Accounting Standard 29 : Provisions, Contingent Liabilities and Contingent Assets

Accounting Standard 29 : Provisions, Contingent Liabilities and Contingent Assets

· This statement should be applied in accounting for provisions and contingent liabilities and in dealing with contingent assets, other than those resulting from financial instruments that are carried at fair value, those resulting from executory contracts, those arising in insurance enterprises from contracts with policy – holders and those covered by another Accounting Standard.

· Provision is a liability, which can be measured only by using a substantial degree of estimation.

· Liability is a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits.

· Contingent Liability is -

o a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise; or

o a present obligation, but is not recognised because it is not probable that outflow of resources embodying economic benefits will be required (or is remote) for its settlement or a reliable estimate of the amount of the obligation cannot be made.

· Contingent asset is a possible asset that arises from past events, the existence of which will be confirmed only by the occurrences or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise.

· A provision should be recognised when –

o an enterprises has a present obligation as a result of a past event;

o it is probable (more likely than not) that an outflow of resources will be required to settle the obligation; and

o a reliable estimate can be made of the amount of the obligation.

· A contingent liability is not recognised in financial statements but is disclosed.

· A contingent asset is not recognised in financial statements.

· The amount of provision should be measure before tax at the best estimate of the expenditure required to settle the present obligation and should not be discounted to its present value.

· The risks and uncertainties that inevitably surround many events and circumstances should be taken into account in arriving at the best estimate of provision to avoid its under or over statement.

· Expected future events, which are likely to affect the amount required to settle an obligation, may be important in measuring provisions.

· Gains on the expected disposal of assets should not be taken into account in measuring a provision, even if the expected disposal is closely linked with the item requiring provision.

· Whenever all or part of the expenditure relevant to a provision is expected to be reimbursed by another party, the reimbursement should be recognised only on virtual certainty of its receipt. The reimbursement should be treated as a separate asset and should not exceed the amount of the provision. In the statement of profit and loss, the expense relating to a provision may be presented net of the amount recognised for a reimbursement.

· Provisions should be reviewed at each balance sheet date and adjusted to reflect the current best estimate. The provision should be reversed, if it is no longer probable to result in a liability.

· A provision should be used only for expenditures for which the provision was originally recognised and not against a provision recognised for another purpose, so as not to conceal the impact of two different events.

· Provision should not be recognised for future operating losses, since it is not a liability nor meet the crieteria for provisions.

· A restructuring provision should include only the direct expenditures, necessarily entailed by the restructuring and not associated with the ongoing activities of the enterprise.

· Disclosure

o For each class of provision - the carrying amount at the beginning and end of the period; additional provisions made, amounts used and unused amounts reversed during the period.

o Also for each class of provision – description of the nature of the obligation, the expected timing of any resulting outflows of economic benefits, the uncertainties about those outflows and the amount of any expected reimbursement (also stating the amount of any asset recognised therefor)

o For each class of contingent liability – a brief description of its nature and where practicable, an estimate of its financial effect, the uncertainties relating to any outflow and the possibility of any reimbursement. If the information is not disclosed, being not practicable, the fact thereof is to be disclosed.

In extremely rare cases, disclosure of any information can be expected to prejudice seriously the position of the enterprise in a dispute with other parties; in such cases the information need not be disclosed but,
the fact and reason for such non–disclosure alongwith the general nature of dispute should be disclosed.