IAS 29

Provisions, Contingent Liabilities and Contingent Assets


Accounting Standard (AS) 29

(issued 2003)

Provisions, Contingent Liabilities and

Contingent Assets

Contents

635

OBJECTIVE

SCOPE Paragraphs 1-9

DEFINITIONS 10-13

RECOGNITION 14-34

Provisions 14-25

Present Obligation 15

Past Event 16-21

Probable Outflow of Resources Embodying

Economic Benefits 22-23

Reliable Estimate of the Obligation 24-25

Contingent Liabilities 26-29

Contingent Assets 30-34

MEASUREMENT 35-45

Best Estimate 35-37

Risks and Uncertainties 38-40

Future Events 41-43

Expected Disposal of Assets 44-45

636

REIMBURSEMENTS 46-51

CHANGES IN PROVISIONS 52

USE OF PROVISIONS 53-54

APPLICATION OF THE RECOGNITION AND

MEASUREMENT RULES 55-65

Future Operating Losses 55-57

Restructuring 58-65

DISCLOSURE 66-72

APPENDICES

A. Tables - Provisions, Contingent Liabilities and

Reimbursements

B. Decision Tree

C. Examples: Recognition

D. Examples: Disclosure

E. Comparison with IAS 37, Provisions, Contingent Liabilities

and Contingent Assets (1998)

The following Accounting Standards Interpretation (ASI) relates to AS

29:

• ASI 30 —Applicability of AS 29 to Onerous Contracts

The above Interpretation is published elsewhere in this Compendium.

Accounting Standard (AS) 29*

(issued 2003)

Provisions, Contingent Liabilities and

Contingent Assets

(This Accounting Standard includes paragraphs set in bold italic type

and plain type, which have equal authority. Paragraphs in bold italic

type indicate the main principles. This Accounting Standard should be

read in the context of its objective and the Preface to the Statements of

Accounting Standards1 .)

Accounting Standard (AS) 29, ‘Provisions, Contingent Liabilities and

Contingent Assets’, issued by the Council of the Institute of Chartered

Accountants of India, comes into effect in respect of accounting periods

commencing on or after 1-4-2004. This Standard is mandatory in nature2

from that date:

(a) in its entirety, for the enterprises which fall in any one or more of

the following categories, at any time during the accounting period:

(i) Enterprises whose equity or debt securities are listed

whether in India or outside India.

* A limited revision to this Standard was made in 2005, to include onerous contracts

in the scope of the Standard (See ‘The Chartered Accountant’, December 2005, (pp.

927-928)). Pursuant to the limited revision, the words ‘except where the contract is

onerous’ have been added in paragraph 1(b); the sentence ‘This Statement does

not apply to executory contracts unless they are onerous.’ has been added in

paragraph 3; and the sentence ‘However, as AS 19 contains no specific requirements

to deal with operating leases that have become onerous, this Statement

applies to such cases’ has been added in paragraph 5(c). Pursuant to this limited

revision, paragraph 2 of Appendix E (dealing with comparison of AS 29 with IAS 37)

to AS 29 stands withdrawn. Consequently, the numbering of subsequent paragraphs

of Appendix E has been changed. This revision comes into effect in respect

of accounting periods commencing on or after April 1, 2006.

1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to which

Accounting Standards are intended to apply only to items which are material.

2 Reference may be made to the section titled ‘Announcements of the Council

regarding status of various documents issued by the Institute of Chartered

Accountants of India’ appearing at the beginning of this Compendium for a detailed

discussion on the implications of the mandatory status of an accounting standard..

638 AS 29 (issued 2003)

(ii) Enterprises which are in the process of listing their equity or

debt securities as evidenced by the board of directors’

resolution in this regard.

(iii) Banks including co-operative banks.

(iv) Financial institutions.

(v) Enterprises carrying on insurance business.

(vi) All commercial, industrial and business reporting enterprises,

whose turnover for the immediately preceding accounting

period on the basis of audited financial statements exceeds

Rs. 50 crore. Turnover does not include ‘other income’.

(vii) All commercial, industrial and business reporting enterprises

having borrowings, including public deposits, in excess of

Rs. 10 crore at any time during the accounting period.

(viii) Holding and subsidiary enterprises of any one of the above

at any time during the accounting period.

(b) in its entirety, except paragraph 67, for the enterprises which do

not fall in any of the categories in (a) above but fall in any one or

more of the following categories:

(i) All commercial, industrial and business reportingenterprises,

whose turnover for the immediately preceding accounting

period on the basis of audited financial statements exceeds

Rs. 40 lakh but does not exceed Rs. 50 crore. Turnover

does not include ‘other income’.

(ii) All commercial, industrial and business reporting enterprises

having borrowings, including public deposits, in excess of

Rs. 1 crore but not in excess of Rs. 10 crore at any time

during the accounting period.

(iii) Holding and subsidiary enterprises of any one of the above

at any time during the accounting period.

(c) in its entirety, except paragraphs 66 and 67, for the enterprises,

which do not fall in any of the categories in (a) and (b) above.

Provisions, Contingent Liabilities and Contingent Assets 639

Where an enterprise has been covered in any one or more of the categories

in (a) above and subsequently, ceases to be so covered, the enterprise will

not qualify for exemption from paragraph 67 of this Standard, until the

enterprise ceases to be covered in any of the categories in (a) above for two

consecutive years.

Where an enterprise has been covered in any one or more of the categories

in (a) or (b) above and subsequently, ceases to be covered in any of the

categories in (a) and (b) above, the enterprise will not qualify for exemption

from paragraphs 66 and 67 of this Standard, until the enterprise ceases to be

covered in any of the categories in (a) and (b) above for two consecutive

years.

Where an enterprise has previously qualified for exemption from paragraph

67 or paragraphs 66 and 67, as the case may be, but no longer qualifies for

exemption from paragraph 67 or paragraphs 66 and 67, as the case may be,

in the current accounting period, this Standard becomes applicable, in its

entirety or, in its entirety except paragraph 67, as the case may be, from the

current period.However, the relevant corresponding previous period figures

need not be disclosed.

An enterprise,which, pursuant to the above provisions, does not disclose the

information required by paragraph 67 or paragraphs 66 and 67, as the case

may be, should disclose the fact.

Fromthe date of thisAccounting Standard becomingmandatory (in its entirety

or with the exception of paragraph 67 or paragraphs 66 and 67, as the case

may be), all paragraphs of Accounting Standard (AS) 4, Contingencies and

Events OccurringAfter the Balance SheetDate, that dealwith contingencies

(viz., paragraphs 1 (a), 2, 3.1, 4 (4.1 to 4.4), 5 (5.1 to 5.6), 6, 7 (7.1 to 7.3),

9.1 (relevant portion), 9.2, 10, 11, 12 and 16), stand withdrawn.3

The following is the text of the Accounting Standard.

3 It is clarified that paragraphs of AS 4 that deal with contingencies would remain

operational to the extent they deal with impairment of assets not covered by other

Indian Accounting Standards. Reference may be made to Announcement XX under

the section titled ‘Announcements of the Council regarding status of various

documents issued by the Institute of Chartered Accountants of India’ appearing

at the beginning of this Compendium.

640 AS 29 (issued 2003)

Objective

The objective of this Statement 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 Statement is also to lay down appropriate accounting

for contingent assets.

Scope

1. This Statement should be applied in accounting for provisions and

contingent liabilities and in dealing with contingent assets, except:

(a) those resulting from financial instruments4 that are carried

at fair value;

(b) those resulting from executory contracts, except where the

5 contract is onerous ;

(c) those arising in insurance enterprises from contracts with

policy-holders; and

(d) those covered by another Accounting Standard.

2. This Statement applies to financial instruments (including guarantees)

that are not carried at fair value.

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 Statement does not apply to

executory contructs unless they are onerous.

4. This Statement applies to provisions, contingent liabilities and contingent

4 For the purpose of this Statement, the term ‘financial instruments’ shall have the

same meaning as in Accounting Standard (AS) 20, Earnings Per Share.

5 The meaning of the term ‘onerous contracts’ and the application of the recognition

and measurement principles of this Statement to such contracts are given in the

Accounting Standards Interpretation (ASI) 30 on ‘Applicability of AS 29 to Onerous

Contracts’. ASI 30 is published elsewhere in this Compendium.

Provisions, Contingent Liabilities and Contingent Assets 641

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

Statement instead of this Statement. For example, certain types of provisions

are also addressed in Accounting Standards on:

(a) construction contracts (see AS 7, Construction Contracts);

(b) taxes on income (see AS 22, Accounting for Taxes on Income);

(c) leases (see AS 19, Leases). However, as AS 19 contains no

specific requirements to deal with operating leases that have

become onerous, this Statement applies to such cases; and

(d) retirement benefits (see AS 15, Accounting for Retirement

Benefits in the Financial Statements of Employers).6

6. Some amounts treated as provisions may relate to the recognition of

revenue, for example where an enterprise gives guarantees in exchange for

a fee. This Statement 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 Statement does not change the requirements of AS 9.

7. This Statement defines provisions as liabilities which can bemeasured

only by using a substantial degree of estimation. The term‘provision’ is also

used in the context of items such as depreciation, impairment of assets and

doubtful debts: these are adjustments to the carrying amounts of assets and

are not addressed in this Statement.

8. Other Accounting Standards specify whether expenditures are treated

as assets or as expenses. These issues are not addressed in this Statement.

Accordingly, this Statement neither prohibits nor requires capitalisation of

the costs recognised when a provision is made.

6 AS 15 (issued 1995) has been revised in 2005 and is titled as ‘Employee Benefits’.

AS 15 (revised 2005) comes into effect in respect of accounting periods commencing

on or after April 1, 2006.

642 AS 29 (issued 2003)

9. This Statement 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,

DiscontinuingOperations.

Definitions

10. The following terms are used in this Statement with the meanings

specified:

A provision is a liability which can be measured only by using a

substantial degree of estimation.

A liability is a present obligation of the enterprise arising from past

events, the settlement of which is expected to result in an outflow from

the enterprise of resources embodying economic benefits.

An obligating event is an event that creates an obligation that results in

an enterprise having no realistic alternative to settling that obligation.

A contingent liability is:

(a) 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

(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.

A contingent asset is a possible asset that arises from past events the

existence of which will be confirmed only by the occurrence or nonoccurrence

of one or more uncertain future events not wholly within the

control of the enterprise.

Provisions, Contingent Liabilities and Contingent Assets 643

Present obligation - an obligation is a present obligation if, based on the

evidence available, its existence at the balance sheet date is considered

probable, i.e., more likely than not.

Possible obligation - an obligation is a possible obligation if, based on

the evidence available, its existence at the balance sheet date is

considered not probable.

A restructuring is a programme that 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 fromnormal business

practice, customand a desire to maintain good business relations or act in an

equitable manner.

12. Provisions can be distinguished from other liabilities such as trade

payables and accruals because in the measurement of provisions substantial

degree of estimation is involvedwith regard to the future expenditure required

in settlement. By contrast:

(a) trade payables are liabilities to pay for goods or services 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.

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 Statement, 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 events not

wholly within the control of the enterprise. In addition, the term ‘contingent

liability’ is used for liabilities that do not meet the recognition criteria.

644 AS 29 (issued 2003)

Recognition

Provisions

14. A provision should be recognised when:

(a) an enterprise has a present obligation 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 should be recognised.

PresentObligation

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, itmay 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, for example, the opinion of experts.The evidence

considered includes any additional evidence provided by events after the balance

sheet date. On the basis of such evidence:

(a) where it is more likely than not that a present obligation exists at

the balance sheet date, the enterprise recognises a provision (if

the recognition criteria are met); and

(b) 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 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.

Provisions, Contingent Liabilities and Contingent Assets 645

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.

Therefore, no provision is recognised for costs that need to be incurred to

operate in the future.The onlyliabilities recognised in an enterprise’s balance

sheet are those that exist at the balance sheet date.

18. It is only those obligations arising frompast events existing independently

of an enterprise’s future actions (i.e. the future conduct of its business) that

are recognised as provisions. Examples of such obligations are penalties or

clean-up costs for unlawful environmental damage, 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 (for example, by fitting smoke filters in a certain type of factory).

Because the enterprise can avoid the future expenditure by its future actions,

for example by changing itsmethod of operation, it has no present obligation

for that future expenditure and no provision is recognised.

19. 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.

20. An event that does not give rise to an obligation immediatelymay 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 damagewill 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 certain to be enacted.

Differences in circumstances surrounding enactment usually make it

impossible to specify a single event that would make the enactment of a law

virtually certain. In many cases itwill be impossible to be virtually certain of

the enactment of a law until it is enacted.

646 AS 29 (issued 2003)

ProbableOutflowofResources Embodying Economic Benefits

22. For a liability to qualify for recognition theremust be not only a present

obligation but also the probability of an outflow of resources embodying

economic benefits to settle that obligation. For the purpose of this Statement7 ,

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 68).

23. Where there are a number of similar obligations (e.g. productwarranties

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 itemmay be small, itmaywell

be probable that some outflow of resources will be needed to settle the class

of obligations as a whole. If that is the case, a provision is recognised (if the

other recognition criteria are 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

recognising a provision.

25. 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 68).

Contingent Liabilities

26. An enterprise should not recognise a contingent liability.

27. A contingent liability is disclosed, as required by paragraph 68, unless

7 The interpretation of ‘probable’ in this Statement as ‘more likely than not’ does not

necessarily apply in other Accounting Standards.

Provisions, Contingent Liabilities and Contingent Assets 647

the possibility of an outflow of resources embodying economic benefits is

remote.

28. Where an enterprise 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 enterprise recognises a provision for the part of

the obligation forwhich an outflowof 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 determine whether an outflow

of resources embodying economic benefits has become probable. If it

becomes probable that an outflowof future economic benefitswill be required

for an item previously dealt with as a contingent liability, a provision is

recognised in accordance with paragraph 14 in the financial statements of

the period in which the change in probability occurs (except in the extremely

rare circumstances where no reliable estimate can be made).

Contingent Assets

30. An enterprise should 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 thatmay 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.

33. A contingent asset is not disclosed in the financial statements. It is

usually disclosed in the report of the approving authority (Board of Directors

in the case of a company, and, the corresponding approving authority in the

case of any other enterprise), where an inflow of economic benefits is

probable.

34. Contingent assets are assessed continually and if it has become virtually

certain that an inflow of economic benefits will arise, the asset and the

648 AS 29 (issued 2003)

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.

36. The estimates of outcome and financial effect are determined by the

judgment of the management of the enterprise, supplemented by experience

of similar transactions and, in some cases, reports fromindependent 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 events

and circumstances should be taken into account in reaching the best

estimate of a provision.

39. Risk describes variability of outcome. A risk adjustment may increase

the amount at which a liability is measured. Caution is needed in making

judgments under conditions of uncertainty, so that income or assets are not

overstated and expenses or liabilities are not understated. However,

uncertainty does not justify the creation of excessive provisions or a deliberate

overstatement of liabilities. 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).

Provisions, Contingent Liabilities and Contingent Assets 649

Future Events

41. Future events that may affect the amount required to settle an

obligation should be reflected in the amount of a provision where there

is sufficient objective evidence that they will occur.

42. Expected future events may be particularly important in measuring

provisions. For example, an enterprise may believe that the cost of cleaning

up a site at the end of its lifewill be reduced by future changes in technology.

The amount recognised reflects a reasonable expectation of technically

qualified, objective observers, taking account of all available 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 associatedwith

increased experience in applying existing technology or the expected cost of

applying existing technology to a larger ormore 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 sufficient objective evidence.

43. 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 usually makes it impossible to specify

a single event that will provide sufficient, objective evidence in every case.

Evidence is required both of what legislation will demand and of whether it

is virtually certain 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 gains on

expected disposals of assets at the time specified by theAccounting Standard

dealing with the assets concerned.

650 AS 29 (issued 2003)

Reimbursements

46. Where some or all of the expenditure required to settle a provision

is expected to be reimbursed by another party, the reimbursement should

be recognised when, and only when, it is virtually certain that

reimbursement will be received if the enterprise settles the obligation.

The reimbursement should be treated as a separate asset. The amount

recognised for 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 pay the

amounts directly.

49. In most cases, the enterprise will remain liable for the whole of the

amount in question so that the enterprise 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 enterprise settles the liability.

50. In some cases, 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 forwhich 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 date and

adjusted to reflect the current best estimate. If it is no longer probable

that an outflow of resources embodying economic benefitswill be required

to settle the obligation, the provision should be reversed.

Provisions, Contingent Liabilities and Contingent Assets 651

Use of Provisions

53. A provision should be used only for expenditures for which the

provision was originally recognised.

54. Only expenditures that relate to the original provision are adjusted against

it. Adjusting expenditures against a provision that was originally recognised

for another purpose would conceal the impact of two different events.

Application of theRecognition andMeasurement

Rules

Future Operating Losses

55. Provisions should not be recognised for future operating losses.

56. Future operating losses do notmeet 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 enterprise tests these assets for

impairment under Accounting Standard (AS) 28, Impairment of Assets.

Restructuring

58. The following are examples of events thatmay 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 inmanagement structure, for example, eliminating a layer

of management; and

(d) fundamental re-organisations that have a material effect on the

nature and focus of the enterprise’s operations.

652 AS 29 (issued 2003)

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 agreement.Until there is a binding

sale agreement, the enterprise will be able to change itsmind 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 part of a

restructuring, the assets of the operation are reviewed for impairment under

Accounting Standard (AS) 28, Impairment of Assets.

62. A restructuring provision should include only the direct

expenditures arising from the restructuring which are those 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 basis as if they arose

independently of a restructuring.

64. Identifiable future operating losses up to the date of a restructuring are

not included in a provision.

65. As required by paragraph 44, 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.

Provisions, Contingent Liabilities and Contingent Assets 653

Disclosure

66. For each class of provision, an enterprise should 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 (i.e. incurred and charged against the

provision) during the period; and

(d) unused amounts reversed during the period.

67. An enterprise should 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 those outflows. Where

necessary to provide adequate information, an enterprise

should disclose the major assumptions made concerning

future events, as addressed in paragraph 41; and

(c) the amount of any expected reimbursement, stating the amount

of any asset that has been recognised for that expected

reimbursement.

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.

654 AS 29 (issued 2003)

69. In determining which provisions or contingent liabilities may be

aggregated to form a class, it is necessary to consider whether the nature of

the items is sufficiently similar for a single statement about themto fulfill the

requirements of paragraphs 67 (a) and (b) and 68 (a) and (b). Thus, it may

be appropriate to treat as a single class of provision amounts relating to

warranties of different products, but it would not be appropriate to treat as a

single class amounts relating to normal warranties and amounts 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

required by paragraphs 66-70 can be expected to prejudice seriously

the position of the enterprise in a dispute with other parties on the subject

matter of the provision or contingent liability. In such cases, an enterprise

need not disclose the information, but should disclose the general nature

of the dispute, together with the fact that, and reason why, the information

has not been disclosed.

Provisions, Contingent Liabilities and Contingent Assets 655

AppendixA

Tables - Provisions, Contingent Liabilities and

Reimbursements

The purpose of this appendix 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 a result of past events, there may be an outflow of

resources embodying future economic benefits in settlement of:

(a) a present obligation the one whose existence at the balance

sheet date is considered probable; or (b) a possible obligation

the existence of which at the balance sheet date is considered

not probable.

There is a present

obligation that

probably requires

an outflowof

resources and a

reliable estimate

can be made of the

amount of

obligation.

There is a possible

obligation or a

present obligation

thatmay, but

probablywill not,

require an outflowof

resources.

There is a possible

obligation or a

present obligation

where the likelihood

of an outflowof

resources is remote.

Aprovision 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

68).

656 AS 29 (issued 2003)

Reimbursements

Some or all of the expenditure required to settle a provision is

expected to be reimbursed by another party.

The enterprise has

no obligation for the

part of the

expenditure to be

reimbursed by the

other party.

The obligation for the

amount expected to

be reimbursed

remains with the

enterprise and it is

virtually certain that

reimbursement will

be received if the

enterprise settles the

provision.

The obligation for

the amount

expected to be

reimbursed remains

with the enterprise

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).

No disclosure is

required.

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 reimbursement is

disclosed together with

the amount recognised

for the reimbursement

(paragraph 67(c)).

The expected

reimbursement is not

recognised as an asset

(paragraph 46).

The expected

reimbursement is

disclosed (paragraph

67(c)).

Present obligation No

as a result of an

obligating event?

Yes

No

Portable outflow?

Yes

Provisions, Contingent Liabilities and Contingent Assets 657

AppendixB

Decision Tree

The purpose of the decision tree is to summarise the main recognition

requirements of the Accounting Standard for provisions and contingent

liabilities. The decision tree does not form part of the Accounting

Standard and should be read in the context of the full text of the

Accounting Standard.

Start

Possible No

obligation?

Yes

Remote?

Yes

No

Reliable estimate? No (rare)

Yes

Provide Disclose contingent

liability

Do nothing

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).

658 AS 29 (issued 2003)

AppendixC

Examples:Recognition

This appendix illustrates the application of the Accounting Standard to

assist in clarifying its meaning. It does not form part of the Accounting

Standard.

All the enterprises in the examples have 31 March year ends. In all

cases, it is assumed that a reliable estimate can be made of any outflows

expected. In some examples the circumstances described may have

resulted in impairment of the assets - this aspect is not dealt with in the

examples.

The cross references provided in the examples indicate paragraphs of

the Accounting Standard that are particularly relevant. The appendix

should be read in the context of the full text of the Accounting Standard.

Example 1: Warranties

A manufacturer gives warranties at the time of sale to purchasers of its

product. Under the terms of the contract for sale themanufacturer 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 a result of a past obligating event - The obligating

event is the sale of the product with a warranty, which gives rise to an

obligation.

An outflow of resources embodying economic benefits in settlement

- Probable for the warranties as a whole (see paragraph 23).

Conclusion - A provision is recognised for the best estimate of the costs of

making good under the warranty products sold before the balance sheet date

(see paragraphs 14 and 23).

Provisions, Contingent Liabilities and Contingent Assets 659

Example 2: Contaminated Land - Legislation Virtually

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 virtual certainty of

legislation requiring cleaning up.

An outflow of resources embodying economic benefits in settlement

- Probable.

Conclusion - A provision is recognised for the best estimate of the costs of

the clean-up (see paragraphs 14 and 21).

Example 3: Offshore Oilfield

An enterprise operates an offshore oilfield where its licensing agreement

requires it to remove the oil rig at the end of production and restore the

seabed. Ninety per cent of the eventual costs relate to the removal 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 damage

that will be caused by extraction of the oil.

An outflow of resources embodying economic benefits in settlement

- Probable.

Conclusion - A provision is recognised for the best estimate of ninety per

cent of the eventual costs that relate to the removal of the oil rig and restoration

of damage caused by building it (see paragraph 14). These costs are included

660 AS 29 (issued 2003)

as part of the cost of the oil rig. The ten per cent of costs that arise through

the extraction of oil are recognised as a liability when the oil is extracted.

Example 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 act in an equitable manner.

An outflow of resources embodying economic benefits in settlement

- Probable, a proportion of goods are returned for refund (see paragraph

23).

Conclusion - A provision is recognised for the best estimate of the costs of

refunds (see paragraphs 11, 14 and 23).

Example 5: Legal Requirement to Fit Smoke Filters

Under new legislation, an enterprise is required to fit smoke filters to its

factories by 30 September 2005. The enterprise has not fitted the smoke

filters.

(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 the costs of fitting smoke filters because no obligating event

has occurred (the fitting of the filters). However, an obligation might arise to

Provisions, Contingent Liabilities and Contingent Assets 661

pay fines or penalties under the legislation because the obligating event has

occurred (the non-compliant operation of the factory).

An outflow of resources embodying economic benefits in settlement

-Assessmentof probabilityof incurringfines and penalties bynon-compliant

operation depends on the details of the legislation and the stringency of the

enforcement 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).

Example 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 retrain a large proportion of its administrative and salesworkforce

in order to ensure continued compliance with financial services regulation.

At the balance sheet date, no retraining of staff has taken place.

Present obligation as a result of a past obligating event - There is no

obligation because no obligating event (retraining) has taken place.

Conclusion - No provision is recognised (see paragraphs 14 and 16-18).

Example 7: A Single Guarantee

During 2004-05, Enterprise A gives a guarantee 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 March 2005.

662 AS 29 (issued 2003)

Conclusion - No provision is recognised (see paragraphs 14 and 22). The

guarantee is disclosed as a contingent liability unless the probability of any

outflow is regarded as remote (see paragraph 68).

(b) At 31 March 2006

Present obligation as a result of a past obligating event - The obligating

event is the giving of the guarantee, which gives rise to a legal obligation.

An outflow of resources embodying economic benefits in settlement

- At 31 March 2006, it is probable that an outflow 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 fee, revenue is recognised under AS 9, Revenue

Recognition.

Example 8: A Court Case

After a wedding in 2004-05, ten people died, possibly as a result of food

poisoning fromproducts sold by the enterprise.Legal proceedings are started

seeking damages from the enterprise but it disputes liability. Up to the date

of approval of the financial statements for the year 31 March 2005, the

enterprise’s lawyers advise that it is probable that the enterprise will not be

found liable.However,when the 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 paragraph 15). Thematter is disclosed as a contingent liability unless the

probability of any outflow is regarded as remote (paragraph 68).

Provisions, Contingent Liabilities and Contingent Assets 663

(b) At 31 March 2006

Present obligation as a result of a past obligating event - On the basis

of the evidence available, there is a present obligation.

An outflow of resources embodying economic benefits in settlement

- Probable.

Conclusion - A provision is recognised for the best estimate of the amount

to settle the obligation (paragraphs 14-15).

Example 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 exists independently of the

company’s future actions - even the intention to incur the expenditure depends

on the company deciding to continue operating the furnace or to replace the

lining.

Example 9B: Refurbishment Costs - Legislative

Requirement

An airline is required by law to overhaul its aircraft once every 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 costs of overhauling aircraft are not recognised as a provision for the

664 AS 29 (issued 2003)

same reasons as the cost of replacing the lining is not recognised as a

provision in example 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.

Provisions, Contingent Liabilities and Contingent Assets 665

AppendixD

Examples: Disclosure

The appendix is illustrative only and does not form part of the Accounting

Standard. The purpose of the appendix is to illustrate the application of

the Accounting Standard to assist in clarifying its meaning.

An example of the disclosures required by paragraph 67 is provided

below.

Example 1 Warranties

A manufacturer gives warranties at the time of sale to purchasers of

its three product lines. Under the terms of the warranty, the

manufacturer undertakes to repair or replace items that fail to perform

satisfactorily for two years from the date of sale. At the balance sheet

date, a provision of Rs. 60,000 has been recognised. The following

information is disclosed:

A provision of Rs. 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 example is given below of the disclosures required by paragraph

72 where some of the information required is not given because it can

be expected to prejudice seriously the position of the enterprise.

Example 2 Disclosure Exemption

An enterprise is involved in a dispute with a competitor, who is alleging

that the enterprise has infringed patents and is seeking damages of Rs.

1000 lakh. The enterprise recognises a provision for its best estimate

of the obligation, but discloses none of the information required by

paragraphs 66 and 67 of the Statement. The following information is

disclosed:

666 AS 29 (issued 2003)

Litigation is in process against the company relating to a dispute

with a competitor who alleges that the company has infringed patents

and is seeking damages of Rs. 1000 lakh. 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.

Provisions, Contingent Liabilities and Contingent Assets 667

AppendixE

Note: This Appendix is not a part of the Accounting Standard. The

purpose of this appendix is only to bring out the major differences

between Accounting Standard 29 and corresponding International

Accounting Standard (IAS) 37.

Comparison with IAS 37, Provisions, Contingent

Liabilities and Contingent Assets (1998)

The Accounting Standard differs from International Accounting Standard

(IAS) 37, Provisions, Contingent Liabilities and Contingent Assets, in the

followingmajor respects:

1. Discounting of Provisions

IAS 37 requires that where the effect of the time value of money is material,

the amount of a provision should be the present value of the expenditures

expected to be required to settle the obligation. On the other hand, the

Accounting Standard requires that the amount of a provision should not be

discounted to its present value. The reason for not requiring discounting is

that, at present, in India, financial statements are prepared generally on

historical cost basis and not on present value basis.

2. Constructive obligation and Restructurings

IAS 37 deals with ‘constructive obligation’ in the context of creation of a

provision. The effect of recognising provision on the basis of constructive

obligation is that, in some cases, provision will be required to be recognised

at an early stage. For example, in case of a restructuring, a constructive

obligation arises when an enterprise has a detailed formal plan for

the restructuring and the enterprise has raised a valid expectation in those

affected that it will carry out the restructuring by starting to implement

that plan or announcing its main features to those affected by it. It is felt

that merely on the basis of a detailed formal plan and announcement thereof,

it would not be appropriate to recognise a provision since a liability can not

be considered to be crystalised at this stage. Further, the judgment whether

the management has raised valid expectations in those affected may be a

matter of considerable argument.

668 AS 29 (issued 2003)

In viewof the above, theAccountingStandard does not dealwith ‘constructive

obligation’. Thus, in situations such as restructuring, general recognition criteria

are required to be applied.

3. Contingent Assets

Both the Accounting Standard and IAS 37 require that an enterprise should

not recognise a contingent asset. However, IAS 37 requires certain disclosures

in respect of contingent assets in the financial statements where an inflow of

economic benefits is probable. In contrast to this, as a measure of prudence,

the Accounting Standard does not even require contingent assets to be

disclosed in the financial statements.TheStandard recognises that contingent

asset is usually disclosed in the report of the approving authority where an

inflow of economic benefits is probable.

4. Definitions

The definitions of the terms ‘legal obligation’, ‘constructive obligation’ and

‘onerous contract’ contained in IAS 37 have been omitted from the

Accounting Standard, as a consequence to above departures from IAS

37. Further, the definitions of the terms ‘provision’ and ‘obligating

event’

contained in IAS 37 have been modified as a consequence to above

departures from IAS 37. In the Accounting Standard, the definitions of the

terms ‘present obligation’ and ‘possible obligation’ have been added as

compared to IAS 37 with a view to bring more clarity.