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

Godavari Infra Ltd. has the following items at the year end. (i) A lawsuit by a supplier claiming Rs 40 lakh; lawyers advise it is more likely than not that the company will lose, and the best estimate of the loss is Rs 30 lakh. (ii) A guarantee given for a subsidiary's loan of Rs 25 lakh; the subsidiary is financially sound and default is remote. (iii) A claim filed by the company against a customer for Rs 18 lakh; recovery is virtually certain and an Rs 15 lakh settlement has been agreed in writing after the year end but before approval of accounts, confirming conditions existing at the balance sheet date. What amount should be recognised as a provision/liability and as an asset in the books, respectively?

Provision of Rs 30 lakh and asset of Rs 15 lakh. The lawsuit is a probable outflow with a best estimate of Rs 30 lakh. The guarantee is remote, so nothing is recorded. The claim recovery is virtually certain at Rs 15 lakh, so it is no longer a contingent asset.

  1. AProvision Rs 30 lakh; asset Rs 15 lakhCorrect
  2. BProvision Rs 55 lakh; asset Rs 15 lakh
  3. CProvision Rs 30 lakh; asset nil
  4. DProvision Rs 40 lakh; asset Rs 18 lakh

Explanation

(i) Present obligation, outflow probable, best estimate Rs 30 lakh, so provide Rs 30 lakh. (ii) Remote, so no provision or disclosure needed. (iii) Recovery is virtually certain and it is no longer contingent, so an asset of the best estimate Rs 15 lakh is recognised. Adding the guarantee (Rs 55 lakh) is wrong as the outflow is remote; nil asset wrongly treats it as a contingent asset.

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