CA Intermediate · Advanced Accounting

AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets: formula sheet

Full chapter guide

Key formulas

Provision test: three conditions: Recognise a provision if: (1) present obligation from a past event, (2) outflow probable, (3) reliable estimate possible; All three must be met. If any fails, there is no provision.
Probable: Probable = more likely than not; Under AS 29 this means the probability is higher than that of the event not occurring.
Provision vs contingent liability: Present obligation + probable outflow + reliable estimate → provision; otherwise → contingent liability (disclose) unless outflow is remote; Remote outflow means no disclosure at all.
Contingent asset: Contingent asset → not recognised and not disclosed in financial statements; AS 29 says it is not disclosed in the financial statements, though it may be mentioned in the approving authority's report if an inflow is probable. Once realisation is virtually certain, it is no longer contingent and is recognised as an asset.
Obligation types: Obligation = legal (law/contract) or constructive (own conduct creating valid expectation); Both count as present obligations if the other conditions are met.
Definition of provision: Provision = liability that cannot be measured with certainty (uncertain timing or amount); It is different from an accrual or trade payable, where amount and date are reasonably certain.
Three recognition criteria: Recognise a provision only if: (1) present obligation from a past event AND (2) outflow probable AND (3) reliable estimate possible; All three must be met. Failing any one means no provision.
Meaning of probable: Probable = more likely than not (probability of outflow > probability of no outflow); AS 29 uses this as the meaning of probable for recognition. If the outflow is not probable, it is not a provision.
Obligating event: Obligating event = event that creates a legal or constructive obligation with no realistic alternative but to settle; The event must have occurred on or before the balance sheet date.
Decision rule for failures: Criteria met: provide | Possible obligation, or present obligation with outflow not probable, and outflow not remote: disclose contingent liability | Remote: no provision, no disclosure | Probable but no reliable estimate: disclose contingent liability; If the outflow is remote, there is no provision and no disclosure.
Expected value: Expected value = Σ (Probability × Outcome); Use for a large population of similar items, such as warranties. Probabilities must add up to 100%.
Measurement basis under AS 29: Provision = undiscounted best estimate of the expenditure; AS 29 does not permit discounting. Discounting to present value and unwinding belong to Ind AS 37, not AS 29.
Reimbursement limit: Reimbursement asset ≤ Provision recognised; Recognise only if virtually certain. It is a separate asset and is not netted off in the balance sheet.
Rule for single obligation: Best estimate = most likely outcome, adjusted for other possible outcomes; If other outcomes are mostly higher or lower, the estimate moves in that direction.
Excluded items: Gains on expected asset disposal are ignored; Applies even if the disposal is linked to the event creating the provision.
Contingent liability treatment: Not recognised; disclose in notes unless the possibility of outflow is remote; Disclose a brief description, an estimate of financial effect, the uncertainties about amount or timing, and the possibility of any reimbursement, where practicable.
Contingent asset treatment: Never recognised; not disclosed in the financial statements; if inflow is probable, describe in the Directors' report; The description in the Directors' report is brief and, where practicable, includes an estimate of financial effect.
Outflow decision ladder: Probable and reliably estimable → provision; possible (not probable) or not measurable → disclose; remote → no disclosure; Probable means more likely than not. Remote means the chance is very small.
Inflow decision ladder: Virtually certain → recognise asset; probable → describe in Directors' report; otherwise → nothing; Virtually certain inflow means the asset is not a contingent asset any more.
Reassessment rule: Review contingencies at each balance sheet date; change treatment in the period the probability changes, unless AS 4 makes the later event an adjusting event; A change in probability in a later period is a change in estimate, and earlier periods are not restated. Exception: new information after the balance sheet date but before approval of the accounts that gives evidence of conditions existing at the balance sheet date is an adjusting event under AS 4, so the year just ended is adjusted.
Recognition test: Provision = present obligation (past event) + outflow probable + reliable estimate; All three conditions must be met. Otherwise disclose a contingent liability, unless the outflow is remote.
Onerous contract provision: Provision = lower of (cost of fulfilling the contract, penalty or compensation for non-fulfilment); Use net unavoidable cost: unavoidable cost less the expected benefits from the contract. Impairment of assets dedicated to the contract is recognised first.
Restructuring provision: Provision = direct expenditure necessarily entailed by restructuring and not associated with ongoing activities; Needs a detailed formal plan and a valid expectation in those affected. Exclude retraining, relocation, marketing and new-system investment.
Future operating losses: Provision for future operating losses = nil; No present obligation from a past event exists.
Warranty expected value: Expected cost = Σ (probability × cost of each outcome); Use for a large population of similar items, such as warranties.
Recognition test for a provision: Present obligation from past event AND outflow probable AND reliable estimate → Provision; All three must hold. Failing any one means no provision.
Provision reconciliation: Closing balance = Opening balance + Additions (incl. increases) − Amounts used − Unused amounts reversed; Prepared for each class of provision. Comparative figures are not required under AS 29.
Decision rule for contingent liability: Possible obligation, or present obligation with outflow not probable or no reliable estimate → Disclose; Remote → No disclosure; A contingent liability is never recorded as a liability in the books.
Contingent asset rule: Never 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.
Best estimate of provision: Single obligation: most likely outcome. Large population: expected value (Σ probability × amount); Under AS 29 the provision is the best estimate of the expenditure required and is not discounted to present value (discounting is an Ind AS 37 requirement where the time value of money is material).
Reimbursement: Recognise reimbursement as a separate asset only when virtually certain; its amount cannot exceed the provision; The expense may be shown net of the reimbursement in the Statement of Profit and Loss.

Quick revision

A provision is a liability of uncertain timing or amount.
Recognise a provision only if there is a present obligation from a past event, an outflow is probable, and a reliable estimate can be made.
Probable means more likely than not.
A present obligation can be legal or constructive.
If an outflow is only possible, disclose a contingent liability. If it is remote, no disclosure is needed.
A contingent asset is not recognised while it remains contingent. When realisation becomes virtually certain, it is no longer a contingent asset and the asset is recognised.
A contingent asset is not disclosed in the financial statements. Where an inflow of economic benefits is probable, it is usually described in the report of the approving authority (for a company, the Board's report).
Measure a provision at the best estimate of the amount needed to settle the obligation at the balance sheet date.
For a large population of items use expected value. For a single obligation the most likely outcome is usually the best estimate.
Under AS 29 a provision is measured at the best estimate of the amount needed to settle the obligation, without discounting to present value.
Recognise a reimbursement only when it is virtually certain, and show it as a separate asset.
Recognise the present obligation under an onerous contract as a provision, measured at the lower of the net cost of fulfilling it (costs less expected benefits) and any compensation or penalty payable for failure to fulfil it.
Do not provide for future operating losses.
Provide for restructuring only when a constructive obligation exists, and include only direct expenditure.

Common mistakes

Treating every expected future cost as a provision. Fix: Insist on a present obligation from a past event. Future operating losses and planned costs with no obligation get no provision.
Confusing a provision with a contingent liability. Fix: A provision is a present obligation that passes all three tests. A contingent liability is a possible obligation, or a present one failing the probability or measurement test.
Treating a board decision or intention as an obligation. Fix: Ask whether there is a legal or constructive obligation at the balance sheet date. An internal plan that has created no valid expectation outside is not a past event.
Providing for future operating losses. Fix: Future operating losses have no past obligating event, so no provision is made. An onerous contract is different: the contract is a past event that has created a present obligation. The present obligation under the contract is recognised and measured as a provision, using the unavoidable cost of the contract. This is the lower of the cost of fulfilling it (net of expected economic benefits) and any compensation or penalty for failure to fulfil it. Do not provide the gross cost.
Using expected value for a single obligation such as one lawsuit. Fix: Expected value suits a large population of items. For one obligation, the most likely outcome is generally the best estimate, adjusted if other outcomes lean one way.
Reducing the provision by the insurance recovery. Fix: Recognise the provision in full and the reimbursement as a separate asset, only if virtually certain and capped at the provision.
Recognising a contingent asset as income because the claim looks strong. Fix: Recognition of an asset needs virtual certainty. Probable only earns a description in the Directors' report, not recognition and not a note.
Disclosing a contingent liability even when the outflow is remote. Fix: Remote means no disclosure. Disclose only if the possibility of outflow is not remote.
Providing for a restructuring because the board approved it. Fix: Check for a detailed formal plan plus a start of implementation or an announcement to those affected before the balance sheet date.
Including retraining, relocation or marketing costs in the restructuring provision. Fix: Include only direct expenditure not associated with ongoing activities, such as termination payments.

Exam tips

Always write the three conditions by name in theory answers. Each applied condition usually earns a separate mark.
In scenario questions, underline words like 'probable', 'possible', 'remote' and 'virtually certain'. They decide the classification.
Remember the asymmetry: contingent liabilities are disclosed unless remote, but contingent assets are not recognised or disclosed in the financial statements.
For MCQs, look for the trap of a future operating loss or an obligation that has not yet arisen from a past event.
Check the scope clause first. Questions often hide a deferred tax, lease or employee benefit item that belongs under another standard.
Write the three criteria by name in every recognition answer. Examiners award marks for each test applied to the facts.
Pick out the obligating event and its date from the question. It decides whether the obligation exists at the balance sheet date.
If the question uses words like 'possible', say contingent liability and disclose it. Do not provide.