AS-29 Provisions, Contingent Liabilities and Contingent Assets
29 Provisions, Contingent Liabilities and Contingent Assets
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Content of the Presentation
☛ Objective of the Standard ☛ Applicability ☛ Scope of the Standard ☛ Definitions explained ☛ Recognition criteria - Provisions ☛ Observations/Other points - Provisions ☛ Recognition criteria - Contingencies ☛ Observations/Other points - Contingencies ☛ Measurement of Provisions ☛ Other Points ☛ Disclosure requirement ☛ Comparison with AS 4 ☛ Decision table - Summarized position ☛ Comparison with IAS ☛ Comparison with US GAAP
29 Provisions, Contingent Liabilities and Contingent Assets
Objective of the Standard
☛ Ensuring
that
criteria
and
applied
to
appropriate measurement
provisions
and
recognition bases
are
contingent
liabilities ☛ Incorporation of sufficient information in
financial statements to enable users to understand amount liabilities
of
the
nature,
provisions
and
timing
and
contingent Return
29 Provisions, Contingent Liabilities and Contingent Assets
Applicability of the Standard
☛ It comes into effect in respect of
accounting periods commencing on or after 1st April 2004 ☛ Entire AS is applicable to (category a): ➧ Enterprises whose equity or debt securities
are listed in India or outside India ➧ Enterprises which are in the process of listing ➧ Banks including co-operative banks ➧ Financial institutions ➧ Enterprises carrying on insurance business ➧ Enterprises whose turnover in immediately
preceding financial year is more than Rs. 50 Crs contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Applicability of the Standard (contd...) ☛ Entire AS, except disclosure requirement of para 67, is applicable to (category b): ➧ Enterprises whose turnover in immediately
preceding financial year is more than Rs. 40 Lacs but is not more than Rs. 50 Crs ➧ Enterprises having borrowings in excess of
Rs. 1 Cr. But not in excess of Rs. 10 Crs at any time during the accounting period ➧ Holding and subsidiary enterprises of any one
of the above at any time during the accounting period
☛ Entire AS, except disclosure requirement
of para 66 & 67, is applicable to all other contd...
Other Points Regarding Applicability ☛
29 Provisions, Contingent Liabilities and Contingent Assets
Enterprise once covered in category a and
subsequently
ceases
to
be
so
covered will not get exemption from para 67 until the enterprise ceases to be covered in category a for two consecutive years ☛ Enterprise once covered in category a or
b and subsequently ceases to be so covered will not get exemption from contd... paras 66 & 67 until the enterprise ceases
29 Provisions, Contingent Liabilities and Contingent Assets
Other Points Regarding Applicability (contd…)
☛ Enterprise once covered in category c
and
subsequently
ceases
to
be
so
covered in the current accounting period, this standard applies in its entirety (if it subsequently falls in category a) or in its entirety
except
para
67
(if
it
subsequently falls in category b), as the case may be, from the current accounting period.
However,
the
relevant contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Other Points Regarding Applicability (contd…)
☛ If pursuant to the above provisions an
enterprise does not disclose information required by para 67 or paras 66 and 67, it should disclose such fact ☛ From the date of applicability of this
Standard all paras of AS 4 Contingencies and Events Occurring After the Balance Sheet Date that deal with contingencies (paras 1(a), 2, 3.1, 4 (4.1 to 4.4), 5 (5.1 to 5.6), 6, 7, 9.1(relevant portion), 9.2, Return
29 Provisions, Contingent Liabilities and Contingent Assets
Scope of the Standard
☛ Standard should be applied in accounting
for provisions and contingent liabilities and in dealing with contingent assets ☛ Statement does not apply to provisions,
contingent
liabilities
and
contingent
assets: ➧ Resulting from financial instruments that are
carried at fair value ➧ Resulting from executory contracts ➧ Arising
in
insurance
enterprises
contracts with policy holders and
from contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Scope of the Standard (contd…) ☛ 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 ☛ Examples of provisions dealt with by
another standard are: ➧ AS 7 construction contracts ➧ AS 22 accounting for taxes on income ➧ AS 19 leases contd... ➧ AS 15 accounting for retirement benefits in
29 Provisions, Contingent Liabilities and Contingent Assets
Scope of the Standard ☛ This
statement
(contd…)
does
not
address
recognition of revenue i.e. it does not change
the
requirements
of
AS
9
revenue recognition ☛ The
term provision (as used in this
standard) does not include depreciation, impairment loss and doubtful debts Return
29 Provisions, Contingent Liabilities and Contingent Assets
Definitions explained ☛ A Provision is: ➧ A liability ➧ Which can be measured only by using a
substantial degree of estimation
☛ A Liability is: ➧ Present obligation arising from past events ➧ Settlement of which is expected to result
in
outflow
of
economic benefits
resources
embodying contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Definitions explained
(contd…)
☛ An Obligating Event is: ➧ An event that creates an obligation ➧ That results in an enterprise having no
realistic
alternative
to
settling
that
obligation
☛ A Possible Obligation is an obligation
the existence of which (based on the evidence
available)
at
the
balance contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Definitions explained (contd…) ☛ A Present Obligation is an obligation the existence
of
which
(based
on
the
evidence available) at the balance sheet date is considered probable i.e. more likely than not ☛ A Contingent Asset is: ➧ A possible asset that arises from past events ➧ The existence of which will be confirmed only
by the occurrence or non-occurrence of one or more
uncertain
future
events
not
contd... wholly
29 Provisions, Contingent Liabilities and Contingent Assets
Definitions explained (contd…) ☛ A Contingent Liability is: ➧ A possible obligation ✖ that arises from past events
✖ 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
➧ A present obligation that arises from past
events but is not recognised because: ✖ It is nor probable that an outflow of economic
resources will be required to settle the obligation or ✖ A reliable estimate of the amount of the
contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Definitions explained ☛A
Restructuring
(contd…)
Programme
is
a
controlled
by
programme: ➧ that
is
planned
and
management and ➧ that materially changes either: ✖ the scope of a business undertaken by an
enterprise Return
29 Provisions, Contingent Liabilities and Contingent Assets
Recognition criteria - Provisions
☛ Para 14 of AS states that a Provision
should be recognised when: ➧ an enterprise has a present obligation as a
result of a past event ➧ it is probable that an outflow of economic
resources embodying economic benefits will be required to settle the obligation and Return ➧ a reliable estimate can be made of the
Observations/other points Provisions ☛ On the basis of evidence available on the
29 Provisions, Contingent Liabilities and Contingent Assets
balance sheet date and after considering additional evidence provided by events occurring after the balance sheet date: ➧ where it is more likely than not that a
present obligation exists at the balance sheet date, the enterprise recognises a provision if: ✖ the settlement of obligation will result in
outflow of economic resources and contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Observations/other points - Provisions (contd…)
➧ where it is more likely that no present
obligation exists at the balance sheet date,
the
enterprise
discloses
a
contingent liability, unless the possibility of an outflow of economic resources is remote
☛ Only present obligations arising out of
past events should be considered ☛ No provision should be recognised for
costs
that
need
to
be
incurred contd... to
29 Provisions, Contingent Liabilities and Contingent Assets
Observations/other points - Provisions (contd…)
☛ An obligations always involves another
party to whom obligation is owed. It is not necessary, however, to know the identity
of
the
party
to
whom
the
obligation is owed ☛ An outflow of economic resources or
other event is regarded as probable if the probability that the event will occur contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Observations/other points - Provisions (contd…)
☛ Except
in
extremely
rare
cases,
an
enterprise will be able to determine a range of possible outcomes and can therefore make can reliable estimate of the amount of provision ☛ In extremely rare cases where it is not
possible to make a reliable estimate, no provision is recognised and the liability Return
29 Provisions, Contingent Liabilities and Contingent Assets
Recognition Contingencies
criteria
-
☛ As per para 26 of AS an enterprise
should
not
recognise
a
contingent
liability ☛ As per para 30 of AS an enterprise
should not recognise a contingent asset Return
29 Provisions, Contingent Liabilities and Contingent Assets
Observations / Contingencies
☛ Where
an
other
enterprise
is
points
jointly
-
and
severally liable for an obligation: ➧ provision (if the recognition criteria is
met) should be made of the part of the obligation which has to be met by the enterprise ➧ the part of the obligation that is expected
to be met by other parties is treated as
contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Observations/other points - Contingencies (contd…)
☛ Contingent Liabilities should be assessed
continually to determine whether outflow of
economic
resources
has
become
probable or not ☛ The moment the outflow of economic
resource
becomes
probable
provision
should be recognised if other recognition contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Observations/other points - Contingencies (contd…)
☛ When
the
realisation
of
income
is
virtually certain, then the related asset is not
a
contingent
asset
and
its
recognition is appropriate ☛ A contingent asset is not disclosed in the
financial statements ☛ Contingent
assets
are
assessed
continually and the moment the inflow of economic
resource
becomes
virtually
certain, the asset and related income Return
29 Provisions, Contingent Liabilities and Contingent Assets
Measurement of Provisions
☛ Best Estimate: ➧ The amount recognised as a provision
should
be
the
best
estimate
of
the
expenditure ➧ It should not be discounted to its present
value ➧ It should be based on evidence available
not only on the balance sheet date but also from the events occurring after the balance sheet date contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Measurement (contd…)
of
Provisions
☛ Risks and Uncertainties: ➧ Risks and uncertainties that surround
events and circumstances should be taken into account in reaching the best estimate ➧ Uncertainty
does
not
justify
the
creation of excessive provisions or a deliberate overstatement of liabilitiescontd...
29 Provisions, Contingent Liabilities and Contingent Assets
Measurement of Provisions ☛ Future Events: ➧ Future
events
(contd…)
affecting
the
amount
required to settle an obligation should be reflected in the amount of a provision if and only if there is sufficient objective evidence that they will occur
☛ Expected Disposal of Assets: ➧ Gains from the expected disposal of
assets should not be taken into account contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Measurement of Provisions ☛ Reimbursements:
(contd…)
➧ When the expenditure required to settle
a provision is expected to reimbursed by another party, the reimbursement should be recognised ➧ It should be recognised only if it is
virtually certain that reimbursement will be received ➧ Reimbursement should be treated as a
separate asset
contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Measurement of Provisions
(contd…)
☛ Changes in and Use of Provisions: ➧ Provisions should be reviewed at each
balance
sheet
date
and
adjusted
to
reflect the current best estimate ➧ If after review it is identified that it does
not
meet
the
recognition
criteria
it
should be reversed ➧ Provision
should
be
used
only
for Return
expenditure for which the provision was
29 Provisions, Contingent Liabilities and Contingent Assets
Other points
☛ Future Operating Losses: ➧ Provisions should not be recognised for
future operating losses ➧ Future operating losses do not meet the
definition of liability ➧ Expectation of future operating losses is
an indication that certain assets may be impaired and thus, these assets should be tested under AS 28 Impairment of
contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Other points (contd…) ☛ Restructuring: ➧ Provision
for
restructuring
costs
is
recognised only when the recognition criteria for provisions are met ➧ A restructuring provision should include
only the direct expenditure arising from the restructuring and which are: ✖ necessarily entailed by the restructuring
and ✖ not associated with the ongoing activities contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Other points
(contd…)
☛ Restructuring
(contd…)
:
➧ Examples of restructuring are: ✖ sale or termination of a line of business ✖ the closure of business locations in a
country or region ✖ relocation of business activities ✖ changes in management structure ✖ fundamental re-organisations that have a
material effect on the operations
contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Other points
(contd…)
☛ Restructuring
(contd…)
:
➧ Restructuring provision does not include
such costs as: ✖ retraining or relocating continuing staff ✖ marketing or ✖ investment
in
new
distribution networks
systems
and Return
29 Provisions, Contingent Liabilities and Contingent Assets
Disclosure ☛ For
each
class
of
provision,
the
following should be disclosed (para 66 of the AS) : ➧ carrying amount at beginning and end of
the period ➧ additional provisions made in the period ➧ amount used during the period ➧ unused
amounts
reversed
during
contd... the
29 Provisions, Contingent Liabilities and Contingent Assets
Disclosure (contd…) ☛ For each class of provision, the following should be disclosed (para 67 of the AS) : ➧ brief
description of the nature of the
obligation and expected timing of any resulting outflow of economic resources ➧ an indication of the uncertainties about
those
outflows
and
major
assumptions
concerning future events ➧ the amount of expected reimbursement,
stating the amount recognised as an asset for expected reimbursement
contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Disclosure (contd…) ☛ Unless the possibility
of
outflow
of
economic resources is remote, for each class
of
contingent
liability,
the
following should be disclosed (para 68 of the AS) : ➧ brief
description
of
the
nature
of
contingent liability ➧ an estimate of financial effect ➧ an indication of the uncertainties relating
to any outflow
contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Disclosure
(contd…)
☛ Where any of the information required
by para 68 is not disclosed because it is not practicable to do so, that fact should be stated ☛ If
the
disclosure
of
information
are
required in the Standard, is expected to prejudice seriously the position of the enterprise in a dispute with other parties on the subject matter of the provision or
contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Disclosure
(contd…)
☛ If as per above, the enterprise does not
disclose the information, it is required to disclose ➧ the general nature of the dispute ➧ reason why the information has not
been disclosed Return
29 Provisions, Contingent Liabilities and Contingent Assets
Comparison with AS 4 Contingencies and Events Occurring After the Balance Sheet Date AS 29 AS 4 Definition of Contingent Contingent Liability and Liability and Contingent Contingent Asset included in Asset separated the definition of ‘Contingency’ The term ‘Provision’ clearly No express segregation of distinguished from the term ‘Provision’ from the ‘Contingent Liability’ and term of ‘Contingent Liability’ thus both the terms have been elaborated contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Comparison with AS 4 Contingencies and Events Occurring After the Balance Sheet Date (contd…) AS 29 AS 4 Only if there is a present If it is probable that obligation and there will contingency will result in a be outflow of economic loss (an asset impaired or resources (to settle it) liability incurred), provision which can be reliably should be made estimated, provision should be made Provision once made No such express should be reviewed at requirement mentioned each Balance Sheet date to see whether it sill meets the recognition criteria contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Comparison with AS 4 Contingencies and Events Occurring After the Balance Sheet Date (contd…) AS 29 AS 4 Measurement of amount No such detailed of provision should be: measurement principles laid •Based on best estimate down •After considering risks and uncertainties •After considering future events without •Made considering expected disposal of assets •After taking into account reimbursements
contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Comparison with AS 4 Contingencies and Events Occurring After the Balance Sheet Date (contd…) AS 29 AS 4 Provision can be made for No such specific activity Restructuring activities if it included in the Standard meets the recognition criteria
Provision should be used No such express only for expenditure for requirement mentioned in which the provision was the Standard originally recognised Detailed disclosure No disclosure requirement requirement for the for contingent liability for Provisions made which provision is made contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Comparison with AS 4 Contingencies and Events Occurring After the Balance Sheet Date (contd…) AS 29 AS 4 If the disclosure of No such concession given information will by the Standard prejudicially affect the interest of the enterprise (in a dispute with third party) the same may not be disclosed. However, general nature of dispute and the reason for nondisclosure should be mentioned Return
Decision Table Summarized Situation 1 Situation 2
Position
29 Provisions, Contingent Liabilities and Contingent Assets
Situation 3 There is a present There is a possible There is a possible obligation that obligation or a obligation or a probably requires an present obligation present obligation outflow of resources that may, but where the and a reliable probably will not, likelihood of an estimate can be require an outflow outflow of made of the amount of resources. resources is of obligation. remote. Action 1 Action 2 Action 3 A provision is No provision is No provision is recognised (para 14). recognised (para recognised (para 26). 26). Disclosures are are No disclosure is required for the Disclosures required for the required (para 68). provision (paras 66 contingent liability and 67) Return (para 68).
29 Provisions, Contingent Liabilities and Contingent Assets
Comparison with International Accounting Standard IAS 37 AS 29 Discounting of Provisions Where the effect of The amount of provision time value of money is should not be discounted material the amount of to its present value provision should be discounted Contingent Assets Where the inflow of Contingent Assets are economic benefits is usually disclosed in the probable, contingent report of approving assets should be authority. No requirement disclosed in the of disclosing it in financial financial statements statements contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Comparison with International Accounting Standard (contd…) IAS 37
AS 29
Onerous Contracts Present obligation under No such requirement an Onerous Contract incorporated in AS 29 should be recognised as provision. Onerous Contract is a contract in which the unavoidable costs of meeting the obligations exceed the economic benefits expected to be received under it contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Comparison with International Accounting Standard (contd…) IAS 37 AS 29 Constructive Obligation IAS deals with Requirement of ‘constructive obligation’ in recognising constructive the context of creation of obligation has been provision. For example, in omitted by AS 29. case of a restructuring, a constructive obligation arises when an enterprise has a detailed formal plan for restructuring. Thus, in this case provision is recognised at an early Return stage
29 Provisions, Contingent Liabilities and Contingent Assets
Comparison with US GAAP - FASB Statement No. 5 - Accounting for Contingencies
US GAAP AS 29 If the estimated No such express amount of loss is requirement. However, all within a range, risks and uncertainties provision should be should be considered in based on best reaching best estimate. estimate. If best Uncertainty does not justify estimate cannot be creation of higher amount of made, minimum provision. Thus, in case of amount should be uncertainty lower amount provided with a should be provided with no disclosure of disclosure of higher amount contd... maximum amount.
29 Provisions, Contingent Liabilities and Contingent Assets
Comparison with US GAAP - FASB Statement No. 5 - Accounting for Contingencies (contd…) US GAAP AS 29 No provision should be No provision can be made for made for general general / unspecified /unspecified contingencies. Disclosure of contingencies such as such contingencies is also not seIf-insurance etc. encouraged. However, footnote disclosure and/or appropriation of retained earnings can be made for such contingencies.
contd...
29 Provisions, Contingent Liabilities and Contingent Assets
Comparison with US GAAP - FASB Statement No. 5 - Accounting for Contingencies (contd…) US GAAP AS 29 Unasserted claims exist No such requirement when the claimant has incorporated in the Standard elected not to assert the claim or because the claimant lacks knowledge of existence of claim. If it is probable that outcome of such claims (if made) will be unfavourable, the unasserted claim should be disclosed in the financial statements Return
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