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CMA Intermediate · Corporate Accounting and Auditing

Provisions, Contingent Liabilities and Contingent Assets (Ind AS 37)

Ind AS 37 tells you when to recognise a liability whose timing or amount is uncertain. Recognise a provision for a present obligation if an outflow is probable and a reliable estimate exists. Otherwise disclose a contingent liability, or ignore it if the outflow is remote. Do not recognise contingent assets.

What this chapter covers

This chapter covers how a company treats uncertain obligations and uncertain gains. The standard's objective is to apply appropriate recognition criteria and measurement bases to provisions, contingent liabilities and contingent assets, and to disclose enough in the notes for users to understand their nature, timing and amount.

The core idea is a three-way split. A provision is a liability that is recognised. A contingent liability is not recognised as a liability. It is either a possible obligation, or a present obligation that fails the recognition criteria (the outflow is not probable, or the amount cannot be estimated reliably). A contingent asset is a possible asset that depends on uncertain future events. You must be able to place any fact situation into one of these buckets and justify it.

The chapter links to the rest of Paper 10 in two ways. In corporate accounting, provisions and contingencies appear in the notes to financial statements and in company accounts questions. In auditing, the same judgement matters: an auditor tests whether management has recognised, disclosed or ignored items correctly. It also connects to other standards, because Ind AS 37 does not apply to items covered by another Standard, such as income taxes (Ind AS 12), leases (Ind AS 116) and employee benefits (Ind AS 19), except in the limited cases the standard names.

This chapter is short, rule-based and heavily tested through scenarios. Section A MCQs often ask you to classify an item as a provision, a contingent liability or a contingent asset, and each question is worth 2 marks. In the written section, a short case with a legal claim, a warranty or a closure plan lets you earn step marks by applying the criteria in order. The same decision logic works every time, so the effort you put in pays back across many question types. It is one of the more predictable chapters to prepare well.

Provisions, Contingent Liabilities and Contingent Assets (Ind AS 37): topics in the order to study them

  1. 1Ind AS 37 Scope and Key DefinitionsYou need the vocabulary and the scope exclusions first, because every later rule depends on terms like provision, obligation and contingent.
  2. 2Recognition Criteria for ProvisionsThe recognition test is the heart of the chapter and decides which bucket every item falls into.
  3. 3Measurement of ProvisionsOnce you know a provision is recognised, you learn how to put an amount on it.
  4. 4Contingent Liabilities and Contingent AssetsThis covers items that fail the recognition test, so it is easiest after you know the test itself.
  5. 5Reimbursements, Changes and Use of ProvisionsThis deals with what happens to a provision after it is set up, so it follows recognition and measurement.
  6. 6Onerous Contracts and Restructuring ProvisionsThese are special applications of the general rules, so study them once the general criteria are firm.
  7. 7Applying Ind As 37: Illustrations and DisclosuresEnd with mixed cases and note disclosures, which test everything together and are close to exam format.

How to prepare Provisions, Contingent Liabilities and Contingent Assets (Ind AS 37)

Treat this chapter as a decision process, not a list of definitions. Practise the same sequence of questions on every case until it becomes automatic.

  1. Read the objective and the scope paragraphs, and note which items belong to other Standards, such as income taxes, leases and employee benefits.
  2. Learn the distinction between provisions and contingent liabilities in your own words. A provision is a present obligation with a probable outflow and a reliable estimate. A contingent liability is either a possible obligation or a present obligation that fails those tests.
  3. Build a decision flow: is there a present obligation, is an outflow probable, can you estimate it reliably? Write it on one page and apply it to every illustration.
  4. Practise measurement and the follow-up treatment: best estimate, reimbursements, review at each reporting date, and use of a provision only for the expense it was set up for.
  5. Study onerous contracts and restructuring together. For onerous contracts, remember that impairment on assets used in the contract is recognised before a separate provision. For restructuring, the general recognition criteria must be met before any provision is made.
  6. Solve past MCQs for classification and a few written cases. In written answers, state the criterion, apply it to the facts, then give the conclusion and the journal entry or note disclosure.
  7. In the last week, revise the one-page flow and the disclosure points, and redo the questions you got wrong.

Common mistakes in Provisions, Contingent Liabilities and Contingent Assets (Ind AS 37)

  • Treating every uncertain item as a provision.

    Fix: Run the three tests every time: present obligation, probable outflow, reliable estimate. If any test fails, move to contingent liability.

  • Calling a present obligation a contingent liability only because it is a legal dispute.

    Fix: Ask whether a present obligation exists and whether an outflow is probable. A dispute can still lead to a provision if both are met and the amount is estimable.

  • Forgetting the scope exclusions.

    Fix: Check first whether another Standard deals with the item. Remember the exceptions: onerous leases and onerous contracts with customers still fall under Ind AS 37.

  • Booking a provision for a restructuring without checking the recognition criteria.

    Fix: State that a restructuring provision follows the general criteria, then test them against the facts given in the question.

  • Setting up a provision for an onerous contract without considering impairment first.

    Fix: Recognise any impairment loss on assets used in fulfilling the contract before the separate provision.

  • Skipping disclosure in written answers.

    Fix: End each answer with the disclosure or note treatment for the item, covering its nature, timing and amount where relevant.

Last-day revision: Provisions, Contingent Liabilities and Contingent Assets (Ind AS 37)

  • All provisions are uncertain in timing or amount, but a provision is recognised and a contingent liability is not.
  • A provision needs a present obligation, a probable outflow of economic benefits and a reliable estimate.
  • A contingent liability is either a possible obligation or a present obligation that fails the recognition criteria.
  • A present obligation fails recognition if the outflow is not probable or the amount cannot be estimated reliably.
  • The term contingent covers items whose existence is confirmed only by uncertain future events not wholly within the entity's control.
  • Ind AS 37 does not apply to executory contracts unless the contract is onerous.
  • If another Standard covers a specific provision, apply that Standard instead. Examples are income taxes, leases and employee benefits.
  • Ind AS 37 still applies to onerous contracts with customers, because Ind AS 115 has no specific requirement for them.
  • Before setting up a provision for an onerous contract, recognise any impairment loss on assets used in the contract.
  • A restructuring provision is recognised only when the general recognition criteria are met.
  • Contingent assets are not recognised in the financial statements.
  • Disclosures should help users understand the nature, timing and amount of the item.

Provisions, Contingent Liabilities and Contingent Assets (Ind AS 37) practice questions

Provisions, Contingent Liabilities and Contingent Assets (Ind AS 37) in other exams

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

Provisions, Contingent Liabilities and Contingent Assets (Ind AS 37): frequently asked questions

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 as a liability. A contingent liability is not recognised. It is either a possible obligation, or a present obligation that fails the probability or estimation test.

Does Ind AS 37 apply to all provisions?

No. It does not apply to executory contracts unless they are onerous, or to items covered by another Standard. Examples include income taxes, employee benefits and most leases, with specific exceptions the standard names.

Are contingent assets recognised in the books?

No. A contingent asset is a possible asset that depends on uncertain future events, so it is not recognised in the financial statements. Study the disclosure rules in the Contingent Liabilities and Contingent Assets topic.

How should I answer a written question on this chapter?

State the relevant criterion, apply it to each fact in the question, and give a clear conclusion. Then show the journal entry or note disclosure. This layout earns step marks even if your final number differs.