Skip to content

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

Gopal Pharma Ltd. is defending a suit in which damages of Rs 50 lakh are claimed. Its lawyers advise that it is more likely than not that the company will lose, and the best estimate of the outflow is Rs 30 lakh. The company also expects a reimbursement of Rs 10 lakh from its insurer, and receipt is virtually certain. What is the treatment in the statement of profit and loss and balance sheet?

Recognise a provision of Rs 30 lakh and a separate reimbursement asset of Rs 10 lakh, giving a net charge of Rs 20 lakh in the statement of profit and loss. The outflow is probable and the insurance recovery is virtually certain, so AS 29 requires the asset to be shown separately.

  1. AProvision Rs 30 lakh and separate reimbursement asset Rs 10 lakh; net expense Rs 20 lakh in the statement of profit and lossCorrect
  2. BProvision Rs 20 lakh only, with no asset recognised
  3. CProvision Rs 50 lakh and contingent asset Rs 10 lakh disclosed
  4. DContingent liability Rs 30 lakh disclosed and no provision

Explanation

A probable outflow with a reliable best estimate of Rs 30 lakh requires a provision. Reimbursement that is virtually certain is recognised as a separate asset of Rs 10 lakh, which cannot exceed the provision. The statement of profit and loss may show the expense net of reimbursement, i.e. Rs 20 lakh. Netting the balance sheet items is wrong because the provision and asset are shown separately.

Did you get it right without looking?

One question tells you little. A timed set on AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets shows your real accuracy, how long you take and where you lose marks.

Practise AS 29 (Revised) Provisions, Contingent Liabilities and Contingent AssetsFree diagnostic mock

More AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets questions