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

AS 29 Measurement of Provisions: Best Estimate, Expected Value and Reimbursements

Updated 5 October 2026 · Fact-checked

Under AS 29 (Revised), a provision is the best estimate of the expenditure needed to settle the obligation at the balance sheet date. Use expected value for large populations and the most likely outcome for a single obligation. Do not discount the provision. Reimbursements are a separate asset, recognised only when virtually certain.

Understand Measurement of Provisions

Once you decide a provision must be recognised, the next question is: how much? AS 29 says the amount is the best estimate of the expenditure required to settle the present obligation at the balance sheet date. It is the amount an enterprise would rationally pay to settle the obligation, or to transfer it to a third party, at that date.

The estimate comes from management judgement, experience of similar transactions and sometimes reports from independent experts. Where a provision involves a large population of items, such as warranties on thousands of units, you use expected value: weigh each possible outcome by its probability and add them up. Where a single obligation is involved, the individual most likely outcome may be the best estimate. Even then, if other outcomes are mostly higher or mostly lower, the best estimate may be a higher or lower amount.

Risks and uncertainties must be considered in reaching the best estimate. But uncertainty does not justify creating excess provisions or deliberately overstating liabilities.

No discounting: under AS 29 the amount of a provision should not be discounted to its present value. You measure it at the undiscounted best estimate, even if settlement is years away or a discount rate is given in the question. Discounting a provision and showing the unwinding as a finance cost is a feature of Ind AS 37, not AS 29.

Future events that may affect the amount needed, such as new technology reducing clean-up costs, are reflected only when there is sufficient objective evidence that they will occur. Gains from the expected disposal of assets are not taken into account in measuring a provision, even if the disposal is closely linked to the event giving rise to the provision.

If some or all of the expenditure is expected to be reimbursed by another party, such as under an insurance contract, the reimbursement is recognised only when it is virtually certain that it will be received if the enterprise settles the obligation. It is treated as a separate asset, and the amount recognised must not exceed the provision. In the statement of profit and loss, the expense for the provision may be shown net of the reimbursement. Provisions are reviewed at each balance sheet date and adjusted to the current best estimate. A provision is used only for the expenditure for which it was originally recognised. If an outflow is no longer probable, the provision is reversed.

Key rules to remember

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.

How to solve Measurement of Provisions questions

Use this order for any measurement question. First confirm a provision is needed, then measure it.

1Confirm the recognition test: present obligation from a past event, probable outflow, reliable estimate. If it fails, there is no provision.
2Decide whether it is a large population of items or a single obligation.
3For a large population, compute expected value by multiplying each outcome by its probability. For a single obligation, take the most likely outcome and adjust it for other outcomes.
4Adjust for risks and uncertainties and for future events only if there is objective evidence. Ignore gains from expected asset disposals.
5Do not discount. Measure the provision at the undiscounted best estimate, even if settlement is years away or a discount rate is given. Discounting is an Ind AS 37 feature, not AS 29.
6Deal with reimbursements separately: recognise an asset only if virtually certain, capped at the provision.
7Show the journal entry and the amount charged to the statement of profit and loss. The charge may be shown net of the reimbursement.
8State the closing provision, any reversal or additional provision at later balance sheet dates, and give the disclosure if required.

Quickest way: Fast route for MCQs and written answers

When to use it: Use when the question gives probabilities, a settlement date, a discount rate, an insurance claim or an expected asset sale and asks for the provision amount.

Scan for the trigger word: 'probability' means expected value, 'years later' with a discount rate is a trap (do not discount under AS 29), 'insurer' means reimbursement, 'sale of asset' means ignore the gain.
In MCQs, remove options that net the reimbursement against the provision, that include the gain on disposal, or that discount the provision to present value.
For a single obligation with no probabilities, pick the most likely amount, adjusted upward or downward if other outcomes are mostly higher or lower. Do not simply average the range.
In written answers, write the rule in one line, then the working, then the conclusion. Step marks go to the rule and the working.
Keep the provision and the reimbursement asset on separate lines in your answer, even if the profit and loss charge is shown net.

Common mistakes in Measurement of Provisions

Using expected value for a single obligation such as one lawsuit.
Students see probabilities and apply the formula automatically.
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.
It feels logical to show only the net loss.
Fix: Recognise the provision in full and the reimbursement as a separate asset, only if virtually certain and capped at the provision.
Deducting the profit expected on selling an asset from the provision.
Students think of the sale as an offset to the cost.
Fix: AS 29 says gains from expected asset disposals are not considered in measuring a provision.
Discounting the provision to present value because a rate and a settlement date are given.
Students carry over the time value of money from Financial Management or from Ind AS 37 / IAS 37.
Fix: AS 29 does not permit discounting. Measure the provision at the undiscounted best estimate. Discounting is an Ind AS 37 feature.
Adding an unwinding of discount as a finance cost on a provision.
Students apply Ind AS 37 practice to an AS 29 question.
Fix: Under AS 29 there is no discount and so no unwinding. Review the provision at each balance sheet date and adjust it to the current best estimate.
Using a provision for a different expense than the one it was created for.
Students see an unused balance and use it elsewhere.
Fix: A provision is used only for the expenditure it was recognised for. Reverse it if the outflow is no longer probable.

Worked examples

Example 1

A company sells goods with a warranty. If minor defects occur in all goods sold, repair cost would be ₹4,00,000. If major defects occur in all goods sold, repair cost would be ₹20,00,000. Past experience shows 75% of goods will have no defects, 20% will have minor defects and 5% will have major defects. Compute the warranty provision.

Show the solution

Warranties cover a large population of items, so use expected value.
No defects: 75% × ₹0 = ₹0.
Minor defects: 20% × ₹4,00,000 = ₹80,000.
Major defects: 5% × ₹20,00,000 = ₹1,00,000.
Total = ₹0 + ₹80,000 + ₹1,00,000 = ₹1,80,000.

Answer: Provision for warranty = ₹1,80,000.

Example 2

At the balance sheet date, a company has a present obligation to restore a site, which it expects to settle in 2 years at a cost of ₹5,00,000. A pre-tax rate of 10% a year is mentioned in the question. The company expects ₹2,00,000 to be reimbursed by an insurer, and receipt is virtually certain if it settles the obligation. It also expects to gain ₹1,50,000 on selling a related machine. Show the amounts recognised now under AS 29 and the charge to the statement of profit and loss.

Show the solution

AS 29 does not permit discounting, so the 10% rate and the 2-year settlement period do not change the amount. The provision is the undiscounted best estimate: ₹5,00,000.
The expected gain of ₹1,50,000 on the machine is ignored in measuring the provision.
Reimbursement is virtually certain, so recognise a separate asset of ₹2,00,000. It is below the provision of ₹5,00,000, so it is within the cap.
Provision recognised: ₹5,00,000. Reimbursement asset: ₹2,00,000, shown separately in the balance sheet.
Net charge to the statement of profit and loss may be shown as ₹5,00,000 − ₹2,00,000 = ₹3,00,000.
There is no unwinding of discount under AS 29, because the provision is not discounted.

Answer: Provision ₹5,00,000 and separate reimbursement asset ₹2,00,000. The ₹1,50,000 gain is ignored. The profit and loss charge may be shown net as ₹3,00,000. There is no unwinding or finance cost on the provision.

Exam tips

Read the question for the word 'probability'. It signals expected value and is the most common way this topic is tested.
In reimbursement questions, always show the provision and the asset separately before showing any net figure.
Write the rule in one line before the working. A correct rule earns marks even if your arithmetic slips.
Do not discount provisions under AS 29, even if a rate is given.
In MCQs, any option that includes a gain on asset disposal in the provision is wrong.

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

Measurement of Provisions in other exams

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

Measurement of Provisions: frequently asked questions

When do I use expected value and when the most likely outcome?

Use expected value when the provision covers a large population of similar items, such as warranties. For a single obligation, the most likely outcome is generally the best estimate. Adjust it if other possible outcomes are mostly higher or lower.

Can I net the insurance claim against the provision?

No. The reimbursement is recognised as a separate asset only when it is virtually certain, and it cannot exceed the provision. In the statement of profit and loss, the expense may be shown net of the reimbursement.

Why are gains on asset disposal ignored?

AS 29 states that gains from the expected disposal of assets are not taken into account in measuring a provision. They are accounted for under the standard that applies to the asset, when the disposal actually occurs.

Does AS 29 allow discounting of provisions?

No. AS 29 does not permit discounting; provisions are measured at the undiscounted best estimate. Discounting to present value and showing the unwinding as a finance cost is a feature of Ind AS 37, so do not apply it in an AS 29 answer.