through the extraction of oil. At the balance sheet date, the rig has been constructed but no oil has been extracted. Present obligation as a result of a past obligating event -The construction of the oil rig creates an obligation under the terms of the licence to remove the rig and restore the seabed and is thus an obligating event. At the balance sheet date, however, there is no obligation to rectify the da .....

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en the oil is extracted. Illustration 4: Refunds Policy A retail store has a policy of refunding purchases by dissatisfied customers, even though it is under no legal obligation to do so. Its policy of making refunds is generally known. Present obligation as a result of a past obligating event -The obligating event is the sale of the product, which gives rise to an obligation because obligations also arise from normal business practice, custom and a desire to maintain good business relations or .....

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(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 .....

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nforcement regime. Conclusion - No provision is recognised for the costs of fitting smoke filters. However, a provision is recognised for the best estimate of any fines and penalties that are more likely than not to be imposed (see paragraphs 14 and 16-18). Illustration 6: Staff Retraining as a Result of Changes in the Income Tax System The government introduces a number of changes to the income tax system. As a result of these changes, an enterprise in the financial services sector will need to .....

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rantee of certain borrowings of Enterprise B, whose financial condition at that time is sound. During 2005-06, the financial condition of Enterprise B deteriorates and at 30 September 2005 Enterprise B goes into liquidation. (a) At 31 March 2005 Present obligation as a result of a past obligating event -The obligating event is the giving of the guarantee, which gives rise to an obligation. An outflow of resources embodying economic benefits in settlement No outflow of benefits is probable at 31 .....

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w of resources embodying economic benefits will be required to settle the obligation. Conclusion -A provision is recognised for the best estimate of the obligation (see paragraphs 14 and 22). Note: This example deals with a single guarantee. If an enterprise has a portfolio of similar guarantees, it will assess that portfolio as a whole in determining whether an outflow of resources embodying economic benefit is probable (see paragraph 23). Where an enterprise gives guarantees in exchange for a .....

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he 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 - No provision is recognised (see definition of present obligation and pa .....

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9A: Refurbishment Costs -No Legislative Requirement A furnace has a lining that needs to be replaced every five years for technical reasons. At the balance sheet date, the lining has been in use for three years. Present obligation as a result of a past obligating event -There is no present obligation. Conclusion - No provision is recognised (see paragraphs 14 and 16-18). The cost of replacing the lining is not recognised because, at the balance sheet date, no obligation to replace the lining ex .....

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s of overhauling aircraft are not recognised as a provision for the same reasons as the cost of replacing the lining is not recognised as a provision in illustration 9A. Even a legal requirement to overhaul does not make the costs of overhaul a liability, because no obligation exists to overhaul the aircraft independently of the enterprise s future actions - the enterprise could avoid the future expenditure by its future actions, for example by selling the aircraft. Illustration 10: An onerous c .....

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on. An outflow of resources embodying economic benefits in settlement - When the lease becomes onerous, an outflow of resources embodying economic benefits is probable. (Until the lease becomes onerous, the enterprise accounts for the lease under AS 19, Leases). Conclusion -A provision is recognised for the best estimate of the unavoidable lease payments. Illustration D Illustration: Disclosures This illustration does not form part of the Accounting Standard. Its purpose is to illustrate the app .....

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ecognised. The following information is disclosed: A provision of ₹ 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 72 where some of the information required is not given because it can be ex .....

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the company relating to a dispute with a competitor who alleges that the company has infringed patents and is seeking damages of ₹ 1000 lakhs. The information usually required by AS 29, Provisions, Contingent Liabilities and Contingent Assets is not disclosed on the grounds that it can be expected to prejudice the interests of the company. The directors are of the opinion that the claim can be successfully resisted by the company. [Footnotes as per Notification no. 364E dated 30-3-2016] * .....

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on Agriculture is issued, accounting for livestock meeting the definition of Property, Plant and Equipment, will be covered as per AS 10 (Revised), Property, Plant and Equipment. 2 Shares, debentures and other securities held as stock-in-trade (i.e., for sale in the ordinary course of business) are not investments as defined in this Standard. However, the manner in which they are accounted for and disclosed in the financial statements is quite similar to that applicable in respect of current inv .....

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