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CA Intermediate · Advanced Accounting

AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets

AS 29 (Revised) tells you when to book a provision, when to only disclose a contingent liability, and when to ignore a contingent asset. To solve problems, test three recognition conditions, pick the best estimate, then decide: recognise, disclose, or do nothing.

What this chapter covers

AS 29 (Revised) deals with uncertain obligations. A company may be sued, may have given a warranty, may have signed a loss-making contract or may plan to close a unit. The standard tells you whether such an item is a provision (a liability recognised in the books), a contingent liability (disclosed in notes) or a contingent asset (not recognised).

The chapter has a clear logic. First learn the definitions: provision, liability, obligating event, legal and constructive obligation, contingent liability, contingent asset. Then learn the three conditions for recognising a provision: a present obligation from a past event, a probable outflow of resources, and a reliable estimate. After that come measurement (best estimate, expected value, risks and uncertainties, reimbursements; no discounting) and the special cases: onerous contracts and restructuring.

The chapter links to other parts of Advanced Accounting. Provisions appear in company final accounts under Schedule III, in AS 4 for events after the balance sheet date, and in AS 5 for prior period items and changes in estimates. It also connects to Auditing, where auditors test provisions and contingent liabilities. Questions are often short and mixed with MCQs, so clear concepts earn quick marks.

This chapter is short, conceptual and repeatedly tested. You get MCQs on classification (provision, contingent liability or nothing), and short written problems on measurement, onerous contracts, restructuring and disclosure. The marks depend on applying a few rules with correct reasons, not on long calculations. A student who learns the decision flow can answer most questions in a few minutes, which frees time for heavier chapters.

AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets: topics in the order to study them

  1. 1AS 29 Objective, Scope and Key DefinitionsEvery later rule uses these terms, so you must be sure what an obligating event and a constructive obligation mean first.
  2. 2Recognition of ProvisionsThe three recognition conditions are the core test, and every classification question starts here.
  3. 3Measurement of ProvisionsOnce a provision qualifies, you need the best estimate, expected value, risks and uncertainties, and reimbursement rules to put a figure on it.
  4. 4Contingent Liabilities and Contingent AssetsThis covers items that fail the recognition test, so it is easiest to learn after you know what passes.
  5. 5Applying Recognition Rules: Onerous Contracts and RestructuringThese are the standard applications of the recognition rules, with extra conditions you can add once the basics are firm.
  6. 6Disclosures and Practical Problems in AS 29Finish with note disclosures and mixed problems so you practise the whole decision flow together.

How to prepare AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets

Treat AS 29 as a decision flow, not a list of facts to memorise. Build the flow once, then test it on many small cases.

  1. Write the definitions in your own words on one page. Keep provision, contingent liability and contingent asset side by side.
  2. Learn the three recognition conditions and be able to state them from memory. For each case, ask the three questions in order and write the answer for each.
  3. Learn the meaning of probable, possible and remote in the context of the standard. Probable means more likely than not. Practise sorting cases into these buckets.
  4. Practise measurement with small numbers: single obligation, large population, ranges, risks and uncertainties, and expected reimbursement. Write the working step by step.
  5. Study onerous contracts and restructuring as separate mini-topics. For restructuring, learn the conditions for a constructive obligation, such as a detailed formal plan and a valid expectation raised in those affected.
  6. Solve past exam and ICAI practice questions in a mixed set. For each, write the conclusion first (provision, disclose or ignore), then the reason in one or two lines.
  7. Attempt MCQs in timed sets. There is no negative marking, so always mark an answer, and use elimination on options that mix up provision and contingent liability.

Common mistakes in AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets

  • Creating a provision for a possible future loss or for future operating losses.

    Fix: Apply the three conditions. If there is no present obligation from a past event, no provision arises, whatever the size of the expected loss.

  • Treating a contingent liability as a provision, or the reverse.

    Fix: Ask whether an outflow is probable and the estimate reliable. If yes, it is a provision. If only possible, it is a contingent liability.

  • Recognising a contingent asset because the gain looks very likely.

    Fix: Remember the asymmetry. A contingent asset is not recognised while it remains contingent. Recognise the asset only when realisation becomes virtually certain, because it is then no longer a contingent asset. Until then, do not recognise it in the financial statements. Where an inflow is probable, it is usually described in the report of the approving authority (for a company, the Board's report).

  • Netting a reimbursement against the provision.

    Fix: Show the provision at its full amount. Recognise the reimbursement as a separate asset, only when it is virtually certain, and net the two only in the statement of profit and loss.

  • Including future operating costs or relocation of staff in a restructuring provision.

    Fix: Include only direct expenditure arising from the restructuring that is necessary and not related to ongoing activities.

  • Writing only the number in a written answer and skipping the reasoning.

    Fix: State the condition tested, give the facts, then the conclusion and the accounting entry or disclosure. Step marks depend on these links.

Last-day revision: AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets

  • 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.

AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets practice questions

AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets: frequently asked questions

Is AS 29 mostly theory or numerical?

It is mostly conceptual, with short numerical parts on measurement. Expect classification cases, expected value workings and entries. The numbers are small, but the reasoning must be correct.

What is the difference between a provision and a contingent liability?

A provision is a present obligation with a probable outflow and a reliable estimate, so it is recognised in the books. A contingent liability is a possible obligation or a present obligation that does not meet these tests, so it is only disclosed.

Do I need to disclose a remote contingent liability?

No. If the possibility of an outflow is remote, no disclosure is required. Disclose a contingent liability when an outflow is possible, unless it is remote.

How should I answer a written question on AS 29?

Test the three recognition conditions one by one using the facts given. Then state the conclusion, give the amount with working, and mention the disclosure or entry. Keep each step on a separate line.