Advanced Accounting · AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets

AS 29 Objective, Scope and Key Definitions

Updated 4 October 2026 · Fact-checked

AS 29 (Revised) ensures that provisions, contingent liabilities and contingent assets are recognised only when the criteria are met and are disclosed with enough information. A provision is a liability which can be measured only by using a substantial degree of estimation. To solve questions, test for a present obligation from a past event.

Understand AS 29 Objective, Scope and Key Definitions

Every business faces uncertain future outflows: a lawsuit, a warranty claim, a guarantee given. AS 29 tells you what to do with each. Some go in the books as a liability. Some are only disclosed in the notes. Some are not recognised in the financial statements at all. The standard's objective is to make sure that appropriate recognition criteria and measurement bases are applied, and that enough information is disclosed in the notes so users can understand the nature, timing and amount.

Start with the key terms. A provision is a liability which can be measured only by using a substantial degree of estimation. A liability is a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits. An obligating event is an event that creates a legal or constructive obligation, leaving the enterprise with no realistic alternative to settling it.

A legal obligation comes from a contract, legislation or other operation of law. A constructive obligation comes from the enterprise's own actions: through an established pattern of past practice, published policies or a sufficiently specific current statement, it has shown others it will accept certain responsibilities, and so has created a valid expectation that it will discharge them. Example: a shop that has always refunded unsatisfied customers, even beyond the law, and has publicised this.

A contingent liability is either (a) a possible obligation arising from past events, whose existence will be confirmed only by uncertain future events not wholly within the enterprise's control, or (b) a present obligation that is not recognised because an outflow is not probable, or the amount cannot be measured reliably. A contingent asset is a possible asset arising from past events, whose existence will be confirmed only by uncertain future events not wholly within the enterprise's control. It is not recognised in the financial statements. If an inflow is probable, it may be mentioned in the report of the approving authority (for example, the Board's report), not in the financial statements.

On scope: AS 29 applies to all provisions, contingent liabilities and contingent assets, except those resulting from executory contracts (other than onerous contracts) and those covered by other Accounting Standards. Examples of items covered elsewhere include construction contracts (AS 7), income taxes (AS 22), leases (AS 19) and employee benefits (AS 15). AS 29 does not apply to items covered by other Accounting Standards; guarantees not covered by another standard fall under AS 29. Leases are otherwise under AS 19, but AS 29 applies to operating leases that become onerous. A provision is distinct from accrued liabilities and from amounts like depreciation or impairment, which are adjustments to asset values.

Key rules to remember

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.

How to solve AS 29 Objective, Scope and Key Definitions questions

Use this sequence for any scenario asking whether to recognise, disclose or ignore an item.

1Check scope: is the item covered by another AS (AS 7, 15, 19, 22) or an executory contract that is not onerous? If yes, AS 29 does not apply. Remember that onerous operating leases still fall under AS 29.
2Identify the past event. Ask whether it is an obligating event that leaves no realistic alternative to settlement.
3Decide the nature of the obligation: legal or constructive. Look for law, contract, past practice or a public statement.
4Decide whether it is a present obligation or only a possible one. If it is only possible, it is a contingent liability.
5If it is a present obligation, test the outflow: probable (more likely than not), possible but not probable, or remote.
6Test whether a reliable estimate can be made. If not, it is a contingent liability.
7Conclude: recognise a provision, disclose a contingent liability, or make no entry or disclosure. Treat any possible inflow as a contingent asset (not recognised).
8Write the reason in one line using the exact test words, such as 'present obligation as a result of a past event'.

Quickest way: Three-gate filter for MCQs and short answers

When to use it: Use for MCQs and for 2 to 3 mark theory parts where you must classify an item fast.

Gate 1: Is there an obligation today from something already done? No means contingent liability or nothing.
Gate 2: Is the outflow more likely than not? No means contingent liability, or ignore if remote.
Gate 3: Can you estimate it reliably? No means contingent liability.
Pass all three means provision. In MCQs, eliminate options that recognise a contingent asset or disclose a remote item.
In written answers, use the format: Provision/facts, Test applied, Conclusion. Step marks come from naming each condition and applying it to the facts.

Common mistakes in AS 29 Objective, Scope and Key Definitions

Treating every expected future cost as a provision.
Students link provisions to prudence and book any anticipated expense.
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.
Both involve uncertainty, so they look alike.
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.
Disclosing or recognising a contingent asset.
Students mirror the treatment of contingent liabilities.
Fix: A contingent asset is not recognised. Recognise an asset only when realisation is virtually certain, since then it is no longer contingent.
Ignoring constructive obligations because no law requires payment.
Students equate obligation with legal duty.
Fix: If past practice or a public announcement created a valid expectation, there is a constructive obligation. Look for words such as 'always', 'policy' or 'announced'.
Disclosing remote contingent liabilities.
Students think more disclosure is always safer.
Fix: Disclose a contingent liability unless the possibility of outflow is remote. If remote, no disclosure.
Applying AS 29 to items governed by other standards.
Students skip the scope check, e.g. for deferred tax or retirement benefits.
Fix: Always check the scope exclusions first and name the relevant standard in your answer.

Worked examples

Example 1

A company sells goods with a warranty. Based on past experience, it is probable that a small proportion of goods sold will give rise to repair claims within the warranty period; the expected cost of these claims is ₹1,20,000. A customer has also filed a suit against the company for ₹5,00,000 for a defective product sold last year. Legal advisers say the company will probably lose and estimate the likely outflow at ₹5,00,000. Another suit for ₹2,00,000 has been filed, and the advisers think the company will probably win. Classify each item under AS 29.

Show the solution

Identify the obligating event for the first suit: the sale of the defective product last year. On the legal advisers' view, it is more likely than not that a present obligation exists at the balance sheet date, so the past event creates a present obligation.
Test the outflow: the advisers say the company will probably lose, so an outflow is probable (more likely than not).
Test the estimate: a provision is measured at the best estimate of the outflow, not simply the claim amount. Here the legal advisers' best estimate is assumed to equal the claim of ₹5,00,000, so a reliable estimate exists. All three conditions are met, so provide ₹5,00,000. If the advisers had estimated a different amount, that amount would be the provision.
Second suit: the company will probably win, so an outflow is not probable. The obligation is only possible, and it is a contingent liability.
The outflow is not remote, so disclose the ₹2,00,000 contingent liability in the notes with a brief description. Do not make a provision.
Warranty: past sales are the obligating event, and past experience gives a reliable estimate across the class of obligations. An outflow is probable for the class as a whole, so provide ₹1,20,000, the expected cost of repair claims, as the best estimate.

Answer: Provide ₹5,00,000 for the first suit, being the advisers' best estimate (assumed equal to the claim). Disclose the ₹2,00,000 suit as a contingent liability, with no provision. Provide ₹1,20,000 for warranty costs based on past experience.

Example 2

A company has a policy of cleaning up any contamination it causes, though no law requires it. It has publicly stated this policy and has always followed it. This year it contaminated land at a cost of ₹8,00,000 to clean up. Separately, the company expects to receive ₹3,00,000 in a claim against a supplier, which is under dispute and is not virtually certain. Explain the AS 29 treatment.

Show the solution

Contamination is a past event. No law requires the cleanup, so there is no legal obligation.
The company has a published policy and a record of following it. This creates a valid expectation in others, so there is a constructive obligation.
The obligating event leaves no realistic alternative to cleaning up, so a present obligation exists.
The outflow is probable since the company always cleans up, and the cost of ₹8,00,000 is reliably estimated. Recognise a provision of ₹8,00,000.
The ₹3,00,000 supplier claim is a possible asset depending on an uncertain future event, so it is a contingent asset.
A contingent asset is not recognised because realisation is not virtually certain, and it is not disclosed in the financial statements. If an inflow becomes probable, it may be mentioned in the report of the approving authority (for example, the Board's report), not in the financial statements.

Answer: Provide ₹8,00,000 for the cleanup (constructive obligation). The ₹3,00,000 claim is a contingent asset: not recognised and not disclosed in the financial statements. If an inflow is probable, it may be mentioned in the Board's report.

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.

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

AS 29 Objective, Scope and Key Definitions 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 Objective, Scope and Key Definitions: frequently asked questions

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

A provision is a present obligation from a past event, 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 fails the probability or measurement test. It is disclosed in the notes unless the outflow is remote.

What is the difference between legal and constructive obligation?

A legal obligation arises from a contract, legislation or other operation of law. A constructive obligation arises from the enterprise's own conduct, such as an established practice or a public statement, which creates a valid expectation that it will accept the responsibility. Both can lead to a provision.

What is an obligating event under AS 29?

It is an event that creates a legal or constructive obligation, leaving the enterprise with no realistic alternative to settling it. The obligation must exist at the balance sheet date. Intention to spend money in future is not an obligating event.

Which items are outside the scope of AS 29?

AS 29 does not apply to provisions, contingent liabilities and contingent assets from executory contracts (other than onerous contracts) or those covered by other Accounting Standards, such as AS 7, AS 15, AS 19 and AS 22. Onerous operating leases still fall under AS 29, and guarantees not covered by another standard also fall under it. Always name the other standard in your answer.