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

Ganga Pharma Ltd. is defendant in a patent suit. At 31 March 2026 its lawyers advise that the company is more likely than not to lose, and a reliable estimate of damages is Rs 12 lakh. How should the company treat this in the financial statements for 2025-26?

The company should recognise a provision of Rs 12 lakh. Lawyers say loss is more likely than not, which meets the probable test under AS 29, and the amount is reliably estimated. Contingent liability disclosure would apply only if an outflow were possible but not probable.

  1. ARecognise a provision of Rs 12 lakhCorrect
  2. BDisclose a contingent liability of Rs 12 lakh without any provision
  3. CDisclose a contingent asset of Rs 12 lakh
  4. DMake no provision or disclosure since the case is not decided

Explanation

Under AS 29 'probable' means more likely than not. The lawsuit is a past event creating a present obligation, an outflow is probable and the amount is estimable, so a provision of Rs 12 lakh is recognised. Contingent liability disclosure applies only when the outflow is merely possible.

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