CA Final · Financial Reporting

Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets: formula sheet

Full chapter guide

Key formulas

Provision: Provision = Liability of uncertain timing or amount; Uncertainty is about when or how much, not about whether the obligation exists. If existence itself is uncertain, think contingent liability.
Liability test: Present obligation + Past event + Expected outflow of economic benefits; All three parts are needed for a liability.
Recognition conditions for a provision: Present obligation (legal or constructive) from a past event AND outflow probable AND reliable estimate possible; All three must be met. If any fails, no provision. Probable means more likely than not. A reliable estimate can almost always be made.
Obligating event: Obligating event = event creating a legal or constructive obligation with no realistic alternative to settlement; The obligation must exist independent of the entity's future actions. Future operating costs are not provisions.
Contingent liability treatment: Possible obligation, or present obligation failing the probability test (or, in extremely rare cases, the measurement test) → disclose, unless outflow is remote; Not recognised in the balance sheet. Inability to make a reliable estimate of a present obligation arises only in extremely rare cases.
Contingent asset treatment: Do not recognise; disclose only if inflow is probable; If realisation is virtually certain, it is no longer a contingent asset and is recognised as an asset.
Scope exclusions: Ind AS 37 applies to all provisions, contingent liabilities and contingent assets, except those from executory contracts (other than onerous contracts) and those within the scope of another Standard; Examples of other Standards: Ind AS 12, Ind AS 19, Ind AS 104 (insurance contracts), Ind AS 115 and Ind AS 109 (Ind AS 37 does not apply to financial instruments, including guarantees, within Ind AS 109). Ind AS 37 does apply to onerous contracts with customers, except where Ind AS 115 specifies otherwise. Ind AS 116 governs leases, including the lessee's lease liability and lessor accounting, but Ind AS 37 still applies to leases that become onerous before commencement and to short-term or low-value leases that become onerous.
Recognition test for a provision: Present obligation from a past event AND probable outflow AND reliable estimate → recognise provision; All three conditions must be met. If any one fails, no provision is recognised.
Meaning of probable: Probable = more likely than not = probability > 50%; For many similar items, assess the class as a whole, not each item alone.
Present obligation, where in doubt: Present obligation exists if it is more likely than not that it exists at the end of the reporting period; Used for disputes and lawsuits, after considering all available evidence.
Obligating event: Obligating event = event leaving no realistic alternative to settling the obligation; Legal: settlement is enforceable by law. Constructive: event creates a valid expectation in others.
If recognition criteria are not met: Possible obligation, or present obligation without probable outflow or reliable estimate → contingent liability (disclose, unless outflow is remote); A contingent liability is not recognised in the balance sheet.
Best estimate: large population: Expected value = Σ (Outcome × Probability); Used for many similar items such as warranties or refunds. Probabilities must add up to 100%.
Best estimate: single obligation: Most likely outcome (adjusted if other outcomes are mostly higher or lower); Also, for a continuous range with equal likelihood, use the mid-point.
Present value of provision: PV = Expected outflow ÷ (1 + r)ⁿ; Use a pre-tax rate. Apply only when the time value of money is material.
Unwinding of discount: Finance cost for the year = Opening provision × r; Recognised as borrowing cost. The provision rises to the full outflow by the settlement date.
Reimbursement: Separate asset recognised only if receipt is virtually certain; asset ≤ provision; Do not net off on the balance sheet. The profit and loss expense may be shown net.
Gains on disposal of assets: Ignored when measuring the provision; Even if the disposal is linked to the event that gave rise to the provision.
Contingent liability: probable outflow: Present obligation + outflow probable + reliable estimate → Provision (recognise); Probable means more likely than not. This is a provision, not a contingent liability.
Contingent liability: disclosure rule: Possible obligation, or present obligation with no recognition → Disclose, unless outflow is remote; Disclose a brief description, an estimate of financial effect, the uncertainties and the possibility of reimbursement, where practicable.
Contingent liability: remote outflow: Outflow remote → No recognition, no disclosure; Remote is the only level of likelihood where no disclosure is needed.
Contingent asset: probable inflow: Inflow probable → Disclose only (not recognise); Disclose the nature and, where practicable, the estimated financial effect.
Contingent asset: virtually certain: Inflow virtually certain → Not contingent; recognise the asset; Recognise the asset in the period in which the change occurs. The exception is an adjusting event after the reporting period under Ind AS 10. In that case, recognise it in the earlier reporting period.
Ongoing assessment: Review at each reporting date; Move items between provision, contingent liability, and recognised asset as the facts change.
Recognition test for a provision: Present obligation from a past event + Probable outflow (more likely than not) + Reliable estimate = Recognise; If any one condition fails, do not recognise. Consider a contingent liability disclosure instead, unless the outflow is remote.
Onerous contract provision: Provision = Lower of (Net cost of continuing = Unavoidable cost of fulfilling − Economic benefits expected) and (Penalty or compensation for exit); Compare the net cost of continuing with the exit penalty or compensation, and provide the lower. Recognise impairment on dedicated assets first.
Cost of fulfilling a contract: Incremental costs + Allocation of other costs directly related to the contract; This is the gross unavoidable cost used in the net cost of continuing above. Excludes general administrative costs not chargeable to the counterparty.
Restructuring provision: Provision = Direct expenditure necessarily entailed by the restructuring and not associated with ongoing activities; Include termination payments. Exclude retraining, relocation of continuing staff, marketing and new systems. Exclude future operating losses. Gains on expected asset sales are ignored.
Future operating losses: No past event → No present obligation → No provision; Always a no-provision answer. Check for asset impairment.
Warranty provision: Expected cost = Σ (Probability × Cost of each outcome) across the population of warranties; Use expected value for a large population of similar items. Discount if the time value of money is material.
Review rule: Provision at reporting date = current best estimate of the amount to settle the obligation; Review at the end of every reporting period. Reverse if an outflow is no longer probable.
Provision roll-forward (per class): Closing = Opening + Additional provisions (incl. increases to existing) + Unwinding of discount and effect of rate change − Amounts used − Unused amounts reversed; Disclose each line for every class of provision. Comparatives are not required for this reconciliation.
Use rule: Provision can be set off only against the expenditure for which it was originally recognised; Unrelated cost goes to profit or loss, or against its own provision. Do not use the old provision.
Unwinding of discount: Unwinding = Opening discounted provision × discount rate (for the period); Recognised as a borrowing cost, not as an operating expense.
Other disclosures per class: Nature and expected timing + uncertainties and major assumptions + expected reimbursement (and any asset recognised); Given alongside the reconciliation.
Contingent items: Contingent liability: disclose unless outflow is remote. Contingent asset: disclose only if inflow is probable.; Disclosure includes a brief description, estimate of financial effect and uncertainties. Contingent assets are reviewed continually. When the inflow becomes virtually certain, the asset is no longer contingent and is recognised.
Seriously prejudicial cases: In extremely rare cases, the information required for provisions, contingent liabilities and contingent assets may be omitted only where disclosure would seriously prejudice the entity's position in a dispute with other parties on the subject matter of the item; disclose the general nature of the dispute and why the information was not disclosed; This exception (para 92) is narrow. It is tied to a dispute with other parties on the subject matter of the provision, contingent liability or contingent asset. Do not use it as a routine escape.
IFRIC 21 levies: Obligating event = the activity that triggers payment, as identified by the legislation; Progressive activity gives progressive recognition. A threshold trigger gives recognition when the threshold is reached. Interim reports follow the same recognition principles.

Quick revision

Provision = liability of uncertain timing or amount.
Recognise only if: present obligation from a past event, outflow probable, reliable estimate possible.
Probable here means more likely than not.
An obligation can be legal or constructive.
Contingent liability: a possible obligation, or a present obligation not recognised. Disclose it unless the outflow is remote.
A contingent asset is not recognised; an asset is recognised only when realisation is virtually certain, because it is then no longer contingent. Disclose a contingent asset only when an inflow is probable.
Measure at the best estimate of the amount needed to settle at the reporting date.
Use expected value for large populations and the most likely outcome for a single obligation.
Discount when the time value of money is material, using a pre-tax rate.
Reimbursement: recognise a separate asset only when it is virtually certain that the reimbursement will be received if the entity settles the obligation. The asset cannot exceed the provision amount. Show it gross in the balance sheet (asset and provision separately). The profit or loss expense may be shown net of the reimbursement.
Onerous contract: unavoidable costs exceed the expected economic benefits, so provide for the lower of the cost of fulfilling the contract (incremental costs plus an allocation of other directly related costs) and any compensation or penalty arising from failure to fulfil it. Before a separate provision is made, recognise any impairment loss on assets dedicated to that contract under Ind AS 36.
Restructuring provision needs a detailed formal plan and a valid expectation in those affected, and covers only direct expenditure.
Never provide for future operating losses.
Use a provision only for the expenditure it was created for, and review it at each reporting date.

Common mistakes

Treating a future operating loss or planned expenditure as a provision. Fix: Check for a past obligating event. Without a present obligation at the reporting date, there is no provision, however certain the future cost.
Saying a provision is a liability whose amount is certain, or confusing it with an accrual. Fix: A provision has uncertain timing or amount. Accruals and trade payables are for goods or services received and invoiced or agreed, with little uncertainty.
Treating a future intention or need to spend as a present obligation, for example a provision for planned major repairs. Fix: Apply the no realistic alternative test. If future action can avoid the spending, there is no present obligation, so no provision.
Reading 'probable' as 'possible' or as 'certain'. Fix: Under Ind AS 37, probable means more likely than not, above 50%. Possible but not probable means a contingent liability.
Using the most likely outcome for a large population of items such as warranty claims. Fix: Link the method to the population. Many items means expected value. One item means most likely outcome.
Netting the reimbursement against the provision on the balance sheet. Fix: Show a full provision as a liability and the reimbursement as a separate asset. Only the profit and loss expense may be shown net.
Recognising a contingent asset in the books when the inflow is only probable. Fix: For assets the recognition bar is virtually certain. Probable only gives disclosure.
Saying a remote contingent liability must be disclosed. Fix: If the possibility of outflow is remote, there is no disclosure at all.
Providing for future operating losses because the business is expected to lose money. Fix: No past event means no obligation. Say that no provision is made, and test the related assets for impairment under Ind AS 36.
Recognising a restructuring provision on the date the board approves the plan. Fix: A board decision alone does not create a constructive obligation. You need a detailed formal plan plus a valid expectation in those affected through announcement or implementation before the reporting date.

Exam tips

Begin every case answer with a scope check and one line on the obligating event. Examiners award marks for this reasoning.
Learn the exact definitions of provision, contingent liability and contingent asset word for word in simple form. Definition questions are easy marks.
In legal obligation versus constructive obligation questions, give a one-line source for each (contract or law versus past practice or published policy creating valid expectation) and one example.
In MCQ cases, watch the words probable, possible and remote. Probable means more likely than not, and remote means very unlikely.
Write conclusions as a short table-free list: item, classification, accounting treatment. Do not stop at the classification.
Write the three conditions by name and tie each to a fact in the case. Marks are given for the application, not only the rule.
In MCQs, look for the word 'intends' or 'plans'. It often signals that the first condition fails.
If the answer is 'no provision', state what applies instead: contingent liability disclosure unless the outflow is remote, or no disclosure at all.