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CA Final · Financial Reporting · Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets

An analyst reviews four items of Narmada Steels Ltd. Item 1: present obligation, outflow probable, reliable estimate available. Item 2: present obligation, outflow not probable. Item 3: possible obligation whose existence depends on a pending court ruling. Item 4: present obligation, outflow probable, no reliable estimate possible. How many of these items are contingent liabilities, and which is the only provision?

Three items are contingent liabilities: Items 2, 3 and 4, and Item 1 is the only provision. Provisions need a present obligation, probable outflow and a reliable estimate. Item 2 fails on probability, Item 3 is merely a possible obligation, and Item 4 fails on reliable estimation.

  1. ATwo contingent liabilities (Items 2 and 3); Items 1 and 4 are provisions
  2. BThree contingent liabilities (Items 2, 3 and 4); Item 1 is the only provisionCorrect
  3. CFour contingent liabilities; there is no provision
  4. DOne contingent liability (Item 3); Items 1, 2 and 4 are provisions

Explanation

Item 1 meets all conditions and is a provision. Item 2 is a present obligation not meeting recognition because outflow is not probable, so it is a contingent liability. Item 3 is a possible obligation, so it is a contingent liability. Item 4 lacks a reliable estimate, so it is also a contingent liability. Option A wrongly treats Item 4 as a provision.

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