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

Ganga Mining Ltd. has a Rs 50 lakh claim by a customer under litigation. Legal opinion says the outflow is only possible, not probable. Separately, the company has filed a claim for Rs 30 lakh against its insurer for a fire loss; the insurer has admitted the claim virtually certain to be paid, but the amount is yet to be received. How should these be treated?

Disclose the Rs 50 lakh as a contingent liability and recognise the Rs 30 lakh insurance claim as an asset. The outflow is merely possible, so no provision arises, whereas realisation of the insurance reimbursement is virtually certain, so it is no longer a contingent asset.

  1. ADisclose the Rs 50 lakh as contingent liability; recognise Rs 30 lakh as an assetCorrect
  2. BProvide Rs 50 lakh; recognise Rs 30 lakh as an asset
  3. CDisclose both as contingent items
  4. DDisclose Rs 50 lakh as contingent liability; disclose Rs 30 lakh as contingent asset

Explanation

A possible outflow is only a contingent liability and is disclosed, not provided. When realisation of income is virtually certain, the related asset is not contingent and is recognised. Treating the insurance claim as a contingent asset would be wrong because it is virtually certain.

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