TaxTMI 
TaxTMI 
Provisions, Contingent Liabilities and Contingent Assets
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.... within the scope of Ind AS 109, Financial 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, Insur....
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....se other parties that it will discharge those responsibilities. A contingent liability is: (a) a possible obligation 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; 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 busine....
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....ettle the obligation, or a sufficiently reliable estimate of the amount of the 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 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 obli....
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.... operate in a particular way in the future (for example, by fitting smoke filters in a certain type of factory). Because the entity can avoid the future expenditure by its future actions, for example by changing its method of operation, it has no present obligation for that future expenditure and no provision is recognised. 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 giv....
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....n 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 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 d....
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....n at the end of the reporting period. 38 The estimates of outcome and financial effect are determined by the judgement of the management of the entity, 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 reporting period. 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 app....
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.... 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 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 pa....
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....nd loss, the expense relating to a provision may be presented net of the amount recognised for a reimbursement. 55 Sometimes, an entity 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 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 liabi....
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....e lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it. ^18[68A The cost of fulfilling a contract comprises the costs that relate directly to the contract. Costs that relate directly to a contract consist of both- (a) the incremental costs of fulfilling that contract-for example, direct labour and materials; and (b) an allocation of other costs that relate 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....
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....ucture 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 sufficiently specific manner to raise a valid expectation in them that the entity will carry out the restructuring. If an entity starts to implement a restructuring plan, or announces its main features 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....
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....ion, unless they relate to an onerous contract as defined in paragraph 10. 83 As required by paragraph 51, gains on the expected disposal of assets are not taken into account in measuring a restructuring provision, even if the sale of assets is envisaged as part of the restructuring. Disclosure 84 For each class of provision, an entity shall disclose: (a) the carrying amount at the beginning and end of the period; (b) additional provisions made in the period, including 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 expected timing of any resulting outflows of economic benefits; (b) an indication of the uncertainties about the amount or timing of those outflows. Where ne....
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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. ^7[Transitional Provisions 93 * 94 * ^20[94A Onerous Contracts-Cost of Fulfilling a Contract, added paragraph 68A and amended paragraph 69. An entity shall apply those amendments to contracts for which it has not yet fulfilled all its obligations at the beginning of the annual reporting period in which it first applies the amendments (the date of initial application). The entity shall not restate comparative information. 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 paragra....
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.... for example, in the event of the bankruptcy of another contributor. (c) 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 have the following features: (a) the fund is separately administered by independent trustees. (b) entities (contributors) make contributions to the fund, which are invested in a range of assets that may include both debt and equity investments, and are available to help pay the contributors' decommissioning 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 ....
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....g obligation recognised; and (b) the contributor's share of the fair value of the net assets of the fund attributable to contributors. Changes in the carrying value of the right to receive reimbursement other than contributions to and payments from the fund shall be recognised in profit or loss in the period in which these changes occur. Accounting for obligations to make additional contributions 10 When a contributor has an obligation to make potential additional contributions, for example, in the event of the bankruptcy of another contributor or if the value of the investment assets held 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 additional contributions that is not recognised as a liability (see paragraph ....
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.... not within the scope of this Appendix. Scope 6 This Appendix 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 to historical waste from private households, the principles of this Appendix apply by reference to the hierarchy in paragraphs 10-12 of Ind AS 8. The Ind AS 8 hierarchy is also relevant for other regulations that impose obligations in a way that is similar to the cost attribution model specified in the EU Directive. Issue 8 This Appendix determines in the context of the decommissioning of WE&EE what constitutes the obligating event 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? ....
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....gislation. '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 levy. 6. An entity is not required to apply this Appendix to liabilities that arise from emissions trading schemes. Issues 7. To clarify the accounting for a liability to pay a levy, this Appendix addresses the following issues: (a) what is the obligating event that gives rise to the recognition of a liability to pay a levy? (b) does economic compulsion to continue to operate in a future period create a constructive obligation to pay a levy that will be triggered by operating in that future period? (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 eve....
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....As a result, in the interim financial report, a liability to pay a levy: (a) shall not be recognised if there is no present obligation to pay the levy at the end of the interim reporting period; and (b) shall be recognised if a present obligation to pay the levy exists at the end of the interim 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, Provisions, Contingent Liabilities and Contingent Assets. ^8[(i) Appendix D, Service Concession Arrangements and Appendix E, Service Concession Arrangements: Disclosures, contained in Ind AS 115, Revenue from Contracts with Customers.] (ii) Appendix A, Changes in Existing Decommissioning, Restoration and Similar Liabilities, contained in Ind AS 16, Property, Plant and Equipment. (iii) ^13[****] Appendix 1 Note: This Appendix is not a part o....
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....ph numbers are retained in Ind AS 37] ***************** NOTES:- 1. Substituted vide F. No. 01/01/2009-CL-V(Part) - Dated 30-3-2016 before it was read as, "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) ) [Refer Appendix 1] (b) income taxes (see Ind AS 12, Income Taxes); (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; (d) employee benefits (see Ind AS 19, Employee Benefits); (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; (f) contingent consideration of an acquirer in a business combination (see Ind AS 103, Business Combinations); and (g) revenue from contracts w....
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....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 the recognition criteria. This Standard does not change the requirements of Ind AS 18. ]" 7. Inserted vide F. No. 01/01/2009-CL-V(Part VI) - Dated 28-03-2018, w.e.f. 1st day of April, 2018 8. 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, "^3[(i) Appendix A, Service Concession Arrangements and Appendix B, Service Concession Arrangements: Disclosures, contained in Ind AS 11, Construction Contracts.]" 9. 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, "^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]" 10. Inserted vide F. No. 01/01/2009-CL-V(Part VI) - Dated 28-03-2018, w.e.f. 1st day of April, 2018 ....
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....ancial statements." 16. Inserted vide NOTIFICATION NO. G.S.R. 463(E) dated 24-07-2020 17. Substituted vide NOTIFICATION NO. G.S.R. 463(E) dated 24-07-2020 before it was read as "^14[4 Paragraphs 93-99 and 101 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 relevant in Indian context. However, in order to maintain consistency with paragraph numbers of IAS 37, these paragraph numbers are retained in Ind AS 37.]" 18. Inserted vide Notification No. G.S.R 255(E) dated 23-03-2022 w.e.f. 01-04-2022 19. Substituted vide Notification No. G.S.R 255(E) dated 23-03-2022 w.e.f. 01-04-2022 before it was read as, "69 Before a separate provision for an onerous contract is established, an entity recognises any impairment loss that has occurred on assets de....