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

Ganga Chemicals Ltd. is sued for Rs 50 lakh for pollution damage that occurred in 2024-25. At 31 March 2025, its lawyers advise that it is more likely than not that the company will not be found liable. Which treatment is correct under AS 29?

The company should disclose a contingent liability of Rs 50 lakh and make no provision. Because the lawyers consider it more likely than not that the company will not be liable, an outflow is not probable, but it is not remote, so disclosure is required.

  1. AProvide Rs 50 lakh because a claim has been lodged
  2. BDisclose a contingent liability of Rs 50 lakh, as the outflow is not probable but is possibleCorrect
  3. CIgnore it entirely, as the outflow is remote
  4. DDisclose a contingent asset of Rs 50 lakh

Explanation

Since it is more likely than not that the company will not be liable, an outflow is not probable, so no provision arises. The outflow is not remote either, so it is a possible obligation and a contingent liability is disclosed with a brief description and estimate of financial effect. Providing the full claim is wrong because probability is below the threshold for recognition.

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