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

Recognition of Provisions under AS 29: Criteria and Examples

Updated 5 October 2026 · Fact-checked

Under AS 29, a provision is a liability of uncertain timing or amount. Recognise it only when three conditions are met together: a present obligation from a past event, a probable outflow of resources, and a reliable estimate of the amount. If any one fails, do not recognise it.

Understand Recognition of Provisions

A provision is a liability that is uncertain in timing or amount. Examples are a warranty cost or the cost of a lawsuit you are likely to lose. It is different from a trade payable, where the amount and date are known.

AS 29 gives three tests. You recognise a provision only when all three are met: (1) the enterprise has a present obligation as a result of a past event; (2) it is probable that an outflow of resources embodying economic benefits will be required to settle it; (3) a reliable estimate of the amount can be made. Miss one and there is no provision.

The key idea is the obligating event. This is an event that creates a legal or constructive obligation, leaving the enterprise no realistic alternative to settling it. A legal obligation comes from a contract, law or other operation of law. A constructive obligation comes from the enterprise's own actions: an established pattern of past practice or a published policy has created a valid expectation in others that it will discharge the responsibility.

Two points often trip students. First, the obligation must exist at the balance sheet date. A future intention or a board decision with no outside commitment is not enough. Costs you can avoid by your own future actions (for example, future operating losses or planned maintenance of your own machinery) are not obligations. Second, AS 29 uses probable to mean more likely than not, for the purpose of recognition. The probability of an outflow must be higher than the probability of no outflow. If an outflow is not probable, you do not provide. A contingent liability is either a possible obligation whose existence will be confirmed only by uncertain future events, or a present obligation that is not recognised because an outflow is not probable or the amount cannot be estimated reliably. You disclose a contingent liability unless the possibility of an outflow is remote. If the outflow is remote, there is no provision and no disclosure. Where an outflow is probable but cannot be estimated reliably, it is also a contingent liability. AS 29 says it is only in extremely rare cases that a reliable estimate cannot be made.

Where it is unclear whether an obligation exists, the enterprise considers all available evidence, including the view of experts. If it is more likely than not that a present obligation exists at the balance sheet date, it is treated as present. If it is more likely than not that no present obligation exists, there is only a possible obligation. You then disclose a contingent liability, unless the possibility of an outflow is remote.

Key rules to remember

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.

How to solve Recognition of Provisions questions

Use this checklist for any AS 29 recognition question, whether it asks for a journal entry, a yes/no decision or a note.

1Identify the event in the question and ask whether it happened on or before the balance sheet date.
2Test for a present obligation: is it legal (contract, law) or constructive (past practice, published policy, public announcement)? A mere intention is not enough.
3Test whether an outflow is probable, meaning more likely than not. Use words like 'likely', 'expected', 'legal advice says' as clues.
4Test whether a reliable estimate can be made. If a range is given, note how AS 29 measurement applies.
5If all three tests pass, recognise a provision: debit the relevant expense, credit provision.
6If a test fails, classify the item: possible outflow means contingent liability (disclose); remote means nothing.
7Write the conclusion with the reason, naming each criterion you applied.

Quickest way: Three-tick test with a written format

When to use it: Use in the exam for any scenario asking 'should a provision be made?', and for MCQs on recognition.

MCQ: look for the word that decides the case. 'Intention', 'plan', 'future losses' signal no obligation. 'Possible' signals contingent liability. 'Likely' with a figure signals provision.
MCQ: eliminate options that recognise a provision for future operating losses or for a decision made but not communicated.
Written: use three lines headed Obligation, Probability, Estimate, each with a tick or cross and a one-line reason from the facts.
Written: give the conclusion, the amount and the entry if any, then the disclosure if it is a contingent liability.
Keep every number from the question in your answer. Step marks follow the criteria you apply, not only the final amount.

Common mistakes in Recognition of Provisions

Treating a board decision or intention as an obligation.
Students think a firm plan means a liability exists.
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.
Prudence is stretched too far.
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.
Confusing 'probable' with 'possible'.
Both sound like uncertainty.
Fix: Under AS 29, probable means more likely than not: the probability of an outflow is higher than the probability of no outflow. Provide when a present obligation exists and the outflow is probable. If the outflow is not probable, or only a possible obligation exists, disclose a contingent liability unless the outflow is remote.
Ignoring constructive obligations.
Students look only for a contract or law.
Fix: Check for past practice or published policy that creates a valid expectation, such as a refund policy followed every time.
Skipping the reliable estimate test or giving up on estimating.
Students stop once the first two criteria pass.
Fix: Always state the third test. Remember that AS 29 expects a reliable estimate to be possible in all but extremely rare cases.
Using the date of the court judgement or settlement as the obligating event.
Students confuse settlement date with the past event.
Fix: The event is the one that created the obligation, such as the sale with warranty or the damage caused, if it occurred by the balance sheet date.

Worked examples

Example 1

A company sells goods with a one-year warranty. Sales during the year were ₹1,00,00,000, all still under warranty at the balance sheet date. Past experience shows that warranty repair costs average 4% of the sales value, and the company expects this to hold this year. Should a provision be made, and for how much?

Show the solution

Past event: sale of goods with a warranty, which happened before the balance sheet date.
Present obligation: the warranty contract is a legal obligation to repair or replace goods.
Probable outflow: past experience shows repairs are required, so an outflow is probable for the class of obligations as a whole.
Reliable estimate: expected repair cost = 4% × ₹1,00,00,000 = ₹4,00,000, derived from past data.
All three criteria are met.

Answer: Yes. Recognise a provision for warranty of ₹4,00,000 by debiting Warranty Expense and crediting Provision for Warranty.

Example 2

On 31 March, the board of X Ltd decides to close a division next year, but has not announced the decision to anyone or started to implement it. The company also has an established policy, followed every time, of refunding the full price of faulty goods, and expects ₹60,000 of such refunds for goods sold before 31 March. Which, if either, gives rise to a provision at 31 March?

Show the solution

Closure decision: the board has only made an internal decision. Nothing has been communicated or started, so no valid expectation has been created in others.
So there is no present obligation, and no provision is recognised for closure costs.
Refund policy: the company's past practice creates a constructive obligation to refund, and the sales (past event) took place before 31 March.
An outflow is probable and the estimate of ₹60,000 is reliable.
All three criteria are met for refunds.

Answer: No provision for the closure, because there is no present obligation. A provision of ₹60,000 is recognised for refunds, as a constructive obligation exists.

Exam tips

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.
For MCQs, scan for phrases like 'intends to', 'plans to' and 'future losses'. These usually point to no provision.
End each answer with the conclusion, the amount and the journal entry, if one is required.

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

Recognition 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.

Recognition of Provisions: frequently asked questions

What are the recognition criteria for a provision under AS 29?

A provision is recognised when an enterprise has a present obligation from a past event, an outflow of resources is probable, and a reliable estimate can be made. All three must be met together. If any fails, no provision is recognised.

What is an obligating event in AS 29?

It is a past event that creates a legal or constructive obligation, so the enterprise has no realistic alternative to settling it. Examples are selling goods with a warranty or a published refund policy followed in practice.

What does probable mean in AS 29?

AS 29 uses 'more likely than not' as the meaning of probable for recognition. The probability of an outflow must be higher than the probability of no outflow. If the outflow is only possible, the item is a contingent liability and is disclosed, not provided for.

Can a provision be made for future operating losses?

No. Future operating losses do not arise from a past event, so there is no present obligation. AS 29 does not allow a provision for them.